Global Presence of Chinese Enterprises: Opportunities and Risks

By staff reporter LUO YUANJUN

Lenovo president Liu Chuanzhi and IBM representative at the purchase agreement signing ceremony on December 8, 2004.

On December 8, 2004, Chinese computer giant Lenovo hit the headlines at home and abroad by announcing it would buy IBM’s PC business, worth US $1.25 billion. For the Chinese company, the move represented a huge step on its road to globalization.

Then in January, the World Economic Development Declaration Conference Organization Committee sponsored the China Economic Situation Symposium in Beijing, undertaken by China International Institute of Multinational Corporations (CIIMC). During the symposium, Economist Li Xingshan pointed out that the so-called Chinese transnational companies lack competitive technologies and have weak brand names in the international market, and therefore are not truly global companies.

The United Nations Conference of Trade and Development, UNCTAD, defines a transnational company as one comprising entities in more than one country which operate under a system of decision-making that permits coherent policies and a common strategy. In this sense, China has thousands of transnational companies. However, though these companies have established branches or agencies abroad, in many cases, they do not meet international standards, and their management systems are not mature enough to compete in the world market.

In 1984, businessman Liu Chuanzhi got together with ten friends, raised 200,000 yuan, and established Lenovo. Two decades later, the company had grown into the largest computer company in China. It boasts one of the best-known computer brand names in the Asia-Pacific region. Observing such rapid expansion, chairman Liu Chuanzhi decided to mold Lenovo into a strong transnational company, and the purchase of IBM’s PC unit is an important step in its strategy.

Lenovo is not the first Chinese enterprise to venture onto the world stage. Two years ago, Chinese TV maker TCL bought the French company Thompson’s television operations. But Lenovo’s acquisition of IBM’s unit seems more influential and is of far greater significance. It will provide valuable experience for other Chinese companies who are trying to step out of the domestic market and participate in distributing resources on the international market. It proves that Chinese enterprises can compete in the fierce global market, and will be a milestone in Chinese industrial and business development history.

Globalization - an Inevitable Trend

There are doubtless many risks involved in China’s economic globalization process, but the trend seems to be unstoppable. From 1949 to 1979, isolation from the international community kept China’s economy stagnant. The reform and opening policy broadened Chinese people’s outlook and shortened the economic distance with other countries. In order to keep pace with world development, China must continue its reform and opening and Chinese enterprises must catch up with the globalization trend.

This means more capital and better management are in high demand. The country’s own reserves are far from enough – and more foreign investment is needed to stimulate growth. Moreover, Chinese companies that have powerful products in the international market need to bring themselves up to speed with advanced management methods, concepts and technologies. Transnational companies are a platform for exchanging resources in the international market according to world market economic rules. Only when Chinese transnational companies reach maturity will they have more clout in the international market.

Chinese enterprises are anxious to step onto the global stage where they have access to international natural, market and technological resources, that will help them be more profitable in the world market. Lenovo’s purchase of IBM’s business exemplifies this mechanism, effectively swapping Chinese market resources for top technology and an internationally respected brand name.

More Business Opportunities in the WTO Era

China’s accession to the WTO in November 2001 was an important economic strategy taken by the central government ushering the country into deeper involvement in world trade activities. It has had positive impact on global economic growth, and also presented Chinese enterprises with unprecedented opportunities to develop overseas business. Private companies now have plenty of opportunities to push their exports abroad and foreign investment is much more convenient. According to the reciprocal principal, Chinese enterprises are allowed to invest in service industries in foreign countries, and well-established ones enjoy national treatment in their host country.

State-owned enterprises have also seen similar benefits. They have the added challenge of reforming their management systems, bringing them more in line with international standards. Many of the country’s SOEs are reinventing themselves from within, so they can be competitive in the international market.

Lenovo Production line.

As China’s involvement in international trade intensifies, the old world industrial chain is faced with a mind-boggling set of permutations and combinations, brought about by the country’s advantages as regards its natural resources, huge market and low labor costs. These large-scale positives will help to fashion a new world industrial chain, one that makes the best use of each country’s resources. They also promise more opportunities for Chinese enterprises that are trying to carve out a niche in the global market.

Three years ago, Lenovo’s bold move would have been unimaginable. China’s accession to the WTO catapulted Chinese companies like it into the world market and provided a stage on which to implement global strategies. Economic experts predict that more Chinese enterprises will buy into foreign companies in 2005.

Business Risks to Beware

Such large-scale changes, however, will not be a walk in the park. Professor Zeng Ming of the Cheung Kong Graduate School of Business pointed out that on the international scene, Chinese enterprises don’t enjoy a success rate of more than 30 percent. Cultural differences are cited as the biggest obstacle, followed by trade barriers, disputes over intellectual property rights, and different interpretations of international laws and regulations.

Some media likened Lenovo’s move to a snake eating an elephant. From the initial whisperings of a deal to the company’s official announcement, doubts about the decision have been rampant. Some argued that Lenovo simply does not have the ability to conduct international business, and others worried about the company’s future development. “Lenovo bid too high in the purchasing,” a Hong Kong business analyst commented, “and as the business it bought is not a profitable one, it will not bring more profits to the company. the issue of its new stocks will have a diluting effect and bring a slide to its stock price in the short term.”

Lenovo had spent three years struggling to promote its brand name in the international market, without much joy. Later, the company changed its strategy. It now hopes to use IBM, and its world-renowned reputation, to find a firm position in the global market. The company will have to fork out a total of US $1.75 billion for the deal.

“Lenovo will have certain risks in its business operation after this purchase,” said Fung Ee Lim and William Bao Bean, analysts with Deutsche Bank. “But before details of the business contracts are announced, most analysts and investors will maintain a prudent attitude.” Some years ago, HP purchased Compaq at a price of US $19 billion but did not achieve its expected result. On the contrary, Dell won out in the PC market. That should serve as a lesson for the inexperienced Lenovo. Other Chinese enterprises have had a hard time breaking into the international marketplace. Chinese TV producer Changhong was cheated out of US $480 million and was forced to stop selling its stocks. China Aviation Oil (Singapore) Co., Ltd lost US $550 million following poor investment decisions in oil futures and had to apply for bankruptcy protection in the Singapore Supreme Court.

Lenovo is well aware of the business risks it faces, and has taken measures to minimize any negative impacts. It appointed Steven Ward, an IBM vice president, as its new CEO, and moved its headquarters from Beijing to New York.

Many Chinese companies stress that globalization is their development strategy, but courage does not guarantee success. Advanced technology, management and market strategies are needed to increase their competitiveness in the international market. South Korea’s Samsung spent the best part of 40 years gradually developing into a global company. China has a long journey ahead.