China goes West How Chinese companies start to ... - Roland Berger

China goes West
How Chinese companies
start to conquer the
international markets
Key findings
Frankfurt, November 2007
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Content
Page
Macroeconomic data 3
Challenges and opportunities for expanding Chinese companies 8
Conclusion 12
Roland Berger's "The Most Globally Competitive Chinese Companies" award 13
Key facts about Roland Berger Strategy Consultants 16
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Imports of developed economies from China are growing
strongly – Multinationals source from own production capacities
Import volume 1) from China [USD bn] and number of foreign affiliates in China
Importers
# of foreign affiliates 1,2)
Comments
US
GERMANY
UK
As % of
US imports
As % of
GER imports
As % of
UK imports
2.8% 3.5% 8.1%
27
52
163
1996 2000 2005
1.0% 1.5% 3.3%
6
9
33
1996 2000 2005
0.9% 1.5% 2.8%
3
6
19
1996 2000 2005
CAGR
22%
CAGR
21%
CAGR
22%
CAGR 19%
280,000
49,604
1994 2004
> Imports of key developed
markets from China have
been growing at a yearly
rate of ~20% since 1996
> Substantial share of
such imports is generated
by subsidiaries of multinational
companies
through local production
capacities
> The number of foreign
affiliates in China has
increased almost sixfold
between 1994 and 2004
1) Including Hong Kong 2) Including Joint Ventures
Source: UNCTAD World Investment Report 2006; Roland Berger analysis
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As a result, mainland China has replaced France to become
world's third largest recipient of FDI
FDI inflow per country [USD bn; 2005]
Top target countries
Global distribution
165
18%
UK
99
72
64
Other 56%
11% US
8%
7% China
France
UK
US
China
France
2005 total global FDI = USD 916 bn
> Global inflow of FDI remains highly concentrated, mainly targeting top developed countries
> China has, however, now become the third largest recipient of global FDI, achieving a stable 8%
share in recent years
Source: UNCTAD World Investment Report 2006; Roland Berger analysis
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In terms of FDI outflow, companies in Europe and the United States
continue to dominate – Share of mainland China not yet significant
FDI outflow per country [USD bn]
Global FDI
outflow
volume
398
CAGR 9.3%
813
Comments
> European and North American
countries are the primary sources of
capital for FDI, initiating 80% of total
foreign direct investments in 2004
Regional
distribution
South America
Mainl. China
Other
Asia w/o
China
1%
20% 2%
1%
North
America
25%
1996 2004
52%
Europe
Mainl. China
Asia w/o
China
North
America
0%
16% 3%
1%
33%
South America
Other
47%
Europe
> Large fluctuations on a year-to-year
basis are attributable to the volatility of
M&A deal volume
> Asia as a whole has lost some ground
to developed countries; yet regional
differences remain
> Mainland China did not yet increase
its overall share until 2004, but 2005
share reached an overall high of 1.5%
> Hong Kong, on the other hand, is the
single largest source of FDI among
developing nations
Source: UNCTAD World Investment Report 2006 and 1997; Roland Berger analysis
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Outward M&A activities by mainland Chinese companies have
accelerated over the last years …
Number & volume of overseas M&A deals of Chinese companies [1996-2005]
# of M&A
deals
CAGR 13%
73
59
58
17
30
23
13
35
22
35
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Volume of
M&A deals
[USD bn]
CAGR 31%
5.3
0.4
0.8
1.3
0.1
0.5
0.5
1.0
1.6
1.1
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Source: UNCTAD World Investment Report 2006; Roland Berger analysis
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… but are still on a very low level compared to the EU
M&A purchases (country of origin) 1996-2005 [USD bn]
China
European Union
Comments
CAGR +17%
387
> Chinese companies are still in a
very early stage in outward M&A
> Outward M&A purchases have
increased at a faster rate in China
than in the European Union (25
members)
CAGR +31%
0 5
0.2%
of
GDP
97
2.8%
of
GDP
> Nevertheless, Chinese outward
purchases through M&A only
account to 0.2% of nominal GDP,
compared to 2.8% in the European
Union
1996 2005
1996 2005
Source: UNCTAD World Investment Report 2006; Roland Berger analysis
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With the exception of a competitive cost basis, Chinese companies
are still facing numerous challenges in their global expansion
> Limited R&D capabilities – Difficulties breaking into high-end market segments
– R&D capabilities in China are still generally low, which hinders Chinese companies in entering more
profitable high-end market segments
> Weak brands with limited international marketing experience and few distribution channels
– The strong focus on manufacturing has diverted attention from brand development
– Only Haier belongs to the top 100 of the most famous brands in the world
> Insufficient knowledge of foreign markets
– the insufficient knowledge of foreign markets (competition/ products/ local differences/ design/ rules
and regulations…)
> Still low managerial capacity in the global environment
– the still low managerial capacities of Chinese executives when faced with different social rules and
business environments
> Stil bad reputation of the “Made in China” in respect to quality
– the (still) bad reputation of the "Made in China" very often associated with poor quality and low
standards (according to a 2007 NBC Wall street survey, 82% of the Americans do not trust Chinese
products quality)
Source: Roland Berger analysis
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Five key success factors have been identified for Chinese
companies to compete successfully overseas
1
2
3
4
5
Continuously improving manufacturing productivity and quality
> As wages - both in absolute terms and relative to other low-wage regions - increase, the role of technology,
techniques and processes in productivity improvement is becoming even more significant
Increased and systematic investment in R&D
> A strong R&D capability has become one of the leading competitive factors in many of the industries, in which
China is trying to compete. China not only needs to develop its know-how in product technology, but in production
processes as well
Strong brand recognition
> In order for China's industrial economy to advance to the next stage of development, its companies have to own
brands that are recognizable and well thought of outside of China. At present, there are less than a handful of
Chinese brands that meet these criteria
Excellent HR skills and access to talent
> The shortage of skilled and trained human resources for international business is one of China's greatest
constraints. This is particularly true in management areas such as senior leadership, marketing, operations, and
R&D. What is missing is not only experience, but also training programs, strategic planning capabilities and global
perspectives
Usage of external consultants
> Many of the challenging tasks identified above can be addressed effectively with the use of appropriate consultants
with world-class credentials in industrial and market analysis, strategic planning, organization management, and
legal and M&A transactions
Source: Roland Berger analysis
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Growth patterns of the expansion of Chinese companies can be
divided into three groups – Organic growth, alliances and M&A
Summary of growth patterns of the expansion of Chinese companies
Description Possible approaches Company examples
Organic
growth
> Business expansion through
increasing output and sales as
opposed to mergers,
acquisitions and takeovers
> Direct export
> Greenfield investments
> Haier Group
> Huawei Technologies
Alliances/
partnerships
> Business expansion through
alliances or confederating
> Cooperation with OEMs
> Chinese companies set up joint
venture to invest abroad
> Chery signed cooperative
agreement to build small cars
under Chrysler brand for sale in
the US and elsewhere
Mergers
and
acquisitions
> Business expansion through
buying, selling and combining
of different companies
> Acquire overseas natural
resources
> Acquire overseas brand
> Acquire overseas companies
for know-how
> CNOOC
> Minmetal
> Lenovo’s acquisition of IBM PC
> Shanghai Automotive Industry
Corporation’s acquisition of
Rover technology
Source: Roland Berger analysis
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Success stories: Intensive globalization is the basis for growth
Organic
growth
To expand into overseas markets through organic growth
> Haier started in the US by targeting niche markets, than
progressively accumulated market share and strengthened its
internal capabilities in overseas operations
> Huawei invests 10% of its revenue in R&D each year
Growth by
alliance
To expand into overseas markets through alliances
> Not only did Chery focus on R&D to provide best-in-class
products, it also acquired overseas know-how through the
strategic alliance agreement with Chrysler, thereby gaining
access to sales channels in North America
Growth by
M&A
To acquire superior brands and technologies
> Besides focusing on R&D to strengthen their products, Lenovo
acquired western management talent through its acquisition of
IBM’s PC division
Source: Roland Berger analysis
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Bottom line: China's outward integration into the world
economy is going to continue and accelerate
Conclusion
> China's ascent as a global economic power is giving rise to a growing group
of Chinese companies with the potential to become global players over
the next decade
> Though overall Chinese companies' global performance has potential room for
improvement, the trend is clear: China's outward integration into the world
economy is going to continue and accelerate, providing mutual economic
benefits to both Chinese and foreign enterprises
> However, success will not come easily; and only companies with clear,
focused strategies, strong execution capabilities and substantial international
business know-how can reap the potential rewards
Source: Roland Berger analysis
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China's strongest international firms were honored with the
"The Most Globally Competitive Chinese Companies" award
Selected company profiles from top 20 winning companies (state owned enterprises) 1)
Company
Industry
Revenue
(2006)
[EUR m]
Growth
(CAGR
2003-2006)
Overseas revenue
as % of total
revenue (2006)
Recent overseas activities
China National
Offshore Oil
Corporation
(CNOOC)
Oil/gas
11,766
43.8%
16.0%
> April 2006 – Raised 15 billion Hong Kong
dollar overseas investment
> April 2006 – Signed exploration contract with
Kenya government
> 2006 – Announced enhancing investment in
overseas exploration activities
China International
Marine
Containers
(Group) Co., Ltd.
Engineered
Products
3,231
38.7%
93.0%
> June 2007 – Announced successful acquisition
of Netherland‘s Burg Industries BV
> December 2006 – Founded a joint-venture
with Burg Industries BV
Shanghai
Automotive
Industry
Corporation
(SAIC)
Automobile
11,053 -15.2% 6.0%
> October 2006 – Launched its first fully
patented and branded car Roewe, on the
basis of purchased Rover technology in 2004
and planned to export through the sales
channel of Ssang Yong, acquired by SAIC
also in 2004
1) The companies listed are selected as best representatives of winning enterprises in each category (state owned- and private enterprises and emerging high-tech firms)
Source: Company annual reports; Roland Berger analysis
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Roland Berger analyzed over 200 companies and revealed
those 20 with exemplary internationalization strategies
Selected company profiles from top 20 winning companies (private companies)
Company
Industry
Revenue
(2006)
[EUR m]
Growth
(CAGR
2003-2006)
Overseas revenue
as % of total
revenue (2006)
Recent overseas activities
Huawei
Technologies
Haier Group
Lenovo Group
Telecom
equipment
Consumer
durables
PCs
6,390
10,520
10,130
27.2%
6.3%
100.0%
65.0%
24.7%
65.0%
> June 2007 – Continued to make inroads in
the European market via signing contract
with Vodafone Spain
> December 2006 – Signed contract with
Telecom Italia SpA – the first Chinese vendor
to be awarded a contract in Italy
> December 2005 – Named one of the leading
vendors in the British Telecom (BT) 21 CN
network
> 2007 - Plans to increase the number of
overseas manufacturing bases from 13 now
to 20 by 2010
> October 2006 – Reached an agreement with
Japanese company Sanyo to establish a joint
venture
> July 2007 – Announced it would build two
new plants in Mexico and India
> October 2006 – Signed a multi-year global
marketing partnership with NBA
Source: Company annual reports; Roland Berger analysis
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The top international performers included emerging high-tech
firms Sun Tech Solar and Chery Automobile
Selected company profiles from top 20 winning companies (emerging high-tech firms)
Company
Industry
Revenue
(2006)
[EUR m]
Growth
(CAGR
2003-2006)
Overseas revenue
as % of total
revenue (2006)
Recent overseas activities
Sun Tech Solar
Co., Ltd.
Energy
438
88.7%
82.0%
> August 2006 – Acquired Japanese competitor
MSK
> 2006 – Signed a 10-year contract to secure
silicon supply
Chery
Automobile Co.,
Ltd.
Automobile
1,929
43.8%
3.5%
> July 2007 – Signed contract with Chrysler to
produce Chery in China and market in North
America and EU
> June 2007 – Established joint-venture with
Quantum
> 2006 – Founded its first overseas company in
Russia
Source: Company annual reports; Roland Berger analysis
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Roland Berger Strategy Consultants combine global
competence with local know-how
Key facts about Roland Berger Strategy Consultants
33 offices in 23 countries all over the world
1,700 employees worldwide
Specific strengths in Europe (25 offices), The Americas (3 offices), and Asia (5 offices)
Revenues of EUR 555 m in 2006
Average growth p.a. 17%
75% of all projects with international focus
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Would you like to know more?
Vincent Mercier
Member of Roland Berger
Strategy Consultants'
Executive Committee
Phone: +33 (1) 53670-326
e-mail: Vincent_Mercier@fr.rolandberger.com
Jochen Gleisberg
Partner and Head of
Roland Berger Strategy
Consultants' China Desk
Phone: +49 (711) 3275 7221
e-mail: Jochen_Gleisberg@de.rolandberger.com
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