Two decades of market reform have opened up the Chinese economy, but protectionism has allowed Mainland enterprises to adapt before the arrival of world consumer giants in China during the 1980s and 1990s. Some names have held their own exceptionally well Shanghai White Cat Company's White Cat, for example, has proved more than a match for Unilever's Omo and Procter & Gamble's Tide, and it holds the top slot in the domestic detergent market. Now, fired by export success, some Chinese groups are establishing them-selves on the world stage.
The central government is supporting China's high achievers as they strive to become multinational corporations with globally recognised brands. But while policy now encourages China's household names to extend their overseas operations beyond exports and distribution lines, the thrust of government thinking is unchanged. Plant overseas represents additional demand for components from Mainland suppliers, boosting exports and fuelling growth. This is at the heart of Beijing's economic strategy as it seeks to maintain employment levels as the economy restructures.
Nevertheless, government support is available for more than just a facilitated export drive. In April last year, at the Export Commodities Fair in Guangzhou, the Ministry of Foreign Trade and Economic Cooperation (Moftec) revealed a first raft of 33 enterprises in leading export sectors that would receive state favour in establishing themselves overseas. They stand to benefit from priority access to state trade development funding to promote Chinese brands and sup-port operational infrastructure abroad. Loans are to be made available for technological upgrading, along with subsidies and aid for overseas initiatives and for collaboration with foreign parties. Tax regulations, too, are being tailored to favour Mainland companies seeking a beachhead on foreign shores. For example, the State Administration of Taxation wants to protect Chinese companies from double taxation by extending concessions that allow them to offset overseas liabilities against tax bills at home.
Embracing market principles
Corporate names with overseas visibility were rare before 1979, when the economy was all but closed. Bank of China and China Ocean Shipping Company served as an international interface, because isolationist China still needed to transact with the out-side world. Consumer goods, however, were internalised within the closed market. And, although by the end of 1998 Chinese companies had invested about US$6.7bn overseas, according to Moftec figures, China remains a minor foreign investor, with little plant and production abroad.
Before the market reforms, domestic products were not viewed as brands, with all the sophisticated connotations understood in developed consumer markets. However, once the leadership had revised policy in favour of market principles and opened up to Western-style consumerism and industrial practices, it was a short hop from the energising of latent consumerism to brand consciousness.
Today's big names traded up in the 1980s, and by the 1990s product branding had come into its own. Hisense, for example, evolved from the Qingdao Number Two Radio Factory to the Qingdao Television Factory of the 1980s to Hisense in the 1990s, dropping the parochial Qingdao tag of its diversified interests in 1993.
Gree typifies companies with a shorter history, having been incorporated in 1985 onthe establishment of Zhuhai special economic zone. Galanz dates back to 1978, spending most of the 1980s in textiles before beginning to produce microwaves in 1991 and starting to build the Galanz brand in 1992, when the company converted to the Galanz Enterprise Group. A few consumer names carried the Mainland banner overseas comparatively early. Tsingtao beer, for example, has a high profile on supermarket shelves and in restaurants around the world.
Hisense, Gree and Galanz all feature on Moftec's April list, with its strong weighting towards large household appliance companies. The list includes Changhong, Chunlan, Haier, Kelon, Konka, Little Swan, Meidi, Panda and TCL. These enterprises collectively embody an aspiration for overseas adventure since their home markets are crowded and margins are under pressure. The enhanced status in going global is another commercial incentive for offshore expansion. Moftec has, however, selected other light industrial sectors, including bicycle-makers Forever and Phoenix, along with textiles and motorcycle manufacturers.
Domestically, these names are major players and significant exporters. In world terms, however, they are small beer. For example, Haier Group commanded annual sales of Yn16.2bn (US$1.96bn) in 1998. Shenzhen Konka Electronics Group, China's second largest colour television manufacturer, anticipated a turnover of Yn l O.5bn in 1999, while Guangdong Kelon Electrical Holdings, a leader in air conditioners, refrigerators and freezers, posted a turnover of Yn5.6bn. Kelon was the only Chinese company to feature in the Forbes list of the world's 300 best small companies. There are also loss-makers among China's leading names. Nanjing Panda Electronics posted an interim 1999 loss of Yn107m on turnover of Yn669m.
But it is the companies' performance as exporters that makes the case for the move to overseas production. Selling into a deflationary economy at home, Haier racked up 35 percent year-on-year sales growth, to Yn10.3bn, and 36 percent in pre-tax profit growth in the first six months of 1999. Kelon's profits attributable to shareholders in 1999 rose 6 percent to Yn628m. Konka's net profits were expected to improve from Yn420m in 1998 to Yn496rn in 1999. Out in the wider world, Haier managed a 126 percent surge in foreign exchange earnings from exports in the first half of 1999. In 1998 it made US$77m from overseas sales.
Where companies have struggled at home, the parlous nature of their sector has been to blame. Overseas markets represent a way out. The government had to intervene to prevent television producers in China from the downward spiral of a price war, initiated by Changhong and Konka. As a result, Changhong's 1999 net profits fell to Yn434m, a year-on-year fall of 32 percent. Changhong Electrical Appliances ranks second on the Ministry of Information Indus-try's list of premier domestic companies by 1998 sales. Like many companies slow off the mark in forming a strategy for development overseas, Changhong is likely to begin to see the merits of Haier-style expansion.
Haier builds American plant
Haier is emblematic. China's premier house-hold electrical appliance manufacturer is on a high profile route by investing in production in the US, where it is building a US$30m refrigerator plant in South Carolina. It already has facilities elsewhere, including product design centres, and its 50-odd distributors keep – the supply of Haier goods flowing into world markets.
But the company wants to take the major territories head on, after which it will turn its attention to smaller markets. Some US$55m went overseas in the first six months of 1999 up 127 percent on the same period in 1998 two thirds to the US and the EU. Haier has up to 20 percent of the refrigerator market in the US but it also wants to tap America's expertise in design, research, innovation and technology. The US and the EU have proven less volatile than Haier's existing overseas production bases, which include Malaysia and Iran for washing machines and Indonesia and the Philippines for refrigerators.
Whereas many Chinese companies export on the basis of low labour costs at home, Haier concentrates on product quality and added value, making it one of the more serious Mainland contenders in the international market place. Haier's is a strategy for the long term. Group president Zhang Ruimin wants earnings to be derived equally from sales in China, exports and overseas production. The company understands the commercial significance of innovation and service, accumulating patents and sinking up to 4 percent of revenues back into research and development. Exposure to best practice overseas could translate into improved competitiveness in the home market, which would reinforce its core market.
China's companies have a diversity of targets. Galanz, for example, wants to make branded microwaves in the US, Russia, Australia, Argentina and Israel. Penmaker Hero is already investing in plant in second or third-tier markets. Konka wants to diversify into mobile phones, with production in India. Chunlan Group assembles products in Southeast Asia, intends to produce vehicles overseas, and is beginning to make air-conditioners in Russia. Hisense has been manufacturing in South Africa since 1996, with a 60 percent holding in Hisense South Africa Proprietary.
If all that mattered for an enterprise's confidence were a strong home position and an export edge overseas, appliance makers like Haier would soon be followed by other Mainland majors. China's computer and software companies have ridden the explosion of demand at home and exploited the Mainland's low cost base to conquer foreign markets with `made in China' products, many own-branded. But this is a cut-throat sector undergoing rapid evolution. In the international marketplace, Chinese companies compete with world-leading names for market share. At home, they must defend against foreign predators, which will sell into protected markets by virtue of China's thirst for advanced technology. The problems facing the likes of Great Wall, Legend, Founder and Stone (a non-state enterprise) are of a different order to the challenges in the home market for the consumer durable manufacturers like Haier, Kelon and Konka.
Nevertheless, it is in the home market where many Chinese companies may best exploit their competitive advantage. For computer companies China is known territory with strong research potential in Chinese language-specific technology and an expanding consumer base for rapid organic growth. They have two routes to overseas expansion: the traditional path of low-cost production for exports, and the value-added path of product development for targeted markets.
Great Wall Group, with 1998 sales of Yn11.1bn and profits of Yn700m, has participated in high profile state modernisation initiatives like the Golden Taxation Project. It also engages in Great Wall own-brand and foreign brand manufacturing – 300,000 personal computers out of a total of 680,000units were made under its own name in 1998. Like other domestic computer companies, it has ties to top universities and foreign giants such as Microsoft and Intel, and has access to the major technology hubs such as Zhongguancun in Beijing. It has a robust export record, posted at US$880m in 1998.
Distracted by the opportunities at home, Chinese computer companies are nevertheless keeping an eye on the potential for over-seas expansion. Founder is in production in India, the great regional rival among emerging markets in the computer and information technology sector.
Legend Computer is China's premier name in computing and number one on the Ministry of Information Industry ranking of Chinese electronics companies by sales, with Yn17.6bn in 1998. The corporation is assessing market potential in the US, and is intent on becoming a Fortune 500 member within five years. It ranks itself 14th among the world's computer makers, has a strong shipment presence in the Asia-Pacific market and has captured 20 percent of home sales. Turnover for the financial year ending March 1999 showed a 45 percent growth on the previous year, with profits up 34 percent. It has a track record for innovation and product development and close proximity to ventures of excellence, having invested heavily in Zhongguancun. The company is raising the proportion of group turnover committed to research and development from the current 2 percent limit. The favourable long-term outlook in the home market suggests a solid base from which to assess the potential for offshore initiatives.
The biggest obstacle for China's multinational aspirants is the most obvious competition. Their international rivals have been competing in the world markets for longer and they command the best management and have excellent access to resources and finance worldwide. They are performance driven, for the most demanding shareholders. They are equipped materially to innovate in-house, and financially – through earnings and access to capital – to make strategic acquisitions in areas where they are deficient. They regard themselves as global players rather than territory specific, wherever their headquarters or origins.
By comparison, China's newcomers are reluctant to recruit foreign executives with international experience. An exception is Bank of China International (UK), which appointed a Westerner as managing director, recognising that it needed external expertise to build its reputation in the field of investment banking.
Most companies are accountable to the state as a major shareholder, which is a constraint on commercial decision-making. Innovation is often a trade-off between access to the home market for foreign collaborators, via joint venture, and technology transfer by the foreign partner to the joint venture. Wuxi-based Little Swan, for example, with markets in Japan, South America, Africa, Europe and Southeast Asia, is also in collaboration with Merloni Group for making dishwashers. Little Swan is a major listed automatic washing machine producer and a rival to Haier, another partner of Merloni.
China could identify specialist niches where it has an inherent advantage – for example, Chinese-language information technology. In traditional Chinese medicines (TCM), Shanghai-listed Tong Ren Tang is a company with a history stretching back more than three centuries. It is registering products overseas at the same time as it casts around for expanded markets. The company remains primarily an exporter, but represents the type of organisation that could upgrade operations to establish a firmer presence overseas, tackling regulation and standards. A more distant prospect is of a Chinese TCM or pharmaceutical company acquiring clinical testing facilities and technology abroad, a platform for multinational expansion.
The lesson applies elsewhere. Promoting the heritage or exclusiveness of a Chinese product lends itself to areas such as food and drinks, even to some consumer items such as cosmetics.
Learning to liberalise
For now, the highest profile Mainland names will continue to be drawn from outside the consumer light industrial sectors, corporations well known to investors rather than consumers across the world. Giants like China Telecom, with 95 percent of the local market, and rival China Unicorn, for example, will largely be confined to the home market. Under World Trade Organisation rules they could wither under foreign competition in the domestic market, unless they make a radical jump overseas – for example, through strategic acquisitions in fast growing areas of their core trades.
Cross-border telecommunication hopes in China rest rather with companies like Huawei Technology, a telecoms manufacturer and network solutions provider on a more modest scale than its oligarchic seniors. It invests heavily in research and development and is selling well into modest but important markets in Russia, Eastern Europe and Africa. The Huawei name sits atop a research facility in the US and a joint venture in Russia.
Elsewhere, Mainland corporations like China National Petroleum Corporation and China National Overseas Oil Corporation will continue to exploit China's substantial natural resources and channel money into securing overseas supplies to cater for rising demand at home, without achieving the stature of a foreign major.
The grandest monopolies like the State Power Corporation are only just learning how to liberalise domestic markets, and are ill equipped for foreign forays. Fortune 500 lists will continue to embrace the likes of the Bank of China and the Industrial and Commercial Bank of China, Sinochem and Sinopec. China's vehicle-makers such as First Automobile Works have offshore plant, but primarily in poorer regions or simply to secure footholds in protected markets. For the present, China must pin its consumer multinational ambitions on the rarest of breeds, the Haiers.