Business Development

Generic China entry strategies

OLYMPUS DIGITAL CAMERAOn a backdrop of Microsoft facing investigation by Chinese authorities for violation of antimonopoly laws, Adobe having decided to close down its R&D facilities in China, the Alibaba IPO, and the emergence of Chinese global tech giants, this article revisits a really old theme in the business literature: that of generic China entry strategies.

Writing about China entry strategies in 2014 may appear a tad like writing about business process reengineering around 2005 or about six sigma in the late nineties: the set of high impact, well-founded, and non-trivial ideas was clearly finite and everything intelligent and / or interesting had in a certain sense already been said 10 years ago.  I will however argue that it is now time to revisit the theme of China entry strategies, and I will explain why:

First, we have recently received news from China about Microsoft facing investigation in China for possible violation of antimonopoly laws, and Adobe and other US tech firms of closing down their R&D facilities in China due to the a hostile business climate.  It seems that the current tussle is about US software companies and about Chinese concerns about information security, but it could easily extend to other parts of the tech sector.

Second, there appears to be an emerging divide between US Internet space and Chinese Internet space.  To some extent this divide is due to peculiarities of the Internet sector, including local language content, local language requirements, governmental regulations (incl. censorship), and network effects, but the situation could again extend to other parts of the tech sector and other geographies.

Third, we are also seeing the emergence of Chinese tech companies endeavoring to build leading global positions in a variety of industries.  Examples include (in ranked order of prominence; source: www.forbes.com/sites/joelbackaler/2014/01/10/ranking-14-chinese-companies-going-global-in-2014/): Lenovo (consumer electronics), Dalian Wanda (entertainment, and commercial real estate), Huawei Technologies (telecommunications), CNOOC (oil and gas), Shuanghui International (consumer goods), Fosun Group (conglomerate), Alibaba (e-commerce), Bright Foods (consumer goods), ZTE (telecommunications), SANY (diversified industrial), Tencent (online gaming), Geely (automotive), Baidu (Internet), and Li Ning (athletic apparel).

Finally, and related to the observation of Chinese companies endeavoring to build leading global positions, we are also seeing Chinese companies take active part in global M&A activity, also in the technology sector.  Examples include China Oilfield Services’ (COSL) acquisition of Awilco Offshore in 2008 (oilservice), China National Bluestar’s acquisition of Elkem in 2011 (mining), Lenovo’s acquisition of first IBM’s PC business in 2005 and then the Google-owned Motorola mobile business 2014 (computer hardware), and Geely’s acquisition of Volvo in 2010 (automotive). It should be noted that this activity could be explained by a number of other strategic factors, including securing access to raw materials and technology (in addition to building global champions).

Industry typology, and your optimal entry strategy depends on the type of your industry

Crafting effective entry strategies on the backdrop described above requires us indeed to study what Chinese tech firms and the Chinese government do inside China, what Chinese firms do outside China, and what successful Western firms do inside China.  However, to make sense of it all, we also need to disaggregate global behaviors into industry-specific behaviors.  Then, industry-specific (or industry type-specific) patterns start to emerge, as I have tried to document in the following industry typology:

Industry type Type I: Non-strategic industries, limited gov. involvement Type II: Parallel universes Type III: Acceptance of foreign market leaders Type IV: Chinese leadership in China Type V: Chinese global leadership
Examples of industries Retail Internet Vertical software (CAE software used as example), luxury cars Oilservice, oil and gas, horizontal software, software development centers Telecom equipment, computer hardware, handset manufacturing, mining, oil and gas
Market leaders in China (with estimated market share) Many, Chinese, but typically very fragmented Alibaba (50%, for payments), Tencent (75%, for QQ), Baidu (70%) in software: AutoCAD, ANSYS, Simulia, Matlab; in luxury cars: Mercedes Benz, BMW, Audi In software: Microsoft, SAP, and Adobe (but significant piracy); in oil service: COSL (95%?) Lenovo, Huawei, Xiaomi, ZTE, CNOOC
Governmental strategy (articulated or not) Tilted in favor of local firms, high hassle factor, import fees, in practice technology and skill transfer The market will fix this by itself, due to local regulations, local language requirement, and network effects Tilted in favor of local firms, high hassle factor, import fees, in practice technology and skill transfer Local content, preferred status for Chinese firms, import fees, export fees on input factors, harassment of foreign companies Same as to the left, plus consolidation, plus outbound direct investment, plus aggressive global expansion
Generic ‘good’ entry strategy for Western firm Like any other foreign market, just significantly tougher and bigger Very tough, with exception of niches and high-end Like any other foreign market, just significantly tougher and bigger China as unrelated business, R&D centers, JVs, licensing, strong IP protection, make money through local firms, good Chinese lawyer Same as to the left; protect position globally; for low-margin business: sell the business to Chinese players; for high-margin business: protect IP

The above table seems to imply that the strategic postures of Chinese companies can be explained by industry-specific governmental policies.  This is generally not the case and if one looks at prime examples of Chinese companies with global aspirations, see for example the Forbes’ list, it is an interesting mix of industries, including sports apparel, which is hardly a strategic industry deserving governmental attention.  Rather, a Chinese company’s strategic posture should be seen as a function of a number of factors, including visionary company management, governmental policies, the extent of connections with central or local government, and the opportunistic pursuit of M&A and other business opportunities.

Governmental policies are furthermore not only about which sectors and what policies, but also about the strength of the government’s strategic interest in a specific industry.  It varies a lot across industries even within one type, with the government having no or limited interest in say retail or travel, and significant interest in say the wholesale and retail energy markets, and understanding the government’s involvement in an industry is crucial for crafting effective entry strategies.

The above table gives also the impression that industry type is a static attribute of an industry; reality is that industries may shift from being of one type at one point in time, to another type at another point in time, though on lengthy time scales.  Indeed, the publicly espoused policy for SOEs in strategic sectors used to be Chinese leadership in China (type IV).  The policy has now been replaced by a ‘go global’ policy (type V).

A final comment is that it is becoming increasingly tough to conduct business in China for Western technology firms, due to for example taxation, legal system, preferential purchasing, local content regulations, and import / export control.  This is further evidence for the Chinese government’s endeavor to shift more industries to the right in the above typology.  On the other hand, there are a number of countervailing forces, including stronger enforcement of IP protection regimes and China’s membership in WTO.

Stark implications for your China entry strategy

The above table suggests that there are some key  issues that any Western firm should address in its China entry strategy (beyond the trivial ones of for example IP protection, governmental connections, and regulatory savvy):

  • What type of industry are you in, in terms of types I-V? Hypothesis: Your optimal entry strategy will strongly depend on the type of your industry.
  • If in an industry of type III or IV, should you look at current type as a static attribute or just as a stepping stone to IV or V? Hypothesis: A prudent approach would be to consider type as a dynamic attribute.
  • Could what you do in China impact your global competitive situation? Hypothesis: Yes, what may seem like a local competitor today may emerge as a global technology giant in 5 or 10 years.
  • Are you sitting on assets (technology, raw materials access, competencies) that could be more worth to your Chinese competitor, given what you know about its strategic intent in China and globally, than it is to you? Hypothesis: If so, you may want to consider selling it.
  • Is it ‘them versus us’, or is it time to consider ‘together we are stronger’? Hypothesis 1: One should consider ‘together we are stronger’.  Hypothesis 2: We will start to see the emergence of global giants based on the cross-border mergers of Western companies and Chinese companies (but remember the merger of Daimler-Benz with Chrysler in 1998, and the subsequent divestiture of Chrysler in 2007).

Is it all bleak?  Of course not, and I can use the Norwegian tech sector as an example.  Despite the award in 2010 of the Nobel Peace Prize to Liu Xiaobo, Chinese dissident, and the subsequent freezing of all political relationships between Norway and China, Norwegian industry has increased its export to China from around NOK 13b in 2010 to around NOK 16b in 2013.  Most of this export is technology-related or seafood-related.  A fair number of major Norwegian technology firms have furthermore successfully established a presence in China, including: TTS, DNV, Aker Solutions, Kongsberg Maritime, Jotun, Tomra and Statoil.  That said, recent events in China, as discussed in the introduction to this blog post, should provide food for thought for any technology SME with aspirations of establishing a presence in China.

And if you think that this blog post was not about sales effectiveness, you are of course right.  However, in China, understanding the broader industry dynamics and the role of government eats in my opinion sales effectiveness for breakfast if the objective is to maximize topline.

This blog post was based on a number of sources (in addition to the ones referred to in the text), including but not limited to: www.nytimes.com/2014/07/30/business/international/china-confirms-investigation-of-microsoft-on-possible-monopoly-violations.html?_r=0, www.reuters.com/article/2014/09/24/us-adobe-systems-china-idUSKCN0HJ0WY20140924, www.nytimes.com/2014/08/01/opinion/china-harasses-us-tech-companies.html?_r=0, www.theguardian.com/world/2014/jun/03/chinese-technology-companies-huawei-dominate-world, www.hongkiat.com/blog/tech-brands-us-vs-china/, www.theinformation.com/US-and-Chinese-Internet-Sectors-Diverging, and www.pwc.com/id/en/asia-school-of-mines/assets/chinas-mining-sector_benson-wong.pdf.

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