Editor’s Note: This article originally appeared in East Asia Quarterly’s Volume IV/Number II, April-June 2012 issue.
Following the Chinese government’s mandate that companies should “go out” (走出去) or “go global” (走向世界), many observers anticipate that Chinese multinational corporations (MNCs) will secure a growing share of the international consumer market around the world. This may eventually occur, but for the time being China’s multinational corporations remain a very long way from playing in the premier leagues of international commerce.
How many Chinese corporations can you name? Most likely fewer than 10, or even five. We are all familiar with Tsingtao beer, Air China, Bank of China and Lenovo computers—and some may know names like Huawei Technologies, Haier appliances or China Mobile. But not a single one of these firms made the 2011 ‘Top 100 Global Brands’ list compiled annually by BusinessWeek and Interbrand. The global brand presence of China’s best-known multinationals is nowhere near the likes of Coca-Cola, GE, Intel, McDonald’s, Google, Disney, Honda, Sony, Volkswagen and similar global giants.
Yet when measured in terms of total revenue, it is clear that Chinese companies have steadily climbed up the global rankings. Twelve Chinese companies were included in Fortune’s Global 500 list in 2001. And only a decade later, in 2011, that number rose to 61 (including four with headquarters in Hong Kong). China now ranks third on the global list, only slightly behind Japan but well behind American firms. In 2010 these 61 Chinese enterprises had a combined annual revenue of US$2.89 trillion and an estimated overall profit of US$176.1 billion. Of the 57 mainland companies, 49 are state-owned enterprises (SOEs).
While ranking on the Fortune Global 500 list indicates the growing clout of Chinese corporations, it does not mean that a company is internationally active or even that it is a real multinational. When these companies are ranked by foreign assets and sales, it becomes clear that, with few exceptions, they all operate predominantly within China. In other words, despite the government’s directives and financial incentives to ‘go global’, many leading Chinese corporations have yet to do so.
So why have Chinese multinational corporations encountered difficulties in going global? Ten possible factors may explain it.
Professor of Political Science and International Affairs
Director, China Policy Program - Elliott School of International Affairs, The George Washington University
First, very few Chinese firms can operate truly globally. Haier, Huawei and the national oil companies Sinopec, CNOOC and CNPC are often the only ones that have capital, operations and sales on a global scale. Many of China’s other multinationals (banks, auto companies, natural resource companies or IT) really only invest in and operate on some continents; most are far from possessing global production, marketing, distribution, logistics, supply, research and development, and human resource networks.
Second, the Achilles heel of Chinese multinationals is human resources—particularly management. Multilingual and multicultural managers are few and far between, and all assessments of Chinese corporations note this to be a fundamental weakness. A 2005 study by the global multinational consulting firm McKinsey & Company estimated that Chinese multinationals will require 75,000 global managers by 2020. As a result, Chinese students are flooding into foreign MBA programs as well as business schools in China. Distance-learning MBAs tailored to the Chinese market are also taking off. But classroom training alone will not suffice because there is no substitute for extensive international experience. Some Chinese companies have taken advantage of the global financial downturn by hiring (preferably young) laid-off staff in New York, London, Hong Kong and elsewhere. In 2010, for example, the China Daily reported that Chinese companies operating overseas had hired a total of 800,000 foreign employees.
Third, and related, Chinese companies and their management have displayed an inability to escape their own national corporate culture and business practices. Chinese business culture values interpersonal over institutional relationships, and business decisions are often oriented towards short-term profit. There is also a lack of transparency and oversight, which has been linked to a high degree of corruption. Moreover, Chinese companies are politicised: that is, many have Communist Party cells and members embedded within the firm. Most of China’s state-owned ‘national champion’ firms have CEOs appointed by the Organisation Department of the Chinese Communist Party, and this is also true of multinationals. Unlike their Chinese competitors, though, most Western multinationals are apolitical. And this is not where the differences end. Western business culture emphasises teamwork and cooperation between management and staff, detailed long-term planning, transparency and oversight, multiculturalism, prosecution of corruption, and the institutionalisation of relationships.
Fourth, as noted above, Chinese companies have a very poor global brand presence. Establishing this type of presence requires investing large and sustained resources into advertising and cultivating clientele. Having distinctive, non-Chinese names will also help in this endeavour.
Fifth, mergers and acquisitions have become the preferred modality for Chinese corporations to go global because they are a quick means of acquiring advanced technology, sales networks, established brand names and other strategic assets overseas. Precisely because Chinese corporations have very few multilingual staff who have experience working in cross-cultural environments, and many who are inexperienced in local business practices, it is much easier for Chinese multinationals to simply buy a share of an established foreign firm in order to gain these elements and offset their deficits in one stroke. Even though in recent years China’s mergers and acquisitions have spiked in number and sometimes in value, they have not been very successful so far. One report estimates that 90 per cent of China’s 300 overseas mergers and acquisitions conducted between 2008 and 2010 were unsuccessful, with Chinese companies losing 40–50 percent of their value after the acquisition. This has particularly been the case in the technology, communications and natural resource sectors.
Sixth, while some Chinese firms develop business plans and strategies to globalise, the majority do not. Instead, efforts to ‘go global’ tend to be driven by pent-up cash in search of a place to invest outside China’s saturated domestic market; a strong mandate by the government to ‘go out’, with incentives to do so and penalties for not doing so; naïveté about the complexities of foreign countries; a desire to maximise profits as quickly as possible, rather than produce steady revenue streams; and a fickle management tendency to frequently change decisions and directions.
Seventh, while Chinese firms do tend to have clear performance indicators and incentive programs and do provide job security, they do not score as well in other aspects of management. Big Chinese firms—and the Chinese government is no exception—are extremely hierarchical. Chinese organisational culture stresses discipline and conformity, which creates a climate of risk aversion and discourages initiative. Being entrepreneurial (which Chinese companies certainly are) is different from being innovative and creative. Moreover, the Chinese notion of teamwork is geared towards following leaders’ instructions, rather than the more egalitarian and collegial model prevalent in Western organisations. This preference for clearly defined workplace roles and hierarchies often means that Chinese do not adapt well to management structures that prize decentralisation and individual initiative—and this has resulted in repeated culture clashes in Chinese mergers with Western companies. The practice of mid-career (re)training is similarly alien to Chinese multinationals, while it is intrinsic to most Western corporations.
Chinese firms tend to train a worker for a precise skill and job, which they are expected to do indefinitely, whereas many Western firms adopt much more flexible personnel policies that emphasise self-improvement, retraining and job mobility within the firm, and generalisation over specialisation. Oftentimes this is done within the firm through training aimed at developing new job skills, but also via mid-career management training outside the firm—so-called executive education. A one-month stint in an ‘Executive Ed’ program at the Wharton School, the Kennedy School, INS EAD, London Business School or similar institutions offers an ‘escalator effect’ for corporate management. Chinese business schools—such as Shanghai’s China Europe International Business School, Hong Kong University of Science and Technology’s Business School, or Peking University’s Guanghua School of Management—are all seen to be improving, but are yet to enter the premier league internationally. Though mid-career training has become de rigueur in the Chinese Communist Party and government, this organisational culture is yet to become prevalent in the corporate world.
Eighth, Chinese companies have demonstrated difficulties in adapting to foreign legal, regulatory, tax and political environments. Transparency and corporate governance are not exactly attributes associated with Chinese companies, which have a reputation for opaque decision-making processes, frequently corrupt business practices, and often fraudulent accounting procedures. Few Chinese firms have in-house legal counsel who are knowledgeable about foreign legal and regulatory environments. This impatience with the regulatory environment of host countries has had a negative impact on business operations abroad, particularly when Chinese companies have tried to list on foreign stock markets: many Chinese companies have filed fraudulent information with securities regulators in the US before their initial public offerings. They also often run afoul of foreign politicians who are suspicious of Chinese investments on national security grounds.
Ninth, Chinese firms rarely apply due diligence when dealing with their competitors abroad, which often means they overlook both the strengths and weaknesses of their potential partners and competitors. As a result, they find it harder to exploit comparative advantages.
Finally, in looking for foreign partners, many Chinese multinationals run up against the ‘reciprocity problem’. Many foreign multinationals with whom Chinese corporations seek to partner have either been operating in China for many years or are seeking to enter the Chinese market. The former have most likely experienced years of Chinese red tape, investment obstacles, and have had very frustrating and costly experiences (even if they have become profitable), while the latter want an entrée. In both cases they look to the Chinese firm to make life easier for them inside China; for them, there is an informal quid pro quo: you help us in China, we help you abroad. The problem is that many Chinese multinationals have a bifurcated corporate structure, which means that domestic and international divisions often have a bureaucratic firewall between them and do not communicate well with each other. Moreover, the Chinese partner firm is not necessarily responsible for improving a foreign company’s situation or solving its problems in China—this is often the domain of domestic government authorities. These competing motivations often lead to a mismatch of expectations between Chinese and foreign multinationals.
For all these reasons, Chinese corporations face a number of impediments in going global. They have a steep learning curve ahead. Over time, they will no doubt learn and adapt—as Chinese in all professional pursuits seem so capable of doing—but these obstacles are not insignificant. China’s multinationals are still taking baby steps in global business.
Mao Zedong did not see the value of reform and opening up. The China part of Nixon’s 1967 Foreign Affairs article suggested an implicit bargain that provided the conceptual basis for China’s new direction after 1978. That bargain was if China focused on domestic development and didn’t threaten the security of its neighbours, the United States would help.
Sentiment inside the Beltway has turned sharply against China. There are many issues where the two parties sound more or less the same. Trump and others in the administration seem heavily invested in a ‘get very tough with China’ stance. It’s possible that some Democrats might argue that a decoupling strategy borders on lunacy. But if Trump believes this will play well with his core constituencies as his reelection campaign moves into high gear, he will probably decide to stick with it, if the costs and the collateral damage seem manageable. But that’s a very big if, especially if the downsides of a protracted trade war for both American consumers and for American firms become increasingly apparent.