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Published: May 26, 2009

 
 

China’s Multinational Quandary

The reasons these companies have had an easier go of it than Lenovo also show why China’s plans to quickly create multinational giants may be unrealistic. In comparison to Lenovo’s grand plans, for example, Haier’s approach to international expansion was more incremental. It began by exporting a limited number of private-label products and then slowly extending the reach of its manufacturing operations. “They didn’t jump from being a domestic company to acquiring a very complex operation like Lenovo did,” says Shenkar.

Moreover, Haier’s products are low tech, and the company is not known for being particularly innovative. Indeed, China relies on foreign companies for the vast majority of the advanced technology it deploys, and, to some observers, Lenovo’s failure underscores China’s lack of homegrown R&D. “If you cannot innovate technically and organizationally, you cannot stay in the global game,” Redding says. “Making refrigerated containers and air conditioners is the kind of technology the Chinese can handle.”

China’s automakers have been generating headlines about their global intentions, but they face some of the same limitations that afflict other aspiring Chinese multinationals. Chery Automobile Company, China’s largest vehicle manufacturer, tried to cut a deal with the Chrysler Corporation to distribute its A1 compact sedan in the United States. But even before Chrysler’s bankruptcy put the effort on hold, few automobile experts were optimistic that Chery could ever successfully meet Western safety and emissions standards and sell cars in the United States. In January 2009, BYD Company promoted its lithium ion battery electric cars at the Detroit auto show, and Shanghai Automotive Industrial Corporation has used joint ventures with the General Motors Corporation and Volkswagen AG to develop its engineering and design capabilities. However, neither of these companies has yet been able to achieve U.S. quality levels or develop global distribution and branding strategies that a multinational requires.

Facing such obstacles, many Chinese companies may instead pursue strategic joint ventures, similar to what some Chinese companies in Hong Kong and Southeast Asia have done. For example, such organizations as Hutchison Wampoa Limited, Cheung Kong Holdings, and Henderson Land Development Company tend to forgo R&D in favor of developing telecommunications networks and market products by licensing technologies and distribution rights from companies like IBM and Cisco. “When they need a certain kind of technology or political backing or sales network or manufacturing capability, they create an alliance to make it work,” Redding says. “The mainlanders will probably do the same thing.”

Of course, the Chinese may surprise Western experts, as they have many times before. Companies such as Lenovo could still regroup from Chinese-style hierarchical control and transform themselves into nimble international competitors. “I wouldn’t write off Lenovo as a global player yet,” says Peter Williamson, coauthor of Dragons at Your Door: How Chinese Cost Innovation Is Disrupting Global Competition (Harvard Business School Press, 2007).

But if that occurs, Lenovo and similar companies will likely remain islands of success that won’t reflect broadly on the majority of Chinese enterprises. For one thing, the only companies that could hope to succeed as multinationals anytime soon will have to come from China’s private sector. The country’s many state-owned or state-subsidized banks, petroleum, chemical, and mining enterprises, for example, are far less sophisticated in international business affairs than even the most insular private companies.

Which means that it could take the Chinese many years before they can claim their 50 spots on the Fortune 500.

Author Profile:
William J. Holstein is the author of Why GM Matters: Inside the Race to Transform an American Icon (Walker, 2009). For more on his work, see www.williamjholstein.com.


 
 
 
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Resources

  1. William J. Holstein, “China’s Long Road to Innovation,” s+b Leading Ideas Online, 11/18/2008: Chinese companies are facing difficulties in creating technological innovation.
  2. Gordon Redding and Michael A. Witt, The Future of Chinese Capitalism: Choices and Chances (Oxford University Press, 2008): A definitive examination of the challenges that China faces in its effort to emerge as an economic superpower.
  3. Dexter Roberts, “China’s Chery Gets Closer to Being a World Player,” Business Week, December 12, 2008: An update on the aspirations of the Chinese car manufacturer.
  4. Oded Shenkar, The Chinese Century: The Rising Chinese Economy and Its Impact on the Global Economy, the Balance of Power, and Your Job (Wharton School Publishing, 2006): Chinese enterprises and companies will force a radical restructuring of the global business system.
  5. Jane Spencer and Loretta Chao, “Lenovo Goes Global, but Not Without Strife,” Wall Street Journal, November 4, 2008: An exploration of the internal cultural challenges at Lenovo. (Subscription required.)
  6. Ming Zeng and Peter J. Williamson, Dragons at Your Door: How Chinese Cost Innovation Is Disrupting Global Competition (Harvard Business School Press, 2007): How Chinese enterprises and companies can rapidly target high-end industries that rely on engineering, design, and research and development.
 
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