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powerful guide book: China’s Global Reach

Borderless Business, National Competition, Politics, and Globalization (book excerpts)
George Zhibin Gu

Afterword
China, United States and Global Development

Andre Gunder Frank

Chapter 13. CHINESE MULTINATIONALS (book excerpts)

In this era, the key Chinese strategy is to bring foreign investors over to China. In this regard, China has been doing very well. Consequently, the nation has quickly become a global center. This basic strategy will not change any time soon.

At the same time, especially recently, a small group of Chinese companies have increasingly tried to reach the overseas markets in various ways. However, it has not happened in any big way so far. In truth, setting up an extensive international franchise for China Inc. remains at the very beginning.

In this chapter and the next one, we will examine various business dealings of China’s international work. Still, the most interesting ones take place at home market still.

Some Sizable Chinese Companies

At this time, the 15 Chinese companies in the 500 club are all state-run companies. The list in 2003 included several telecom operators, four banks, State Grid, China Food Group, China Life, Baosteel, and SAIC, the Shanghai-based auto maker.

For now, China’s energy needs are exploding. It now builds a new power plant each and every week. However, the prize goes mostly to State Grid and six other state energy companies. Only in this era have private investors and overseas parties been allowed to enter the field. Still, nobody can compete with State Grid directly, which controls much of the power transmission business. Its predecessor, State Energy, monopolized the entire energy sector for several decades. Only by the end of 1990s, reform on the energy sector gave rise to State Grid and six other companies.

State Grid was already ranked 46th in the club as of 2003. It will become bigger, as China’s energy needs are still exploding. For long, there have been frequent power shortages, even if China is already the second biggest energy supplier after the United States. Naturally, this attracts more investment.

In the state sector group, at least three companies, China National Petroleum Company (CNPC), Sinopec, and China National Offshore Oil Corporation, are already global players. How can they be this big? Well, these three companies form the state monopoly. Their annual profits could reach over $10 billion.

A booming economy has brought these companies all the perks. Since 1993, China has become a net importer of oil. In 2005, China consumed over 7% of the global oil supply. By 2020, its oil demand will likely triple. Fifty percent or more will have to be imported. Therefore, these three giants must go outside to acquire both supply and assets.

So far, CNPC has been competing with the other two oil players head-on in the international field as well as at home. These three giants have fistfights with each other, especially when they see golden spots for gas stations. CNPC’s new management style is reflected in the letter of complaint it sent to Fortune magazine when the Fortune editors wrongly ranked the company a low 73rd. The magazine had to upgrade CNPC to the 52nd slot.

All three companies have already cut a few dozen deals around the world. They are aggressive and go everywhere oil resources are located. So, these three giants are ahead of the curve compared to China Inc. as far as international expansion is concerned. However, several others in this group are also strong.

Take China Mobile and China Unicom. These companies are the monopoly over China’s mobile communication market. China is already the biggest mobile phone market. By early 2006, there were over 400 million users. China Mobile and China Unicom have been the winners in this game. Private Chinese companies are banned from the field. International companies can only sell them hardware and software.

With billions in cash and over 400 million consumers in hand, these companies can go far. At investor conferences, many investors ask about their plans. But the truth is that China has an exploding mobile market, and these companies will stay at home for a while. They have yet to gain international experience above all. They are far from ready to jump into overseas market in a big way, though they may start to test the water soon.

But there are some occasional ventures especially related to industrial materials. The Shanghai-based steel mill Baosteel has created a major joint venture in Brazil. China’s steel market is already bigger than those in the United States and Japan combined, and China still imports more steel. Its manufacturing expansion is demanding ever-increasing amounts of metals, steel, and cements, among other basic industrial materials. Therefore, Baosteel and several other Chinese companies are reaching out to be near resource-rich places. Latin America, Canada, Australia, and Africa are all natural choices.

Still, they happen in rather limited ways. The reason is simple: most Chinese steel and mineral companies are still financially weak. Even if they are eager to reach out, they lack financial resources still.

[...]

Chapter 6. All PLAYERS ARE IMPORTANT

Today China is the biggest new frontier for international companies. In many ways, the Chinese market has more an international flavor than many other markets around the globe. Many unique characteristics have evolved along the way.

For now, China has already become one biggest theater for international businessmen to display their cultures and traditions as well as ambitions. They are singing their favorite songs and doing their traditional dances—all in one theater. So far, some have danced better than others.

Competing International Players

Up to now, the “Overseas Chinese Inc.” has been the biggest investor in mainland China. The United States is in second position, followed by Japan, numerous European nations, South Korea, Canada, and Australia.

Businesses from Hong Kong had an early start. Most if not all of the factories in Hong Kong have moved over the border. Today, about 240,000 Hong Kong residents work and live in Mainland China.1 Their employers are mostly small and midsize companies. They mostly focus on low-end consumer products. Their strengths are best shown in their vast numbers.

Similar things can be said about the business players from Taiwan and Macau, except that Taiwan’s semiconductor business has a sharp edge, which is increasingly established in Mainland China as well.

But the most influential players are global multinationals. China’s expanding market has created tremendous opportunities for the global giants, especially in capital-intensive and high-tech sectors. These giants have made a huge difference in connecting China to the global markets. But so far, different national players have had very different performance inside China.

Overall, on a global basis, the U.S. companies as a group are the biggest. The power of the United States is the most influential in many markets. In China as of now, U.S. players are just one among many foreign business groups. True, they are already very influential, but they can become even more influential if more US players join in.

Relatively speaking, the South Koreans are more active today than the Americans. To the Koreans, coming to China is a necessity, for their home market is small. They aim to use China as a new engine for growth. But the U.S. companies have a huge market at home. Most of them are less willing to venture out. Except for a few large players and high-tech companies, most sizable US companies have only 10% or less international business today. This is quite different from the situation for many leading companies in Europe, Japan, and South Korea. They may have much bigger international sales than their U.S. counterparts.

In China, many Korean companies have been latecomers in relation to Japanese and Western companies. But they have made great strides. Several are already household names, especially LG, Hyundai, and Samsung. Today, there are over 250,000 South Koreans living in China. In addition, some 4 million Korean workers engage in China-related business inside South Korea.

LG has been a star performer. By 2003, LG had invested $2.4 billion in China. The company has become a leader in the consumer electronics and home appliances sector. Its China business reached $8 billion in 2003 and $10 billion in 2004.2 LG is still expanding its investment programs and hoping to make China its second home.

Samsung is another success story. Its product lines—semiconductors, mobile phones, consumer electronics, and home appliances—fit China’s needs.3 By now Samsung has transferred most of its personal computer manufacturing to China. Its latest project is a new plant of making handsets. By now, it is already a top five player in China’s handsets market.

It seems that the Korean giant Samsung has found jade in China. Samsung intends to make China its biggest market, hoping to reach $14 billion in sales by 2008. To this end, the company has been adding new programs. This has already made Samsung a leader in China. The Korean giant will become even more powerful, for it has found a big space in China.

What is behind the success of Korea Inc. is a combination of good timing and the right products. Above all, the Koreans are committed to China for the long term. The Korean success has inspired envy among international competitors.

In fact, Korean companies now treat China as their own production center as well as a big market. The average monthly salary for a manufacturing job is $1,524 in South Korea, but only $115 in China.4 In addition, China is a huge market, much bigger than Korea—something the Korean companies cannot ignore. They intend to move most of their production from Korea to China, increasing the efficiency and profitability of expanding around the globe.5

Auto Market

In the auto market, all the American players are in China today. As is true internationally, GM and Ford are only two players among many in China. The largest player so far is Volkswagen. Volkswagen has been operating in China since 1985. But GM set up its Shanghai joint venture only in 1996. Volkswagen has kept its leadership role by expanding its programs and adding joint ventures.

[...]

ABOUT THE AUTHOR

George Zhibin Gu is a journalist/consultant based in Guangdong, China. A native of Xian, he obtained education at Nanjing University in China and Vanderbilt University and the University of Michigan in the United States. He holds two MS degrees and a Ph.D. from the University of Michigan.

For the past two decades, he has been an investment banker and business consultant with a focus on China. His work focuses on helping international businesses to invest in China and the Chinese companies to expand overseas. He has worked for Prudential Securities, Lazard, and State Street Bank, among others. He generally covers mergers and acquisitions, joint ventures, venture capital, business expansion, and restructuring.

Also, he is a journalist focusing on China in relation to global development. His articles or columns have appeared in Asia Times, Beijing Review, The Seoul Times, Financial Sense, Gurus Online, Money Week, Online Opinion, Asia Venture Capital Journal, and Sinomania, among others.

He is the author of three additional books, China Beyond Deng: Reforms in the PRC (McFarland, 1991), China and New World Order: How Entrepreneurship, Globalization, and Borderless Business Reshape China and World (Fultus, 2006), and Made in China: Players and Challengers in the 21st Century (English edition forthcoming; Portuguese edition, Centro Atlantico, 2005). He is a member of World Association of International Studies hosted by Stanford University.