China's Globalisation Challenge
By Frank-Jürgen Richter

Globalisation has become the key word for many Chinese companies with many aspiring to propel themselves from national champions to global winners. Be it computer maker Lenovo's acquisition of IBM's computer business, Nanjing Automotive buying Rover and TCL taking over certain assets of the French multinationals Thomson and Alcatel, Chinese firms are certainly showing their global ambition. And they are right to do so - with the opening of world markets and the continued globalisation of services they might risk to fail if they do not have real global scale, continuing to build their strategies of home advantages. Powerful forces of change are reshaping the competitive

environment for Chinese companies and for many; globalisation will be a key to success in the new competitive game. But how can a Chinese company best climb the globalisation staircase, avoid its pitfalls and build a sustainable global organisation?

Historically, most Chinese companies pursued a mix of two basic strategies in the face of globalisation: wall off their home market to become a dominant player locally and penetrate overseas markets by exporting from their home base. Compared with their Western counterparts, relatively few invested in building extensive networks of subsidiaries, and even fewer have run their expanded presence as a single, integrated, global company rather than a portfolio of semi-autonomous business scattered around the world. But becoming a truly global company means much more than establishing a portfolio of units in different countries, the whole must be worth more in terms of efficiency and the capacity to create value for customers than the sum of its parts.

The key challenges Chinese companies facing today are related to laying down the necessary infrastructure with partners, ranging from financial to supply-chain networks; building the necessary capabilities, like brand building and people developments, and creating a sustainable global organisation. Chinese companies need to have a long-term approach enabling them to interact with global stakeholders like governments, the media and even Non-Government Organisations (NGOs).

TCL's acquisition of the two French units could have been smoother if the Chinese company had expressed better its intentions for the acquisition. TCL wanted to acquire a well-known brand, state-of-the-art technology and a functioning sales network in Europe. But TCL intentionally wanted to restructure the acquired business, i.e. closing some of the European manufacturing plants - due to the high-cost environment in Europe. The company might not have clearly communicated to the French parties those intentions, and it now has to grapple with unions and regional administrations. TCL's globalisation, like those of many other Chinese companies, is at certain risk. Chinese companies need a long-term plan of globalising their operations instead of a mere grasping of opportunities and deal making. They need to be especially mindful of handicaps that can arise from the kinds of strategies they had pursued in the past: strategies that emphasise local presence over benefiting from network economies; under-investment inintangible assets and systems; lack of international experience and capabilities; and a heritage of highly centralised organisations. Over expansion and too high ambitions are another threat.

Foreign direct investors mostly win when they have abandoned any kind of home-protection and when they have been able to develop system-based advantages that leverage intangible assets and know-how that are proprietary. These are the kinds of competitive advantages that can be transferred to markets where these systems are lacking. The next challenge for Chinese business is to develop blueprints for globally sustainable organisations. The Great Leap forward needs careful and systematic preparation:

First, building a global company requires a determined campaign; one can climb the staircase at the pace one chooses, but trying to skip steps is dangerous and risks creating an unstable global edifice. Second is the idea that there is an over-arching sequence to building a global company - foundations come first, followed by the necessary capabilities to push on higher and further, crowned with the ability to become a good corporate citizen who proactively interacts with the various global stakeholders. The third message is that climbing each step is an active process that involves organisational learning; the learning loop involved in taking each step will help companies to consolidate their position and to prepare them for the next ascent. Each step represents a Great Leap Forward that must be consolidated before moving on. Significant globalisation is seldom achieved from incremental linear change. The big challenge for Chinese companies is to avoid a halfway into globalisation. For those Chinese firms with the right visions of globalisation and the related implementation skills the future will be great.