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Lessons from a Global Journey

Volume 1, 2016

Chinese companies, spurred on by an enthusiastic government, are increasingly going beyond the country’s borders to seek business opportunities. In the last decade, there have been much publicised success stories and often a lot less noise when deals fail. Many Chinese companies are still finding their way, and therefore look for success stories and cautionary tales among those that have already ventured abroad. They also look to CEIBS – with its wealth of knowledge from the school’s faculty, alumni companies and corporate partners – to provide guidance.

It was natural, then, for the issue of Chinese companies going global to be the topic of the 4th Annual CEIBS International Advisory Meeting held at the Shanghai Campus on October 30, 2015. Renowned business leaders from around the world gathered to discuss the challenges companies face when going abroad, and some successful strategies for navigating them. Here are some excerpts from presentations given at the meeting by TCL Chairman and CEO Li Dongsheng (CEO 2003), Founder and Chairman of Shenzhen Mindray Bio-Medical Electronics Xu Hang (EMBA 2002, CEO 2008) and Vice Chairman of Tata Motors Ravi Kant in which they share first-hand experiences of Chinese companies’ forays abroad, as well as lessons on the globalisation practices of companies from other countries – lessons from which everyone can learn.

 

 

Li Dongsheng: Transition, Upgrade & Go Out

The Chinese economy saw rapid growth over the past 30 years, but in 2015 it began to slow down. The GDP growth rate is expected to be under 7% (editor’s note: the official number turned out to be 6.9%) for 2015. This slower growth is due to a sharp rise in manufacturing costs – especially labour costs which have risen 2.7 times in the past decade. TCL is a manufacturer and has experienced these changes itself. With more than 70,000 employees, the change in labour costs, which have seen an especially dramatic rise in the coastal regions, has had a profound impact on the company. Manufacturing costs in China now exceed those in most of the world’s developing countries: if manufacturing costs in the US are 100, then in China costs are 94, in India 82. In other words, the cost advantage of Chinese manufacturers no longer exists. China’s industrial structure is being optimised, and economic growth is shifting from being investment-driven to innovation-driven. Investment-driven growth may last for a while, but it cannot last for long, since rising government and enterprise debts will place restrictions on the investment-driven growth model. Thus I hope the economy will become more innovation-driven in future.

Over the last few years, the developing countries’ contribution to world economic growth has continued to rise and, in the coming years, the greatest growth potential in the world economy will still reside in emerging markets. In 2015 India, with an economic growth rate of 7%, topped all other large-scale economic entities.
   
There is also a reshuffle occurring in the global manufacturing industry. In television, computer and mobile phone manufacturing where TCL is focused, China, Japan and Korea are the leading players in television manufacturing, while Japanese brands are losing market share. Among computer manufacturers, the top three are China, the US and South Korea; while in the mobile phone manufacturing industry, the US, South Korea and China take the first three positions. Looking back five years, Japanese brands were still the major players in the market, but they are now declining. I am convinced that we will see a few new consumer electronics companies come from some emerging markets such as India and Russia in the future, which will give rise to another change in the whole global market structure.

Where’s the opportunity for Chinese companies? TCL has been promoting the strategy of “upgrade, transition and go out” over the past few years. The whole industry is in need of upgrading. In the early years we were focused on learning and imitating, and our products have always been in the medium and low-end markets. In future, we must expand our share of the high- and medium-end markets, in order to obtain higher global brand positioning and better economic benefits. The Internet and intelligence-orientation are more important in this transition process. With this objective in mind, TCL has come up with the “Double +” strategy, namely, “Intelligence + Internet” and “Products + Services”. Our aim is to include smart Internet applications in more terminal products in an effort to turn consumer products into smart terminals, bringing customers more value and experiences. In addition, instead of merely selling products, in future, we will also provide services and support to service platforms.

China’s joining the WTO in 2001 has been a driving force for integrating the Chinese economy into the global economic system. Going global will be a new engine for Chinese companies in the future, especially for large-scale companies. According to our data for 2015, the growth potential in the domestic market in our industry is very low, but the growth potential in foreign and emerging markets remains high. Companies who want to maintain growth must speed up globalisation of their business.

TCL was the forerunner of the globalisation trend among Chinese companies. In 2004 we completed two relatively large-scale cross-border M&A projects – acquisitions of Thomson’s colour TV business and Alcatel's mobile phone business, which have boosted our overseas sales, which have grown from a relatively small number to RMB 47 billion in 2014. Thanks to our global business expansion, we rank fourth globally in sales of colour televisions, and sixth for mobile phone sales.
   
The backstory to the globalisation of Chinese companies is the growth of the Chinese economy. China has risen to become a net capital exporter in 2014, and Chinese financial institutions have also been accelerating their globalisation. Ten years ago, it was very difficult to get support from Chinese banks to do business overseas. Now, the big four state-owned Chinese banks are all expanding globally, and China Industrial and Commercial Bank has seen exceptionally fast development in its overseas business. China has a complete industrial system. In this era of Internet-oriented transition, Chinese companies have proven their advantage in Internet applications and services. The world’s top ten Internet companies are either from the US or China.

The challenge we are facing now is how to grow from a vast manufacturing country to a strong manufacturing country. How can we improve our innovation capability? How can we build brand influence? How can we improve management capabilities of global talent? TCL has set its medium-term target: accelerating the push into emerging markets including India, Brazil and Russia; enhancing its innovation capability in technology. TCL has invested heavily in technological innovation in the past decade. We rank third among Chinese companies for number of patent applications.

Talent cultivation plays a very important role in the company’s development. About 50 executives at TCL, including myself, have attended various CEIBS training courses. I was among the first batch of participants in the CEIBS Global CEO Programme. I hope that in future CEIBS will continue to provide support for the globalisation of Chinese companies. I am really grateful to the nurturing I received from CEIBS.

 

Xu Hang: Mindray’s Global Journey

Confucius said, “A man of forty, free from perplexity”. However, I applied to CEIBS at 40, but with great perplexity. At that time, Mindray was planning to go overseas. Our thinking was that it was now difficult to do business in China, so why not go outside of China? We actually had opportunities to do business overseas; however when we did, the company’s profit was less than RMB100 million, and the sales volume was also very small. The question was, how could we go out? During my two years of study at CEIBS, I focused on the problem of globalisation of Chinese companies. This turned out to be my biggest gain at CEIBS; my graduation thesis’ topic was Mindray’s globalisation strategy, and to my delight, it received “excellent” marks from my professors.

Globalisation is an irreversible trend. Entrepreneurs go where the business opportunities are – they do this by instinct. Huawei and Mindray both began in Shenzhen. Mindray was established in 1991, while Huawei was founded in 1987. Now Huawei is a top-ranked company in the global communications market. Huawei’s successful globalisation was driven by localisation through technological research and development and establishing R&D and talent centres all over the world. Today in Huawei’s overseas plants, 75% of the employees are local residents. Huawei expands steadily around the world by focusing on marketing and R&D.

All roads lead to Rome. Which road has Mindray taken? In 2000, we decided to make our first efforts at globalisation. We began with a strategy similar to our domestic operation, which is to set up offices everywhere, looking for agents and attending exhibitions. We found this worked in Europe but failed in the US. At that time we had many agents in Germany, Britain, France, Italy, Spain and the Netherlands, and we had more orders than we could handle. However in the US it was different. There are only big companies, but no small and medium-sized companies or agents in the US medical device industry, so we had to set up our own teams, and were not able to hire locals. It is very difficult for Chinese products, especially medical products, to enter the US market. Finally we decided to globalise our company, not only our product sales, but also by integrating more resources. We listed on the New York Stock Exchange (NYSE) in 2006. We were not short of money, but of others’ understanding and confidence. By listing on the NYSE, we hoped to show that we are a capable and responsible company, and we will be responsible to everyone who buys our products.

Right before the global financial crisis began in 2008, an opportunity came up when the founder of our American partner was about to retire. After two months’ consideration we acquired that company. It is to date the largest overseas investment by a Chinese company in the medical device industry. The acquisition of a US company has been very helpful for our domestic operation; it has increased domestic clients’ confidence in our brand. Now that we have entered the US market by acquiring a US company, it seems natural for us to enter the Chinese market and other developing markets. This experience exemplifies the Chinese idiom: blossoming outside of the wall, perfuming inside.
   
The American company is very traditional and complementary to us. The biggest challenge for us with the acquisition was integration. This company used to cover many areas, including production, sales, R&D and after-sales service. We found its strength was actually in sales and after-sales service instead of R&D. Therefore we employed the strategy often used by Chinese companies – we drew on its strength. Now its R&D and production are all done in China; its client base and market intelligence have proven to be a great help to our understanding of the American market. What we had failed to accomplish in the US before was realised only after the acquisition – we suddenly had hundreds of staff working on after-sales service, which is of great significance. The US market is basically an indicator of “which way the wind will blow” – what applies to it applies everywhere in the world. In total, 40% of Mindray’s global income in the medical device sector is from the US market.

We made another US acquisition in 2013, which is a leading ultrasound technology company. It had experienced a major loss. After Mindray went public, I told them that their technology was inadequate and that our technology could help them improve their products. At that time they had just raised money, so they rejected us. Five years later, they decided to sell the company. It was still unprofitable, and its investors thought it was the right time to sell. We immediately decided to buy it.

Two years later, we launched a product co-produced by the two companies which has enhanced Mindray’s positioning in the area of ultrasonography. [Co-producing] such a high-end product saved us more than three years [in R&D time].

Based on our knowledge and experience, I think there are still many areas for Chinese companies to work on before they go global. There are many challenges, for example one must have a clear-cut globalisation strategy. It can be difficult hiring local talent and there are also cultural differences. Most of the time, Chinese companies going global only see flowers but not the thorns beside them, which means they need to improve their risk awareness.

I think the time is ripe for CEIBS to take the lead in building communication between Chinese and foreign entrepreneurs. The time is right and the prospects are bright. We can gain more useful knowledge through CEIBS professors’ case studies and research into the experiences of Chinese and Asian companies’ who have gone global. I also hope CEIBS will continue to attract talented professionals from overseas to China and nurture local talent with a global vision. This would make our overseas recruitment efforts easier.

 

 

Ravi Kant: 10 Quick Lessons on Globalisation

Tata Motors had its first globalisation experience in 2004 when we acquired South Korea's Daewoo Commercial Vehicle Co. It was a great success, and became a good example for our subsequent acquisitions (Tata Motors later acquired companies such as Jaguar and Land Rover). Here are 10 things we learned from our first overseas acquisition.

1. Once you decide on an acquisition, you must centralise all resources and respond rapidly, because you have rivals targeting the same properties. In the case of our acquisition of Daewoo, there were 10 companies bidding for it, including companies from South Korea and Europe, so we had to respond quickly to succeed.

2. Figure out an estimated value quickly. If you are obsessed with details, you will get lost in them and miss the overall picture. Only by knowing the whole picture can one have confidence in deciding whether or not to carry out the acquisition. In the Daewoo case, we found that they possessed very strong manufacturing capabilities and were highly complementary to our products, so we only took about 10 days to make the decision on the acquisition.

3. Be prepared for unknown challenges. For example, all the statistics we got were in Korean; and Daewoo employees disliked Tata Motors, because they had the impression that Indian technology was backward. In the first round of interaction, we asked some middle managers, “Please tell us frankly. What do you want?” They replied, “Sir, we really want to work with European companies, because we think that would be better for our future.” From their angle, I understood very well. I knew what we were trying to buy was not only a company or property, but a business, a sustainable business. When you are trying to buy a company, it’s natural for employees to question who you are and what you mean for their future. We needed more conversation. Therefore we began to tell them the story of Tata Motors.

Four years before, the Korean Chaebol [that had owned Daewoo] went bankrupt, leaving a heap of problems behind, so corporate governance was very important for them. We talked about how well we had done with Tata Motor’s corporate governance in the past several decades, which the Koreans could learn from us. Though we belong to the Third World, we have our own excellent technology along with technology from all over the world. After a 20-minute conversation about this, they started to ask us, “What can we do to help you?” The communication was very successful. Later on we began to provide some promotional material to them, and by doing so, we began to work with the Korean employees.

4. Be prepared to be evaluated. Acquisition doesn’t mean you can just tell everyone, “What I say goes!” In the investment process, one must be sincere and frank. Everyone will look critically at everything about you, including your body language.

5. Obtain first-hand knowledge of clients and markets. We interacted with people in the market to gain statistics. If we found anything the clients were not content with, we would try to learn what we could do to satisfy them.

6. Pay attention to details. They are what determine success or failure.

7. Set specific aims, and delegate powers to teams. We have many people working at the frontline, and they have a lot of power. If there is any problem, they can give me a call. We have very good communication among us.

8. Learn about rivals. We didn’t know who we were competing with for the acquisition, but we needed to figure out the reasons why they chose to purchase this company, so that we could work out the prices other bidders were willing to offer. We needed to know something about the competing price offers.

9. Focus on personnel integration and communication. We gave a three-day personnel training course to the teams from the acquired companies. Before dispatching our people to South Korea, we needed to let them understand Korean culture, the labour practices there and the Korean food culture. After the acquisition, the Indian team based in South Korea had to learn the Korean language, and we also provided English training to the Korean team.

10. Internal and external communication. We communicated with non-Korean international companies to get an in-depth understanding of industrial relations in Korea; we also spoke to Korean industry organisations to understand the local market environment and the secret of success, and we also kept in touch with Korean government agencies.

The acquisition of Daewoo took six months, which earned us status and reputation in the market. Years later, another Indian company succeeded in acquiring a Korean company. They said our success in South Korea had paved the way for their acquisition. I think these lessons apply to Chinese companies, Indian companies as well as companies from other countries. If one company can build a good reputation in a foreign land, it will be easier for other companies from the same country to make an acquisition or develop a new market there. If you are not performing well and cause resistance from the locals, it will be a disaster for other companies from your country.