Sino-Finnish Paths to International Competitive Advantage Contact Information
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Perspective John Jullens Hannu Suonio Tony Tang Sino-Finnish Paths to International Competitive Advantage Contact Information Booz & Company John Jullens Partner Suite 2511, One Corporate Avenue No. 222 Hu Bin Road Shanghai 200021, P.R. China Tel: +86 21 2327 9800 Fax: +86 21 2327 9833 Blog: www.johnjullens.com [email protected] Booz & Company Oy Hannu Suonio Partner Mikonkatu 15B, 7th floor Helsinki 00100, Finland Tel: +358-9-6154 6614 Mobile: +358-40-511 9324 [email protected] Booz & Company It may seem ironic that China’s future depends increasingly on the country’s EXECUTIVE ability to forge new paths for growth through international expansion. Over SUMMARY the last 30 years, China has grown at a breakneck pace, largely because of the West’s insatiable appetite for goods that China produced with its near-limitless supply of low-cost labor. But success breeds its own challenges. Rising wages are gradually eroding China’s low-cost advantage, and the country’s continued progress now increasingly hinges on its ability to transform itself from a low- cost to a high-value economy. Some of China’s best opportunities for target sector is in a “sunrise” or glob- developing the capabilities and acquir- ally mature industry. These criteria ing the technology needed to make serve as the basis for our Market that transition are to be found abroad Opportunity Matrix, which charac- and can be captured only through terizes four broad opportunity sets for partnerships with foreign entities. Finnish and Chinese companies seek- ing international partnerships. Finland also needs its companies to expand internationally to drive overall The first part of this report explains economic growth. But many Finnish why Finnish and Chinese companies companies lack the capabilities to need to pursue international expansion expand in emerging markets, where to secure their futures. We start with their growth prospects are greatest, the Finnish case, but we dedicate most because of their limited experience of this section to explaining the com- operating in these countries. And plex historical circumstances that make many lack the capabilities and capital internationalization critical for China. to commercialize innovation, even when they are strong in R&D. In the second part of the report, we introduce our Market Opportunity We believe win-win opportunities Matrix and provide details about the abound for international partnerships four opportunities the matrix high- between Chinese and Finnish compa- lights: good enough, latent demand, nies because they possess many com- breakthrough, and leapfrog. We plementary tangible and intangible describe multiple real-world partner- assets. Chinese companies have deep ships between Western and Chinese experience operating in emerging mar- companies that have been established kets, and they can provide access to to pursue these opportunities. And we China’s vast home market. They can offer guidance on the types of Finnish also supply the capital and low-cost and Chinese companies that would resources that many Finnish compa- make good partners. nies need in order to bring innovation to market. Finnish companies have No country has ever advanced so far world-class technology and possess in such a short time as China has. many of the capabilities—including But the strategies that brought it to experience navigating developed mar- where it is today won’t take it where kets—that Chinese companies need to it wants to be in the future. Finnish move up the value chain and tap new companies face different but often markets for growth. daunting challenges, in part because many have not been sufficiently pre- The best opportunities for Sino- pared for the rise of emerging econo- Finnish partnerships fall into four mies. Together, Chinese and Finnish categories, depending on whether the enterprises have an opportunity to target market is already developed gain tremendous ground and even to or still emerging and whether the take the lead in some markets. Booz & Company 1 To achieve their growth potential, development will also continue to grow PART I: companies in both Finland and China rapidly in emerging markets, including THE CASE FOR must increase their efforts to expand in the area of information and com- abroad. We explain why in the fol- munications technology. INTERNATIONAL- lowing two subsections. We start with IZATION Finland, whose needs in this regard International growth is particularly are similar to the needs of many other important for companies in small developed economies, particularly countries like Finland because domes- those with relatively small home mar- tic demand often is not sufficient to kets. We then discuss China, giving justify the large capital investments more space to explaining China’s required to bring innovation to situation because the nation’s urgent market. This is a matter not only of present-day needs are best understood finding new markets for proven prod- when put in historical context. ucts but also of accessing a sufficiently large customer base to cover the cost Finland’s Internationalization of launching the new products that Imperative will enable Finland to maintain and Finnish companies began to pursue extend its competitive advantages. international expansion on a large scale in the 1980s, and many have To expand their reach and compete built strong global positions in their with multinational corporations own segments. The trend was led (MNCs), large Finnish companies by large companies that had the must further extend their efforts from resources to finance international developed to emerging economies. efforts, and most of those companies They will often need help from local pursued growth through acquisitions enterprises to bring their products to that provided them with access to market in countries where regulations new markets in developed economies. may be much looser, consumer needs may be unfamiliar, and ultra-low-cost Yet Finland’s international busi- products may be a prerequisite for ness presence lags behind that of success. Finnish small and medium other small, open economies, such as enterprises (SMEs) may also be eager Holland, Sweden, and Switzerland. In to focus on emerging markets to gain particular, it does not have a strong access to rising consumers and tap presence in emerging markets. Large financing from local companies that Finnish companies in industries such can help them commercialize innova- as forestry, telecommunications, and tion both at home and abroad. industrial equipment have made impor- tant forays into emerging markets, but China’s Internationalization most Finnish companies are not pre- Imperative pared for the shift in the world’s center China’s rise over the last 30 years of economic gravity from West to East. has been astonishing by any mea- sure. China became the world’s Finland cannot afford to sit out the second-largest economy in 2010, up emerging market revolution that has from ninth largest in 1980, bring- already proved to be such a power- ing its share of world GDP to 17 ful engine of growth for companies percent based on purchasing power across the developed world. Emerging parity. (See Exhibit 1, page 3.) In the markets will continue to be a source of process, it lifted 680 million people disproportionate demand as their stan- out of misery: economic development dards of living rise and their consumers reduced China’s extreme-poverty rate increasingly require midmarket goods from 84 percent to 10 percent. and services. Demand for infrastructure Deng Xiaoping, who succeeded Mao 2 Booz & Company after his death in 1976, finally opened advanced MNCs. But in cooperating era. Many Chinese people still experi- the path to economic growth in the with Chinese companies, which they ence a deep sense of shame about this late 1970s, when he began introduc- knew sought to acquire technology period and would prefer a remedy ing market reforms that paved the and capabilities from their partners, based on national self-sufficiency. way for modernization. To do so, Western companies risked surrender- Deng struck what some have charac- ing their competitive advantages. Those familiar with Chinese history terized as a Faustian bargain with the understand that the bargain was West, allowing foreign companies to Deng’s bargain was particularly always about survival and moderniza- access China’s vast supply of surplus painful because many in China felt tion for China, not Westernization or labor and potential demand from its humiliated by the historical record democratization. It ultimately enabled billion-plus consumers in exchange and were reluctant to embrace any China to emerge from the decades of for foreign direct investment (FDI) solution that would seem to involve near-autarky and economic misman- and transfer of advanced technology turning to foreigners for help. The agement that threatened its survival and know-how. feeling persists even today. China and rendered it virtually irrelevant to had been one of the most powerful foreign businesses. In fact, the bargain had the poten- countries in the premodern world, tial to be Faustian for both sides. In from at least 600 to the early 1800s; China’s tremendous growth over the giving Western companies access to it became one the poorest seemingly next 30 years was concentrated in its market before most of its domestic overnight. A period of chaos and three spurts that each persisted at businesses were ready to compete, immense suffering lasted for almost high levels of intensity for five to six China risked losing entire industries to 150 years, until the end of the Mao years. The first arose as a result of an unleashing of Chinese entrepreneur- ship in the early 1980s and was not export-oriented. The second came Exhibit 1 in the 1990s and was propelled by China: Reclaiming Global Economic Leadership % OF GLOBAL GDP IN PPP (CONSTANT 2005 INTERNATIONAL $) the labor-intensive, low-price export model that is familiar to most read- 100% ers.