Asia Supplement

The Rise of the Chinese Multinationals Dan Steinbock

n early June, hoping to ease These have developed Igrowing trade tensions with the an informal “bamboo network” that tran- European Union, agreed to place scends national boundaries and extends voluntary limits on the growth of its tex- throughout the region, where entrepre- tile and apparel exports to Europe. The neurs, business executives, traders and decision came hours before the eu was financiers of Chinese descent are major set to impose its own trade restrictions players in local economies.1 Today, the on China. A few days later, deep misgiv- array of complementary business rela- ings about China’s rising economic and tionships comprises more than fifty mil- political clout fueled a fierce debate over lion ethnic Chinese, who control many of a major Chinese oil company’s bid to buy Asia’s largest public companies and who U.S. producer Unocal. Topping Chev- have contributed to the rise of China’s ron’s original offer of $16.8 billion, the new multinationals. $18.5 billion bid from the government- When, a century ago, the first wave of controlled China National Offshore Oil globalization swept across the developed Corporation (cnooc) came under fire economies of western Europe and North from U.S. lawmakers. These two inci- America, East Asia enjoyed a boom of dents highlight the new economic reality: its own. Chinese capitalists launched op- China is no longer just a destination for erations outside China while investing in foreign direct investment (fdi)—it is the their home country. home for Asia’s new multinationals. After 1949 the People’s Republic of China opted for a command economy in- Bamboo Networks to sezs 1Murray Weidenbaum and Samuel Hughes, The ince the 1500s, southern Bamboo Network: How Expatriate Chinese En- SChina has been a springboard for trepreneurs are Creating a New Economic Super- emigrants to Vietnam, , Indo- power in Asia (New York: Simon & Schuster, nesia and elsewhere in . 1996).

 The National Interest––Fall 2005 spired by the Soviet model. Despite rapid was a Beijing restaurant in Tokyo, a joint growth, productivity was dismal. The civil venture of a Chinese and a Japanese com- war and the communist rule that followed pany. Despite significant expansion in led to massive capital outflows to neigh- overseas investment, by 1985 only 143 boring Hong Kong, Taiwan and Southeast Chinese enterprises had made the jump, Asia. Chinese “emigrant entrepreneurs” investing $170 million in 45 countries played a critical role in the industrializa- (less than 3 percent of China’s total inflow tion of Hong Kong, contributing to the of fdi). These businesses were mostly in significance of the city as a global textiles low-tech services, such as Chinese res- and garment hub.2 With the Cold War, taurants, located in the major cities or capital outflows from China were replaced of countries like the United by two-way flows between Hong Kong States, Japan and Thailand. Investment in and Southeast Asia. Postwar globalization other service sectors, such as construction arrived in only after the and shipping, was located primarily in failures of the initial national moderniza- Hong Kong and Macao. tion efforts (the Great Leap Forward in the 1950s and the Cultural Revolution in High-Tech Zones and Natural Resources the late 1960s), which contributed to fam- ine, devastation and dissension. ith the initiation of in- In January 1975 and Wdustrial modernization in the Zhou Enlai drafted the “Four Modern- coastal provinces, Chinese reformers also izations”, calling for modernization in began to pay increasing attention to the agriculture, industry, science and technol- modernization of science and technology, ogy, and national defense. The transition the third priority of the modernization from import substitution to export orien- program. The development of high-tech tation led to China’s “reform and open- industries was seen as vital for boosting ing.” Following the successful reforms of fdi inflows and attracting foreign mul- the agricultural sector, Deng moved on tinationals. If the idea for the sezs came to the next stage of China’s moderniza- mainly from other East Asian export pro- tion, industrial reform, in 1984. The gov- cessing zones and free trade zones, the ernment established Special Economic model for the high-tech zones originated Zones (sezs) close to Hong Kong and in Silicon Valley. then opened the coastal provinces and China’s high-tech development pro- major cities to overseas capital. The re- gram was initiated in 1986, when the formers saw the bamboo network of the State Council called together more than overseas Chinese in the south as an asset 120 senior Chinese scientists to draft through which the sezs could be inte- China’s strategic high-technology plan. grated with Hong Kong, Macao and Tai- To implement the plan, the State Science wan, as well as the rest of the world. Still, and Technology (S & T) Commission de- overall annual fdi averaged only around signed the Torch Program, which aimed $1 billion. at the commercialization, industrialization Chinese fdi abroad started even more and internationalization of “high and new modestly. In 1979 a chosen few compa- technology.” One of the program’s key nies began to invest overseas, typically components was to establish Science and on the basis of existing overseas trade Technology Industrial Parks and innova- linkages. A third of overseas operations were located in Hong Kong and Macao, 2Siu-Lin Wong, Emigrant Entrepreneurs: Shanghai another third in the United States, Japan Industrialists in Hong Kong (Hong Kong: Ox- and Thailand. The first multinational ford University, 1988).

Asia Supplement  tion centers. Meanwhile, the program investors, capital inflows accelerated also became responsible for the “high and dramatically. Initially, this fdi phase led new technology industrial development to the geographical expansion of Chi- zones” (hntidzs) focusing on a dozen nese firms from Hong Kong, Taiwan and strategic industries, including microelec- Southeast Asia. Now China also showed tronics, aerospace, biotechnology and, up on the radar screens of U.S. corpora- more recently, information technology. tions. After Deng’s southern tour, U.S. Concurrently, the government took steps investment flows to China grew more to improve the investment environment, than fivefold to $556 million in 1993. which triggered another phase of fdi, Over the latter half of the decade, U.S. with annual inflows exceeding $3 billion. capital flows to China averaged $1.1 bil- These measures were mirrored by lion annually. the Chinese government’s bolder steps Through foreign multinationals—the toward outward investment. In the latter so-called foreign-invested enterprises half of the 1980s, 620 new Chinese busi- (fies)—fdi played a critical role not just nesses invested more than $860 million in China’s economic reforms and opening, in over ninety countries. Instead of res- but in the rise of Chinese multination- taurants, natural resource development als. Until the late 1980s only 2 percent of projects, along with assembly and trans- the foreign multinationals in China were port, dominated Chinese overseas invest- regarded as technologically advanced, ments. Large, state-owned enterprises, and enterprises using advanced technol- including trust, steel and chemical giants, ogy made up just 5 percent of total fdi joined in. Of the newly established over- in China. After the mid-1990s the fies seas firms, 50 percent were in Asia and 18 replaced the small- and medium-sized en- percent were in Africa. However, it was terprises of the overseas Chinese as major the developed countries that attracted investors. Capital inflows soared from $11 the attention of Chinese investors, with billion in 1992 to $50 billion in 1999. Australia targeted as the single most im- Located in the United States, western portant host country for natural resource Europe and Japan, the fies are global development projects. But though the giants, owned by institutional investors, growth rate of Chinese fdi was almost engaged in worldwide operations and ex- 50 percent greater than the growth rate celling in high-tech industries. Account- of multinationals worldwide, Chinese fdi ing for only 10 percent of total national accounted for only 0.1 percent of the industrial assets in 2000, they provided global total. more than 27 percent of the gross in- The tumultuous early years of reform dustrial output value, 24 percent of the contributed to inflationary pressures, total value added and 29 percent of the unrest and, ultimately, the Tiananmen total industrial profits. At the end of the events. The momentum was recaptured growth years in 2001, more than 400 of only in 1992. Following his tour of the the world’s top 500 manufacturing com- southern coastal provinces, Deng was panies had invested in China. The fies now calling for “faster, better, deeper” accounted for an estimated one fifth of economic growth. the gdp growth. In particular, the rapid export growth of China resulted from Enter the Global Giants the dramatic expansion of fie exports as a percentage of national total exports— s the Chinese government from less than 16 percent in the early Aintroduced market-oriented re- 1990s to more than 50 percent in the forms to again attract U.S. and other early 2000s.

 The National Interest––Fall 2005 For more than two decades, China and communication technology (ict). In- has been the most attractive fdi host deed, China’s trade in ict goods (imports among all developing countries. China’s and exports) more than doubled from just accession to the World Trade Organiza- over 12 percent of total trade in 1996 to tion and selection to host the 2008 Olym- more than 27 percent in 2003. More than pics has accelerated investment initiatives. half of these stem from the Chinese affili- In 2004 the capital inflows amounted ates of the fies. to $60 billion. Still, these large absolute As the momentum shifted toward numbers must be put into perspective. high technology, increasing economic re- Like the United States, China is actu- gionalization and foreign trade protection ally a small recipient of fdi relative to its has encouraged Chinese multinationals gdp, ranking 37th worldwide. to develop offshore plants to avoid the In the early 1990s the Chinese gov- quotas imposed on Chinese goods by im- ernment encouraged manufacturing en- porting countries. Meanwhile, the policy terprises to deploy the so-called “two of “grasp the large, release the small”, de- resources and two markets” strategy to fined by the 15th Party Congress in 1998, target both domestic and international endorsed the sale of all but the largest markets, while seeking resources (capital, state enterprises, seeking to consolidate know-how, raw materials) domestically the most thriving state enterprises into and globally. The sectoral distribution of organizations mirroring Germany’s large Chinese investment abroad shifted from multinationals and South Korea’s busi- resource development (more than 60 per- ness groups (). cent in 1991, 32 percent in 1997) to man- Unlike overseas Chinese in main- ufacturing (39 percent in 1997). Initially, land China, few U.S. companies used this was the result of the government China as an export platform. The bulk of focus on several mature manufacturing the investment was drawn by local mar- sectors to establish overseas operations, ket opportunities. Until the early 1990s, particularly industrial machinery and overseas Chinese investment had focused electronics. Today, increasing competi- on low-tech industries to create cheap tion maintains market discipline. manufactured goods for export. After the mid-1990s, two-thirds of U.S. investment Absorbing Foreign Innovation in China was directed at the manufactur- ing sector, especially industrial machinery ecently, growth and de- and electronic equipment—the very same Rvelopment trends show techno- sectors that the Chinese government was logical innovation emerging as a major now promoting in overseas investment. driving force. Through most of the Initially, the fies regarded China 1990s, Chinese research and develop- mainly as a low-cost processing and as- ment (R & D) was an estimated 0.6 to sembling base, relying on imports of 0.7 percent of gdp. Since the late 1990s, component parts. Upgrading their invest- Chinese research and development has ments and asset quality, foreign multina- rapidly increased to an estimated 1.5 per- tionals began to shape the new technol- cent in 2005. In terms of its absolute level ogy infrastructure in China, particularly of R & D expenditure, China will rank in in the prosperous coastal provinces, by the top ten worldwide. In relative terms, contracting and sub-contracting, and by its current proportion is still half that pioneering retailing networks and dis- of Japan or the United States. On the tribution channels. In the process, the other hand, many of the foreign multina- “spillovers” nurtured the rise of indig- tionals are world leaders in information enous suppliers, which provided compo-

Asia Supplement  nents. By the late 1990s, foreign multi- torola transferred technology, provided nationals had become increasingly “local- training and exchange programs, and set ized”, giving rise to a growing ecosystem up retail training centers in a number of of indigenous firms. cities. However, resource commitments Today, foreign multinationals are in- were still low and, after Tiananmen, sig- creasing investment in R & D, marketing nificantly reduced, while European firms and services, while intensifying penetra- such as Ericsson, Nokia and Vodafone tion and integrating management. The were only happy to fill the vacuum. consolidation of fies in China is mir- Following in the footprints of the rored by the increasing boldness of Chi- likes of Motorola, Nokia and Ericsson, nese multinationals. Typically, companies Chinese tech giants are gradually ma- go abroad seeking resources, markets, ef- turing into world-class high-tech play- ficiencies and strategic assets. In competi- ers. With modernization, the reliance on tive high-tech industries, Chinese com- contacts, or , is being augmented panies often internationalize to acquire with the global business culture based on strategic assets (brands, sales channels, contractual obligations. Concurrently, technology, managerial competencies) in bold new attackers are challenging their order to respond to the challenge of for- idols. eign multinationals at home. In the 1990s Chinese equipment Since the early 1990s, computers and manufacturers had no market share in mobile communications have been the China’s mobile marketplace; in 2001 two high-tech industries with the high- it was less than 10 percent; in 2003 an est growth rates in exports from China. extraordinary 55 percent! Focused on Last December, Lenovo—a bold elec- building distribution networks that took tronics manufacturer that today provides them even into small cities, local handset inspiration to Chinese challengers and brands like Ningbo Bird, , Panda new attackers worldwide—acquired ibm’s and tcl were able to beat foreign mncs pc business for $1.75 billion. The goal and their global brands on prices and was not to devour the U.S. market but features that Chinese users appreciated to support Lenovo at home, where it is the most, while pushing clever ad cam- being squeezed by the likes of Dell and paigns and developing product designs Hewlett-Packard. that appealed to local consumers. Rapid In the past, China has been “the growth allowed Chinese firms to expand workshop of Asia.” Now it is growing their presence in neighboring economies, into the “innovation center of Asia.” which in turn has enabled the overseas Chinese to rejoin the changing produc- The Rise of Chinese Challengers tion networks through market expan- sion, capability outsourcing and financial f the computer industry exem- services. The rise of the Chinese mobile Iplifies ambitious internationaliza- brands, for instance, was facilitated by tion, mobile communications illustrates outsourcing production from Taiwanese the high drama of fdi-driven challeng- and South Korean electronics manufac- ers. Five years after the first orders from turers, while gradually building in-house China—at the peak of U.S. trade conflicts manufacturing capabilities.3 and catch-up efforts with Japan—Motor- Once the technology-manufacturing ola’s chairman, Robert Galvin, made a long-term commitment to the market. 3Dan Steinbock, The Mobile Revolution: The Making Trading new technology for market ac- of Mobile Services Worldwide (London: Kogan cess, foreign multinationals such as Mo- Page, 2005).

 The National Interest––Fall 2005 infrastructure was in place, Chinese firms Sovremenny-class missile cruisers that excelled because, knowing the market- they purchased from the Soviet Union, place intimately, they were better able to which have just one role, that is, to kill deploy the right marketing channels to American aircraft carriers.” offer the right products, the right cam- Are the emerging Chinese multina- paigns, and the right advertising and pro- tionals truly such fierce dragons, as many motion. It was a critical turning point. presume on Capitol Hill, or cute pandas, But that is not where the story ends. as others argue? After all, Chinese in- After the rise of the indigenous vestments have gone hand-in-hand with challengers, the foreign multinationals high-profile state visits around the world mounted their own counter-attack. As by President Hu Jintao and Premier Wen Chinese challengers rarely spend more Jiabao. Hoping to offset huge capital in- than 5 percent of revenues on R & D, the flows into China by supporting the in- spending gap provides a substantial com- digenous multinationals, Beijing has been petitive advantage to the fies, which now keen to reinforce economic interest with imitated their challengers, flooding the diplomatic and political influence. market with me-too products, aggressive But let’s look at the actual numbers. marketing campaigns, comparable dis- In 2004 the Global 1000 list by Busi- tribution channels and slashed prices. In ness Week featured 423 U.S. companies 2004 the market share of the indigenous with a combined market capitalization producers declined to 37 percent. But of $10.8 trillion. Japan had 137 compa- in the meantime China had become the nies with a market capitalization of $2 world’s largest mobile manufacturer. trillion; the uk, 73 companies with $1.9 During the past decade or so, similar trillion. Hong Kong’s 15 and China’s six dramas have been seen in industries as companies, meanwhile, had a market cap different as car manufacturing, detergents, of $190 billion and $104 billion, respec- oil, petroleum and petrochemicals. In the tively. China’s top corporations were all first act, foreign multinationals pioneer energy and technology related. The lat- the high-volume markets. Then, indig- ter included two giant mobile operators, enous challengers respond with imitation and . In and low-cost strategies. In the third act, addition to cnooc, the energy-related innovation and more sustainable quality mammoths are China Petroleum and strategies emerge as the keys to success. Chemical (Sinopec) and citic Pacific, In this drama, low-cost strategies offer PetroChina. short-term benefits, but sustained leader- Global competitiveness indicators tell ship is inconceivable without innovation. the same story. In business competitive- This requires global scale capabilities that ness, the United States leads worldwide. only global multinationals possess—but During the past few years, Japan (8th) has the boldest Chinese challengers are deter- steadily improved its position, but China mined to catch up the “resource gap.” (45th) remains behind. Last year, foreign investment by Chi- Fierce Dragons or Cute Pandas? nese companies rose by almost one-third to $3.6 billion, and Chinese capital out- t the first congressional hear- flow is gathering impressive momentum, Aing on the bid by cnooc to pur- coupled with the first major international chase Unocal, the chairman of the House merger and acquisition (M & A) efforts Armed Services Committee described the by emerging Chinese multinationals such effort as “a strategic acquisition, just like as Lenovo and cnooc. Some observers the acquisition by the Chinese of these find associations with Japan in the late

Asia Supplement  1980s just too tempting to ignore (espe- were moved above the poverty line. The cially now that China’s debut as a volume task facing Chinese leaders is extraordi- car exporter happens to coincide with the nary in its history, scope and magnitude: severe problems of U.S. car manufactur- How can they sustain economic growth ers). Still, the numbers should be kept in for another ten to twenty years? In this perspective. The fdi of Chinese multina- strategic objective, leading companies in tionals abroad is barely 6 percent of the China play a critical role, whether they foreign capital inflow to China. are owned by the fies, overseas Chinese Electronics giants such as or mainland Chinese. “It doesn’t mat- may herald the coming of “Chinese Mat- ter whether the cat is black or white”, as sushitas”, but yesterday’s Japan and to- Deng used to say, “as long as it catches day’s China are at very different levels of mice.” economic development. More than half Unlike Japan and the East Asian tiger of Chinese investments come from en- economies, China has opened its domestic ergy and commodities companies, from markets to foreign investment and is not oil fields in Sudan and natural gas in Iran building an export powerhouse behind a to iron ore mines in Brazil and Australia. wall of protective tariffs. During the sec- Most Chinese challengers are engaged ond half of the 1980s—at the peak of the in resource-seeking acquisitions to feed Japanese M & A wave abroad—the out- China’s industrial revolution and rap- flow of Japanese investment amounted to idly rising domestic demand. Outside $36.5 billion, whereas the inflow was only the resources sector, numerous Chinese $2 billion. With contemporary China, manufacturers, such as tcl and Haier in however, inflow far outweighs outflow. electronics and white goods, and Chery This massive and rapidly growing and Geely in cars, have also planted roots marketplace promises extraordinary op- offshore. They seek to embrace innova- portunities worldwide. In the early 2000s tion while developing global brands. it ensured growth for most high-tech Today, a few M & A-driven Chinese industries while the economies of the companies are often portrayed as Chi- United States, Europe and Japan stag- na’s Trojan horses conspiring to over- nated. China’s economic rise requires an throw the U.S. economy. In the 1980s extended period of international stability, the boogeyman was Japan’s Ministry of not disruption and disorder; growth, not International Trade and Industry; today, stagnation; openness, not protectionism. China’s government agencies play the These objectives could not be closer to same role. But competitive realities have those prevailing on Capitol Hill and in not changed. Where the role of the corporate America. These are interests government in China is most intrusive that the United States shares with China. (state-owned enterprises), performance The “futility of trying to match the has been the least competitive. Where China price” is a stage in economic de- the government’s role has been minimal velopment, not an excuse for trade war. (foreign multinationals in China), perfor- In the postwar era, cheap prices typi- mance has been the most competitive. fied all catch-up nations; first in Europe, then in Japan and the tiger economies, The 21st Century’s Greatest Opportunity now in China and India, tomorrow per- haps in Brazil or Russia. As the evidence etween 1980 and 2000, the already shows, when Chinese challeng- Baverage person’s income in China ers begin to upgrade and innovate, they nearly tripled, from less than $1,400 to will engage more in outsourcing and off- close to $4,000, while 170 million people shoring, which can contribute to eco-

 The National Interest––Fall 2005 nomic development in all of Southeast emerging East Asian power axis, as do Asia. Through the Marshall Plan, the America’s mightiest corporations. In our transatlantic economy became the world’s era of extraordinary historical opportu- economic engine. Through economic in- nity, it may be wise to err on the side of tegration, the United States can also par- calm and reason and, as Deng Xiaoping take in China’s growth, which, along with used to say, to “walk across a stream by the rise of India, will transform Asia. The feeling the stones underneath.” n true policy challenge is not engagement or containment, but integration. Dan Steinbock is a Fulbright scholar and strate- Over the next decades, the center of gic consultant for multinational corporations gravity of the world economy will shift and international organizations. He is an af- from the Atlantic, where it has been for filiate researcher at the Columbia Institute for the past three centuries, to Asia-Pacif- Tele-Information and chief of the New York ic, where it once was. American diplo- City office of the Academy of Finland. His macy for the 21st century has much to most recent book is The Mobile Revolution: The gain from deepening integration with the Making of Mobile Services Worldwide (2005).

Asia Supplement