The Development of Chinese Multinationals

ByDr. 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 billionUNCTAD

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

UNCTAD forecasts (2004) China mainland is expected to become the fifth largest investor after US, Germany, Britain and France

UK attract FDI from ChinaBritish investment held seminar, talks, exhibitions in:

Beijing Shanghai

GuangzhouTo convey:

Government policyOpportunities

Tax incentiveEstimated:

Up to 10 billion pounds to UK within next five years

100,000 jobs

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

Macro PerspectiveMacro Perspective

185 non-trading enterprises

Mostly JV

Contracted investment US$249 million

Share of Chinese US$ 149 million

Mostly developing countries

Restaurants, engineering, finance/ insurance

MOFERT: 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

Stage II

(1985 - 1990)

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

1991 Chinese economy pick up drastic increase in terms of both the number and amount of investment

207 overseas, non-trading subsidiaries

Total contracted investment

PRC contributed

US$759 million

US$367 million

1992 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 MuLi Peng

(1991 - 1999)Stage III

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 measuresMayor of Shenzhen

Asked 80 plus overseas enterprises to meet new target of performance

Other provinces and municipalities

LiaoningHubei

XiamenExpressed their intention to increase their FDI further

14th 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

( １９９８ onwards)Stage IVEncourage enterprises to set up

oversees processing plant incentives

Market entry behavior of PRC multinationalsMarket 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 exceptionsIn 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

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

Micro PerspectiveMicro Perspective

1. FTCs1. FTCsBefore 1980

Monopolized foreign trade

Single product

Mono-function

1984

Gradual decentralization

FTCs lost monopolized status in foreign trade

Survival

Vertical integration Production

Multi-functions Finance, transport, insurance

Model: Japanese Sogo ShoshaKorean Choebol

E.g. SinochemEstablished 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:(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-(b) From single commodity trade to multi-functionalfunctional operationoperation

-- production, transportation, finance, service, consultancy, information, insurance, high technology, tourism

(c) From trading to multinational enterprises(c) From trading to multinational enterprises

In 1989In 1989

62 overseas enterprises in Asia, Europe, United States, and Australia

Overseas sales: US$3.7 billion

Overseas production value25% of total value

19941994

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

RRanked 304th in Fortune 500 (1998)

1414th world trading house

TTurnover US$13.8 billion

PProfit US$67.63 million

TTotal asset US$ 4.957 billion

2nd Trial enterprise2nd Trial enterprise

Orient International

Set up in Nov 1994

Merger of five “Golden Flowers”(five FTCs under Shanghai Municipal Government)

SilkSilk

GarmentGarment

Textile Textile

KnitwearKnitwear

Home textileHome textile

Ranked 7th in the 500 FTCs in China

March 1997

Approved as 2nd trial enterprise

Core business-- Import and export trade

-- multifunction conglomerate: production, finance, technology, service, information

Corporate headquarter: Centralized decision makingCentralized decision making

Centralized financeCentralized finance

Centralized managementCentralized 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

JapanAmerica

Hong Kong

2. FBOC2. FBOCCITIC

Yue Xiu

Guangdong Enterprises

Other provincial and municipal investment trust

Partner with industrial companies to invest overseas

Portfolio investment

CITIC

CITIC hunting abroad for natural resources, capital, technology to boost economic development at home

A consortium led by CITIC pacific

Acquired giant Hong Kong trading house

CITIC 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 A9)

CITIC Australia major investment 10% stake in an aluminum smelter known as Portland

[ Asian Wall Street Journal April 20, 1993]

Acquired Naracoorte meatworks from Smorgon Meat group in 1995 . Made CITIC Australia the second largest exporter in Australia

3. LICs3. LICsCapital Iron and steel

Zhou GuanwuZhou 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

AmericaEurope

Southeast AsiaHong Kong

Middle East

Common wealth of the independent states

Accumulated investment US$13.2 billion

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

HaierHaier

4. SMEs 4. SMEs KelonGalanzHuawei

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

KelonKelon

GalanzGalanz78 Established in 1978

80s Garment factory

Microwave oven93

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

HuaweiHuaweiPrivate enterprises

One of the largest in China

After 2000After 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

2nd Acquisition of oversea oil and gas reserves

2. FBOC

Many FBOCs encounter problems during late

90s

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 227m 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 LICsHaierIn June 2001

Haier Purchased a refrigerator manufacturer in Vicenza Italy

1st Chinese enterprise purchasing factory in the European household appliance manufacturing center

3 LICsHaier

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 LICsShanghai Electric GroupAcquired Japanese printing machine manufacture, Akiyama Machinery Manufacturing Corporation in 2002Shanghai Soap GroupPurchased of battery production plants from American corporations multitech and PolystorDalian Machine Tool groupAcquired the production machine Division of American Ingersoll milling machine co. in late 2002SAICAcquired South Korea Ssangyong Motor CompanyLenovoAcquired 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