General Electric has grown to become one of the largest companies in China, with revenues of more than US$2bn and growing at an estimated 20 percent a year. Over the past two decades, GE has invested more than US$1.7bn in China.
The US company's recent history in China started off with a trip that chief executive Jack Welch made in 1993, and its operations have expanded steadily since then. GE has traditionally been quite cautious and conservative in investing in China. Under Welch, there were numerous occasions when Chinese officials stated their desire to see it expand more aggressively in the country. Welch said of China: "It is so vast and complicated and so hard to figure out. I don't know the answer… That's probably why I am retiring. Somebody else is going to have to figure it out".
That somebody is Jeff Immelt, and his team at GE China, headed by Steve Schneider. Since Immelt took the helm, there has been a new sense of urgency in GE's activities in China. This has been driven partly by China's entry to the World Trade Organisation and by heavy investment in China by a number of GE's major global clients, including Sony, Canon, Dell, Nokia and Motorola.
Shortly after taking over as CEO, Immelt said: "We have to think of China as a massive opportunity, not just Beijing and Shanghai. I see China growing either as a market or as a competitor. The growth is profound and real." Immelt set his China team revenue and procurement targets of US$5bn each by 2005. To help achieve these goals, he promised investment support, people and training resources.
Today, a number of GE's major businesses are moving their Asian headquarters to Shanghai, which is likely to become the group's hub in Asia over the next two to three years. These include:
GE Medical, which is moving its headquarters to Shanghai and has its China manufacturing base in Wuxi, where it is a global leader in producing CT-Scan machines;
GE Plastics, which has moved its Asia HQ from Tokyo to Shanghai, with only Asia- Pacific marketing staying in Tokyo;
GE Industrial Systems, which is moving its Asia headquarters to Shanghai from Hong Kong for products such as switches, electric motors, automation and fire safety. China is not a new market for GE – it has had agents and representatives there since the early 1900s. However, the company's recent
history in China really took off from Jack Welch's 1993 trip. Like many other CEOs at the time, Welch flew into China, took in the view and decided to give China a thumbs-up. After this trip, dozens of executives travelled across the country looking for deals. For example, GE Appliances was seeking a partner to set up a pan-Asian manufacturing operation, but none of the potential deals passed GE's unbreakable rule of 20 percent return on investment. These checks and balances were what countered Welch's enthusiasm, and held GE back. This cautious approach has stood GE in good stead, and has made it a much stronger business in China today. By contrast, many other multinational corporations have let 'strategic objectives' take precedence over their rules on investment returns over the past decade, and have paid the price. GE's success in China has been based on a number of factors:
-planning is the responsibility of each business unit;
-GE has been able to transplant its culture to China by using the same business practices and processes it uses all over the world, and the corporate team spends a significant amount of time and energy on human resources;
-over the past few years, there has been a big increase in the number of local managers in the company;
-it has always worked hard at government relations. It has a team of government relations officers, and top managers from the US regularly meet senior officials in China.
Traditionally, GE has pushed strategy down to the business unit level, and therefore its strategy in China has been the sum of the strategies of its various business units. But which businesses have been successes, and which have not?
GE Medical – the biggest success
GE Medical is probably GE's most successful business venture in China. Formed in 1991 with an initial US$2m investment in a joint venture with the Beijing imaging firm Hangwei, it makes medical diagnostic equipment, including magnetic resonance systems, X-ray equipment and computed tomography (CT) scanners. GE Medical Hangwei shipped its 1,000th CT scanner in 2000.
In the early years of the venture, it was helped by two developments. First, Siemens ignored China government advice to form an X-ray joint venture, and effectively handed the market to GE. Second, imports were restricted and GE, which held one of a limited number of licences, was able to grow its market rapidly by importing and selling machines under this controlled regime.
Then in 1995, everything changed. The import quotas were abolished, and there was a real threat of cheap products from overseas flooding the market. As a result, GE Hangwei had to look elsewhere for its growth. Since China was a consumer mainly of low-end machines, the company lobbied its headquarters in the US to become the global centre for the manufacture of low-end CT-scan machines. There was an internal bidding contest against plants in Japan, South Korea and India, which GE Hangwei won. This ensured its export markets, and continuous upgrading of its technology.
GE Hangwei has since become one of the world's biggest manufacturers of CT-scan equipment, and achieved US$305m in revenues in 2000. It has a 31 percent market share, triple that of its nearest competitors Siemens, Philips and Toshiba. Apart from manufacturing, GE Hangwei has also moved into the area of financing, and in 2000 arranged US$40m for Chinese hospitals to buy equipment.
In January 2003, the company announced plans to double its business volume in China to US$2bn over the following three years. The president of the division, Chih Chen, also stated that his company was considering making China its global purchasing base.
GE Lighting – early difficulties
GE's biggest initial investment in China so far has been in the lighting business, but this US$60m investment has not been especially successful so far.
GE Lighting's partner, Shanghai Jiabao, was China's largest lighting product maker in 1992, the year of its public issue, with gross assets of Yn80m and an annual net profit of Yn27m. The central government instructed Shanghai Jiabao to enter into the joint venture, which involved GE putting in cash, technology and management know-how for a 65 percent stake, and the Chinese partner contributing its lighting venture.
From the start, the venture got into difficulties. GE discovered that the quality of local components was not as high as it had thought, and it needed to import parts – which the local team believed were the same in price and quality as the local components.
There were also serious differences in pricing strategy, and in operating expenses such as cars for GE managers and expenses for overseas technicians. The financial performance of the venture went from bad to worse, and in 1997 losses were running at Yn40m.
Meanwhile, local competitors were developing their technology, and global competitors were slowly entering the market. At one point, Shanghai Jiabao wanted to take over the entire joint venture, but this was not accepted by GE. Ultimately, the Chinese partner sold most of its stake to GE, keeping just a small percentage for itself.
GE claims that these difficulties were merely the teething problems of a venture that is today successful and profitable. GE Lighting has so far invested more than US$100m in its China businesses – four factories in Shanghai and a joint venture in Xiamen with Topstar. It has purchased more than US$100m of lighting products from China for global markets.
In 2000, GE Lighting's R&D centre and a finished product purchasing centre were moved to Shanghai, and combined to form GE Asia Lighting Centre. Turning around the performance of this division has taken considerably more effort than most of GE's other businesses in China.
GE Capital – risk-averse in China
GE Capital is the group's huge financial services arm, and perhaps the most aggressive of its divisions around the world. GE Capital accounts for more than 40 percent of GE's revenues and, under Jeff Immelt, its structuring and operations have been changed to give investors more clarity on its finances.
From 1995, the division has been on an expansion path around the world. "GE Capital's instinct has always been to expand when there is blood on the streets," said one of its managers, referring to some of the group's best deals, done when the economy was in difficulty. Across the Asia region, it pumped in more than US$1bn into countries such as India, Thailand and especially Japan. In Asia, GE Capital has estimated assets of US$40bn.
But in China, its strategy was different. It entered the market back in 1983, at a time when each and every deal had to be vetted by head office back in the US. In the words of Dennis Nayden, president of GE Capital in 2000: "Our strategy in Asia in the 1990s [was] to gear up enough of a local presence to understand what was happening in these markets, and then wait and see how things would evolve."
The division's main focus in China so far has been in the area of leasing aircraft and aircraft engines. GE has a very close relationship with aircraft companies such as Boeing and Airbus through its aircraft engine business. David Wang, who headed GE's business in China for much of the 1990s, now heads Boeing's business in China.
This business took off in the early 1990s, when the state airline monopoly split into several regional carriers, all of which faced intense pressure to build up their fleets. Because these airlines had little start-up capital, but great cash flows because of state-regulated prices, their only option to acquire aircraft was through leasing. Enter GE Capital, which saw the area as an asset backed, relatively low-risk business.
Today, of GE's US$2bn in assets in China, almost US$1.2bn is in aircraft. GE Capital is the market leader, with a 40 percent market share in aircraft leasing.
In the area of consumer finance, GE Capital became the first company to receive a finance license in 1998, following a process that took five years to complete. It then opened a joint venture in Guangzhou with a local bank, in which it owned 97.5 percent.
However, within a year GE scaled back its consumer finance operations in China: "It had been almost impossible to create enough of a market for GE's consumer lending business in Guangzhou," said Stephen Hatjun, who at the time was head of GE Consumer Capital.
GE also made a foray into the equipment servicing business in Shanghai, with about 40 pieces of construction equipment available for hire. This joint venture did not work because there was very little credit history available for other organisations or individual borrowers, and customers were unwilling to pay high rates for the perceived risk that they represented.
The group is also believed to have had some exposure in the collapse of Guangdong International Trading and Investment Co (Gitic) in 1999. However over the next few years, as China's financial services, leasing and insurance industries liberalise and grow, GE Capital expects to grow significantly.
Last month, GE said it was preparing to offer a variety of loan products in advance of the opening up of China's financial markets by the end of 2006. These include diverse areas such as vehicle financing, reinsurance and mortgage loans.
GE Plastics – solid manufacturing
GE Plastics entered China quite early, with its first plant being set up in Guangdong in 1994. A second plant was established in Shanghai five years later. These plants supply a wide range of plastics to light industrial and electronics export manufacturers in the Pearl River Delta and the greater Shanghai area. In the last three years, GE has invested US$30m in Shanghai, setting up compounding facilities in Nansha and Pudong, as well as a customer innovation centre. It caters to tightly focused business markets, and the products are either directly exported or sold to electronics exporting companies.
The division's production capacity increased by 50 percent in 2002 to stand at an estimated 100,000 tons, while its annual revenues are about US$500m. It wants to achieve revenues of US$1bn by 2005.
China is perhaps the most crucial market in the world for GE Plastics and it has recently moved its Asia headquarters to Shanghai. It will also open a global research centre in Shanghai in 2003, to develop new products and applications for the whole of the Asia- Pacific region.
In 2002, GE Plastics spent US$25m to acquire a polycarbonate maker in Zhongshan city, Guangdong province, called Zhongshan Plastech Sunsheet Co. It wants to use Zhongshan to quickly ramp up production to meet surging demand in China.
In a related area of specialty chemicals called silicones, GE has a joint venture with Toshiba – GE Toshiba Silicones – which has become one of the world's major silicone producers. This joint venture, set up 30 years ago, has moved into China in a big way. GE's global market share in silicones is estimated to be around 20 percent. In July 2001, it started production at a plant in the Shanghai zone of Waigaoqiao. This plant will supply a wide range of silicone products, including silicone rubber, sealants, oils, emulsions, resins and other specialty chemicals. Customers are drawn from a variety of industries such as textiles and electrical and electronic appliances.
In November 2002, GE Toshiba Silicones set up a joint venture in Shenzhen to make silicone elastomer products, primarily for customers in China. The company, called Shenzhen GETOS Fine Silicones, is a joint venture with Shenzhen Guanghua.
GE sourcing from China
GE has started using China as a global export base. All its businesses, including GE Lighting, GE Plastics, GE Medical and GE Appliances, buy millions of dollars-worth of products from GE and joint ventures in China for global markets. The company wants to increase its total procurement from China to US$5bn by 2005. A notable success has been the export of refrigerators made by Frestech of China to the US market.
In addition to its major businesses, almost all other GE divisions have tried to set up ventures in China. In an extension of the aircraft and engine leasing business, GE has a joint venture engine services business in Xiamen, Fujian province. In 2001, China Eastern Airlines became a 30 percent shareholder in the venture, which overhauls and repairs engines produced by GE Aircraft Engines and related companies. China Eastern has the largest fleet of GE CFM56 aircraft engines in China, and has entered into a service agreement with GE Aircraft Services Xiamen.
GE has also been quietly buying aircraft parts in China, from suppliers including Xian Aero Engine Corporation. It has already bought US$18m-worth of products from Xian, and would like to increase this significantly over the next few years.
GE Aircraft Engines has been named a major engine supplier to China's ARJ21 regional jet programme, which sees a potential of 500 aircraft over the next 20 years. Such a programme could yield total revenues of US$3bn.
GE Power has been a supplier to power projects in China for a long time. There are around 160 GE technology gas turbines in the country. In 2000, GE Power was awarded a contract to supply two gas turbines and technical services to a power station in Shenzhen. In July 2002 it won a US$35m contract for gas turbines in Nanjing.
At the end of last year, it entered into a US$14m joint venture with Shenyang Blower Works to provide repair and maintenance services. This was GE Power's first direct investment in China, although it was followed by another last month when it acquired a majority holding in a leading joint venture supplier of hydropower equipment. For an undisclosed amount it took a 90 percent stake in Kvaerner Hangfa, which was set up in 1995 with registered capital of US$25m.
In the area of automation and controls, GE has also been making some initial moves into the market. In 1999, it signed a US$5.5m contract to build a central monitoring control system for the second phase of the Shanghai sewage project.
In June 2001, it established a joint venture automation engineering company in Chongqing, called Chongqing Tonghua Automation Engineering Co, gaining a foothold in southwestern China. The venture will supply advanced automation control systems to Chongqing's sewage, communications, water supply and other industrial customers, and will design and develop automatic control systems.
In recent months, GE has also taken some steps in the area of software. In November 2002, it set up a global development centre (GDC) at Dalian Haihui Technology Development Co. Established in 1996, Dalian Haihui will provide original design manufacturing services to GE's offices around the world. The company has strengths in transportation solutions, and has clients in Japan. GE looked at more than 100 other companies before selecting Dalian Huihai. It has eight other GDCs across the world, but this is its first in China.
GE today has a business that has critical mass in China, and in Jeff Immelt a CEO who is willing to support and fuel its growth. Its presence in markets such as medical and plastics is particularly strong.
GE's experience reinforces some of the success factors for businesses in China:
-the rules of business investment and return on investment apply, even in China;
-investors need to understand the market and customer requirements, and figure out how to meet their needs better than anyone else;
-plan ahead, but start small, and do not be afraid to pull out when things go wrong;
-transfer a strong culture to the local operation, build a strong local team and invest heavily in management development and training;
-use China as a manufacturing base to supply the local market and export overseas. This allows firms to earn foreign exchange, as well as build products and systems for global markets.
GE looks set for further expansion. A number of other GE businesses, such as the media and television business CNBC, do not yet have a presence in China. The group wants to ride the country's future anticipated growth and take advantage of major events on the horizon, such as the 2008 Olympics in Beijing and the 2010 Shanghai World Expo. "China's hosting of the 2008 Olympics… is going to show the world that China is a far cleaner place to do business than a lot of people imagine," says Immelt. "It's a hard-nosed commercial culture, and GE likes it.?
"The Chinese economy is going to experience the fastest growth on earth and you can either ignore it or go with it. We are looking at major investments there."