China: Going Global
Flush with billions in foreign reserves, China is embarking on a buying spreeBy George Wehrfritz
Newsweek InternationalMarch 1 issue - Nestled deep in Kwun Tong, Hong Kong's gritty factory district, China's leading cell-phone manufacturer is plotting to conquer the world. Hatched in 1992 to make pagers in its namesake coastal city, Ningbo Bird sold more handsets on the mainland last year—nearly 11 million—than Nokia or Motorola. But that was then, and now Wang Jianping, director of Bird International Ltd., has fixed his gaze three to five years down the road—on markets like Vietnam, India and Africa. "China could reach basic equilibrium in just three years," he says, meaning the cell-phone market could be fully mature and new business opportunities increasingly rare. "For us to grow, overseas expansion is a must."
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Even as its white-hot economy continues to outpace the rest of the world, China is setting the stage for a shift in priorities. The last two decades of economic reform—indeed, the last 5,000 years of Chinese history—have been focused largely on changes within the Middle Kingdom. Foreigners intoxicated with dreams of selling oil for China's lamps have paid tribute to Beijing for the privilege of investing in the country. Chinese companies have been preoccupied with overhauling their operations and forestalling labor unrest. China's economic clout has been based, first and foremost, on its citizens—as sources of cheap labor, and as a massive market giving the country the power to pick and choose among suitors.
But now it's China that is beginning to court the world. Buoyed by an incredible $403 billion in foreign reserves, Chinese companies are going on a shopping spree, with a menagerie of elite mainland brands establishing footholds abroad. Leading state enterprises are scouting for overseas partners or takeover targets that offer technology, raw materials and inroads into new markets. Capital is flowing out at record levels—China claimed overseas assets of $35 billion as of the end of 2002. And with a string of new deals either landed or on the horizon, "China will become a visible player not just in the markets for toys and TVs this year," says Dong Tao, chief regional economist for Credit Suisse First Boston in Hong Kong, "but in mergers and acquisitions around the globe."
In February the Shanghai Baosteel Group announced China's largest single foreign investment since it embarked on economic reforms in 1979: a $1.4 billion joint-venture steel mill in Brazil. In December, China National Bluestar Group signed an initial agreement to buy a controlling interest in South Korea's Ssangyong Motors, reportedly pledging $1 billion to turn the company around, including $550 million for its stake in the jeep and SUV maker. The two deals together topped China's average annual foreign-direct-investment outflow of $2.3 billion in the 1990s, and additional investments are in the pipeline. The sums involved bring to mind Japan in the 1980s. But unlike that earlier spending spree, much of it targeting vanity real estate and Hollywood studios, China's breakout is strikingly savvy. Its foreign investments are binding together emerging markets into a kind of global supply chain, while picking off distressed companies for their technology, brands or markets.
To quell fears of Chinese domination, Beijing promotes a theory it calls "peaceful emergence," which holds that its rise will lift all boats. In recent years China has negotiated more than 100 trade, tax or investment accords, both bilaterally and with regional blocs like ASEAN, winning itself good will in emerging markets while opening them to low-cost imports. Unlike the industrialized world, where the People's Republic has been demonized for stealing —jobs from America and Europe, poor countries see China as a crucial consumer of primary commodities from oil to timber to cotton, and as a counterweight to Western nations.
That has eased any frictions that might otherwise have been engendered by China's bids to purchase auto works, refineries, port facilities and telecom networks, or to make exclusive deals for raw materials. The ultimate purpose, of course, is to strengthen domestic businesses. Although China is flush with money to spend, its leaders know spending too much at home could overheat the economy, add upward pressure on the renminbi and undermine China's competitiveness as a cheap-labor haven. One solution is to take over production of the raw materials necessary to keep the country's assembly lines, mills, foundries and refineries humming.
Baosteel's huge Brazilian investment points the way to the future. China's vanguard steelmaker helped ramp up domestic production from 80 million tons in 1995 to a staggering 250 million tons today. Still, China has emerged as the world's top steel importer. For Baosteel, the logical response is to expand further. But how? Iron ore, the key input for steel, is costly to import now that China (which already ships in a third of its ore) has run up the price. Baosteel's answer: a green-field steel mill to be built with a joint-venture partner, Companhia Vale do Rio Doce, the world's largest producer of iron ore. Once completed, the venture will ship steel—not its raw components—back to the home market in China. Frank Zhang, a metals analyst at CLSA in Hong Kong, says the Baosteel investment "will set a trend of Chinese companies going abroad to secure resource supplies."
For high-flying manufacturers like Ningbo Bird, on the other hand, outward expansion is a way to leverage rapid growth at home. Launched on a shoestring, Bird made pagers before shifting to the wireless-phone business for foreign multinationals entering the China market. After learning the ropes, it launched its own brand to target poor interior provinces. Expanding both geographically and with more sophisticated products, Bird became China's top seller nationally in 2003 after just 12 years in business. Yet its main international rivals manufacture millions more phones per year in China, with most going to export markets. Emulating that example, Bird has formulated a long-term strategy that entails transforming itself into a global company. "Could you imagine Nokia focusing only on its home market? Come on!" says Albert Sun, a Bird executive in Hong Kong.
INSEAD Business School scholars Ming Zeng and Peter J. Williamson say the industrialized world has ignored the emergence of powerful rivals in China. In an October 2003 study in the Harvard Business Review entitled "The Hidden Dragons," they examine a cohort of Chinese firms that have, under their own banners, become world-beating makers of refrigerators, microwave ovens and TVs. Dizzy at the prospect of tapping China's vast market, most multinationals are "myopic" when it comes to "the emergence of Chinese companies as powerful rivals—not only within China but also throughout the global market," they write. One example they cite: Guangdong Galanz, which posted $1 billion in revenues in 2002 and made four in 10 microwave ovens sold that year in Europe.
The one thing these companies haven't managed to do, though, is develop internationally recognized brands. Take Haier, the appliance giant. A state-owned enterprise based in the coastal city of Qingdao, it stormed China's domestic white-goods market in the 1990s before broadening its business model as the mainland became saturated with household appliances. It built factories in Europe and the United States, where it now sells wine coolers, fridges, dishwashers and flat-screen TVs in hundreds of retail outlets. Its flag flies over a new North American headquarters in Manhattan, and its ads adorn vans that dash through New York traffic. Yet despite this success, Haier "has gone global in manufacturing but not yet as a brand," says Paul French, a consumer-goods consultant at Access Asia in Shanghai. " 'Made in China' is still hard to sell at a premium."
A few Chinese manufacturers are now taking another path: buying brands abroad. Huizhou-based TLC, the world's leading television maker, for instance, merged with the television unit of France's Thomson last November. The $560 billion deal gave TLC a controlling stake in the new venture—plus the monikers Thomson in Europe and RCA in the United States. Weeks later, China National Bluestar, a Chinese chemical conglomerate, laid claim to Ssangyong Motors. The Chinese firm—which already owns a subsidiary that makes jeeps for the Chinese military—probably plans to tap the Korean motor company's technology and expertise to expand into China's SUV market as well as take advantage of Ssangyong's good name across Asia.
Although not yet finalized, the takeover has sparked fears in South Korea that China might soon pose more of a threat than an opportunity. Unlike many of its neighbors in Asia, Seoul made quick adjustments in the late 1990s to integrate with the rising continental power on its doorstep. Recent economic data show that the strategy paid off—at least in the short run. Last year China surpassed the United States to become the South's leading export market. Sales of Korean goods into China have doubled in each of the last two years and now stand at nearly $36 billion. Yet the Ssang-yong takeover has some Koreans afraid that China's outward investment will hasten its rise as a competitive player in high-tech areas where South Korea is currently the leader. Chung Sang Eun, a senior analyst at the Samsung Economic Research Institute in Seoul, says the day when Korea "served as the brain and China the hands and legs" could soon end.
Indeed, Korea's Ministry of Commerce recently warned that the country's technological edge is slipping fast. Its lead over China in cell-phone technology will disappear by 2007, its flat-screen-television advantage by 2010. Between 2008 and 2011, it forecasts, South Korea's $13.5 billion trade surplus with the mainland will have vanished into chronic deficit. Some fear these trend lines will accelerate if Chinese companies cherry-pick other Korean high-tech companies. Although China has helped Seoul weather years of slack domestic consumption, Korea's reliance on the Chinese economy may also create dangerous dependencies, especially if Korean companies neglect the need to upgrade their technologies or identify future niche markets.
Barring an unforeseen downturn in China, after all, outward investment is likely to soar in the years ahead. Says Jean-Pierre Verbiest, a senior economist at the Asian Development Bank, "If you do projections 10 years down the road, when income will probably have more than doubled, just think of the changes we'll see." More brash grabs for resources and technology, most likely, as well as grander schemes by leading Chinese manufacturers to become the next Samsung, Philips or Ford. Might Ningbo Bird soar to such heights? Like China itself, the cell-phone upstart has no choice but to try.
With Alexandra A. Seno in Hong Kong and B. J. Lee in Seoul
© 2004 Newsweek, Inc.
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