The Development of Chinese Multinationals By Dr TSENG

The Development of Chinese Multinationals By Dr. TSENG C. S. Department of Marketing City University of Hong Kong

Rapid Economic Growth China ranks first as a global destination for FDI Ministry of Commerce: Up to the end of 2003 PRC set up more than 7400 enterprises in 160 countries Cumulative contracted investment US$ 33. 2 billion UNCTAD forecasts (2004) China mainland is expected to become the fifth largest investor after US, Germany, Britain and France FDI outflow from China: US$2. 4 billion yearly (1990 - 1994) Much higher than that of MOFTEC Many Chinese enterprises invest overseas without seeking approval

UK attract FDI from China British investment held seminar, talks, exhibitions in: Beijing Shanghai Guangzhou To convey: Government policy Opportunities Tax incentive Estimated: Up to 10 billion pounds to UK within next five years 100, 000 jobs

Macro Perspective Historical development of PRC outward direct investment Stage I Only state owned import and export corporation Provincial and municipal economic and technological cooperation enterprises under the commission of foreign economic relation and trade Were eligible to invest overseas

185 non-trading enterprises Mostly JV Contracted investment US$249 million Share of Chinese US$ 149 million Mostly developing countries Restaurants, engineering, finance/ insurance

Stage II MOFERT: (1985 - 1990) Legal entity Sufficient capital Technical and operation know-how Suitable partner overseas 577 PRC enterprises were set up Contracted investment US$2. 3 billion PRC firm US$1 billion

Spread more than 90 countries United States Thailand Australia USSR Many of them are developed countries Business: Metallugry/minerals, petro-chemicals, electronic/light industry, transportation, finance/ insurance, medical and tourism Parent: include manufacturing

Emergence of large transnational corporations 1. China National Metals and Minerals Import and Export Corporation 49 companies, JV and representative offices in 23 countries and regions (1989 figures) 2. China National Chemical Import and Export Corporation (Sinochem) 62 overseas subsidiaries in Asia, Europe, United States and Australia

Stage III 1991 (1991 - 1999) Chinese economy pick up drastic increase in terms of both the number and amount of investment 207 overseas, non-trading subsidiaries Total contracted investment US$759 million PRC contributed 1992 US$367 million 305 non-trading overseas enterprises were set up Total contracted investment US$352 million PRC firms contributed US$195 million Various seminars being organized Yuan Mu Li Peng

1992 Deng’s Southern visit Call for faster and further development of export oriented economy Especially in SEZ Foshan Director of foreign trade commission Encourage enterprises to set up manufacturing bases overseas to avoid discriminatory measures Mayor of Shenzhen Asked 80 plus overseas enterprises to meet new target of performance Other provinces and municipalities

Liaoning Hubei Xiamen Expressed their intention to increase their FDI further 14 th National Congress Jiang Zemin Open the country wider Make more and better use of foreign funds, resources technology and management expertise Encourage enterprises to expand their investment abroad and their transnational operation

1992 Turning point Macro economic control Stop approval - avoid loss of state asset Stage IV (１９９８ onwards) Encourage enterprises to set up oversees processing plant incentives

Market entry behavior of PRC multinationals Most of the PRC investors are unlikely to consider alternative countries in FDI decision making process Majority of PRC overseas enterprises are relatively small in size in terms of initial capital outlay with few exceptions In order to reduce capital risk, most of the PRC oversea enterprises are in the form of JV Ethnic and culture ties play a very important role Mainly Greenfield investment complemented by acquisitions

Micro Perspective Classiification of Chinese Multinationals (Hai Yan Zhang and Daniel Van Den Bulcke) 1. Foreign Trade Corporations (FTCs) 2. Foreign Business Oriented Companies or Conglomerates (FBOC) E. g. C I T I C Yue Xiu (Guangzhou Municipal Government) 3. Large industrial corporations(LICs) 4. Small and medium sized firms (SMEs) Including township enterprises

1. FTCs Before 1980 Monopolized foreign trade Single product Mono-function 1984 Gradual decentralization FTCs lost monopolized status in foreign trade Survival Vertical integration Multi-functions Production Finance, transport, insurance

Model: Japanese Sogo Shosha Korean Choebol E. g. Sinochem Established 1950 19 Dec 1987: State council Document 78 approved Sinochem as trial enterprise (試點) for transnational operations San-zhuan-san-hua 三轉三化 (a) Import and export trade to international trade: Future trade, entrepot business of crude oil, barter trade of petroleum

(b) From single commodity trade to multi-functional operation -- production, transportation, finance, service, consultancy, information, insurance, high technology, tourism (c) From trading to multinational enterprises In 1989 62 overseas enterprises in Asia, Europe, United States, and Australia Overseas sales: US$3. 7 billion Overseas production value 25% of total value

1994 Approved by state council as multinational conglomerates based on Sogo Shosha Model 1. Sinochem finance company -- China Trust and Investment Corp for Foreign Economic Relation and Trade (Transferred from MOFTEC) Include Zhong Hong Life Insurance Joint Venture with Manulife 2. Cross share holding with China Petrochemical Crop -- Sinopec and China National Petrochemical Crop

The first of Chinese 500 largest foreign trade firms since 1988 Ranked 304 th in Fortune 500 (1998) 14 th world trading house Turnover US$13. 8 billion Profit US$67. 63 million Total asset US$ 4. 957 billion

2 nd Trial enterprise Orient International Set up in Nov 1994 Merger of five “Golden Flowers” (five FTCs under Shanghai Municipal Government) Silk Garment Textile Knitwear Home textile Ranked 7 th in the 500 FTCs in China

March 1997 Approved as 2 nd trial enterprise Core business -- Import and export trade -- multifunction conglomerate: production, finance, technology, service, information Corporate headquarter: Centralized decision making Centralized finance Centralized management

High value added product Diversified product: Light industrial product, electrical instrument, specialty chemicals and biological product Under Shanghai Government directive Merger of Shanghai Silk Industrial Company and Silk Import and Export Company Orient International: 80% equity Shanghai Textile Holding: 20% equity

Shareholder of security company Pudong Development Bank Set up overseas enterprise division Better coordination Re-organized companies in Japan America Hong Kong

2. FBOC CITIC Yue Xiu Guangdong Enterprises Other provincial and municipal investment trust Partner with industrial companies to invest overseas Portfolio investment

CITIC Ø CITIC hunting abroad for natural resources, capital, technology to boost economic development at home Ø A consortium led by CITIC pacific Ø Acquired giant Hong Kong trading house

CITIC Ø Hang Chong investment co. for 6. 94 billion Hong Kong dollars ( US $894. 4 million) in early 1990. [ Wall Street Journal eastern edition New York Sept 4, 1991 A 9) Ø CITIC Australia major investment 10% stake in an aluminum smelter known as Portland [ Asian Wall Street Journal April 20, 1993] Ø Acquired Naracoorte meatworks from Smorgon Meat group in 1995. Made CITIC Australia the second largest exporter in Australia

3. LICs Capital Iron and steel Zhou Guanwu Zhou Beifang July 1988 Purchased 70% of the share of the Mesta Engineering Company in Pittsburgh for US$3. 4 million Oct 1992 Shougang spent US$20 million to purchase 51% of the total share of Tung Wing Steel and Iron Ltd (Changed name to Shougang Concord in July 1993)

Feb 1993 Bought 25. 12% interest in Eastern Century Holdings by 1993 controlled six listed companies: Shougang Concord, Shougang Grand, Santai Manufacturing, Eastern Century, Paul Y ITC, and Hoi Shing Oct 1992 US$15 million purchase the second steel converter of the California Iron Industry Company Nov 1992 Shougang paid US$120 million to purchase Hierrs Iron Mine in Peru

By 1998 Shougang had 15 overseas enterprise and offices in 11 countries and regions America Europe Southeast Asia Hong Kong Middle East Common wealth of the independent states Accumulated investment US$13. 2 billion

Haier Qingdao Plants in Philippines, Indonesia and Malaysia Invest US$30 million in a factory in South Carolina to produce refrigerators Aim to be listed in Fortune 500

4. SMEs Kelon Galanz Huawei

Kelon Originally township enterprises Listed in Hong Kong Stock Exchange Merger with Huabao in August 1998 further solidified Kelon’s leading position Global strategy Moved headquarter to Hong Kong In July 1996 Invested 1. 1 billion Japanese Yen in Japan to establish Japan Kelon Co. (electronic appliances research and development) Chosen by Forbes in 1999 as one of the world’s 300 best small companies

Galanz 78 Established in 1978 80 s Garment factory 93 Microwave oven Opportunities Korean and US (Whirpool) companies make acquisition capture their markets 98 Enter the Europe market World largest microwave oven producer Marketing companies in US, Canada and South America Dec 98 Set up R&D lab in Silicon Valley

Huawei Private enterprises One of the largest in China

After 2000, particularly after China joining WTO § Behavior changes § More and more activities in outbound M&A 1. FTC 2. FBOC 3. LICs 4. SME

1. FTC Sinochem § In 2002, Acquired Middle East oil and gas exploration and production unit Atlantis from Petroleum Geo-Services (PGS), A Norwegian oil service company § In Dec 2003, Sinochem paid US $100 million to buy a stake in an Ecuadorian oilfield 2 nd Acquisition of oversea oil and gas reserves

2. FBOC Many FBOCs encounter problems during late 90 s

3. LICs CNOOC purchased Repsol-YPF SAS interest in five Indonesian oil and gas properties for $ 585 million in 2002 Petrochina § Early 2003 bought six concessions from US-based Devon for $262 million § June 2003 headed a consortium bought 30% stake in Jabung production-sharing contract (PSC) for $164 million

3 LICs Huaneng power group § In Dec 2003, Dollars 227 m purchased of 50% share in Ozgen in Australia, a subsidiary of Intergen, the Boston-based power company. § It can gain experience and access to management and technology

3 LICs Haier In June 2001 § Haier Purchased a refrigerator manufacturer in Vicenza Italy § 1 st Chinese enterprise purchasing factory in the European household appliance manufacturing center

3 LICs Haier § Haier not only acquire a white home appliances production base in Europe possess the condition for participation in local manufacturers’ organizations and acquiring information § Paving the way for achieving the goal of creating world name-brands by making use of local funds, intellectual resources and culture § Favorable geographic location famous manufacturers whirlpool, Candy and Zanussi

3 LICs TCL § Purchased German Electronics Giant Schneider in Sept 2002 § Merged with Thomson in Nov 4 2003 One of the biggest TV manufacturers in the world after the merger

3 LICs Shanghai Electric Group Acquired Japanese printing machine manufacture, Akiyama Machinery Manufacturing Corporation in 2002 Shanghai Soap Group Purchased of battery production plants from American corporations multitech and Polystor Dalian Machine Tool group Acquired the production machine Division of American Ingersoll milling machine co. in late 2002 SAIC Acquired South Korea Ssangyong Motor Company Lenovo Acquired PC units of IBM in Late 2004

4. SME § In early 2003, Holley Communication Group Inc, a Delaware company, wholly owned subsidiary of China’s Holley group Ltd § Acquired Philips Semiconductors’ CDMA handset reference design operation with offices located in Vancouver BC Canada, and Dallas, Texas USA § CEO’s Wang Licheng