Internationalization of Traditional Chinese Companies

Can a Chinese Business Operating in a Traditional Industry can Go Global?

A significant progress in development of Chinese economic is evident due to massive gradual market liberalization and infrastructure spending (Shambaugh, 2013). This essay thus, studies the designs of, and aims for, internationalization by conspicuous market looking for Chinese businesses. A study by Wensli firm indicates that they need technical and trademark resources, which will help in the establishment of a competitive situation in global marketplaces. The mainstream theory talks about businesses internationalization to make use of the economic benefits. In the same way, Wensli Company is making use of economic benefits in order to internalize its business. It makes use of the ‘internal’ internationalization exploiting an inventive equipment manufacturer and combined scheme businesses, and ‘outward’ internationalization, employing organic growth out of their country so that they could increase and expand ways of doing business. The company was established in the year 2000 (Owen, Sun & Zheng, 2008). Every method gives a specific advantage combined with its problems or hazards. The study proposes that the situation in Chine forms opportunities to expand theoretical knowledge in several areas concerning the latecomer perspective and catch nap strategies, analysis of governmental role, between entrepreneurs and institutions relations, and foreignness’ responsibility.

Overview

The educational tour to China gave me an opportunity to experience Chinese culture and explore changes and development in the economic and business environment. Some of the industries that we visited during the group tour include, auto-part manufacturers, agriculture, major retailers, garment manufacturers, among others. The trip also included a visit to culturally relevant centers. One such cultural visit was to Sun Moon Lake, which offered a good look on how Chinese minority groups interact with the mainstream Chinese culture. Visiting companies such as Wensli gave me an opportunity to assess how Chinese businesses are responding to faltering economic growth and the efforts by the government to support local enterprises. Using Wensli as a case study of traditional Chinese companies wishing to have global imprints, we explored the challenges and opportunities facing conventional Chinese enterprises.

To maximize profitability and returns, Wensli has diversified from its traditional silk business to pursue interests in biotechnology. Notably, this diversification has allowed the company to acquire and sustain innovation within the silk textile industry. For instance, Wensli has been able to develop unique capabilities such as double-sided silk printing. However, compared to other silk players in the advanced economies, Wensli technological capability remains low. Importantly, this informs the intention of the company to pursue international collaborations, through acquisitions and strategic alliances to boost innovation and high-tech upgrades.

Wensli has acquired Marc Rozier as part of the effort in building its brand internationally. Besides, the firm has formed a partnership with internationally recognized brands such as Luis Vuitton and Prada to build trust with global consumers. However, the company still suffers from low-quality brand perception, which will affect its agenda of going into the global market. Lack of worldwide recognition is not just a problem facing Wensli alone, but also several other Chinese firms. While Wensli already enjoys an excellent location and management chain links, it lacks best performance (product) or lowest price that would give it an edge in the international market. The adjustments in the Chinese economy, as firms seek to deal with the problem of overcapacity and great quality product tag means that they are investing in high-tech production, which cuts into the overall company performance. Apart from acquisitions and strategic alliances, recruitment of international designers will help the company to present culturally relevant products to its diverse customer base in the global market. Notably, this approach proved useful in propelling Shanghai Tang brand in the international markets. Shanghai Tang was a Chinese high-end fashion brand that integrated Chinese culture in its products portfolio and designs. However, when the company launched in the international market by opening a stall on Madison Avenue, an event that was marked by high-level celebrity appearances, it did not perform well and closed just 19 months after opening (Yim, 2018). Shanghai Tang was forced to the drawing board, where it sought strategic alliances and recruit a diverse group of designers to provide designs that were relevant to the market and competitors. The lesson learned by Shanghai Tang is one that Chinese firms seeking to venture into the global market cannot afford to ignore.

Key Words

Branding- The promotion of a company’s product or service

IEC- International Electrotechnical Commission

Liability- Legal responsibilities of a company

SOE- State Owned Enterprise

ISO- International Organization for Standardization

Acquisition- Purchasing another company

Background

The traditional view of the Chinese companies as manufacturers of the cheap low-quality product could be a hindrance in the efforts of these companies to serve global clients, especially in markets such as Europe, America, and Japan where consumers are used to high-quality brands. The government effort to help Chinese companies gain a global foothold include drafting of policy papers and plans to support the global expansion drive of the Chinese domestic enterprises. Going global was a concept that began in 1999 that meant to change the Chinese economy from independence to exploit on the benefits obtainable by the thriving international trade, which was the Chinese main agenda in ‘going global.’ It has over 500 employees who help in making the company more successful. The work effortlessly to ensure it meets all the consumers’ needs. It has also R&D staffs who add up to 20-29 (Owen, Sun & Zheng, 2008). Part of the agenda in going global is for the Chinese economy to move from investment based on innovation-based growth (Rui & Yip, 2008). The government initiatives such as the Belt Road seeking to connect the world through rail, maritime and road and Capacity Cooperation will help companies such as Wensli to pursue markets outside China. The challenge of overcapacity is a key driving factor why business in China would wish to enter the global market. In this regard, these firms hope that by accessing overseas markets, they could export some of their capacity not only in industries such as steel and cement but also in high tech ones such as robotics. Traditional segments similarly permit these Chinese businesses to put more effort on a new economy that is based on sci-tech, invention, consumption, and facilities. This could be highly recommendable since the Chinese economy would grow drastically as compared to when there would be no allowance to provide these facilities. The company makes US$10,000,000 to 15,000,000 annually (Rui & Yip, 2008). The idea is to help move the Chinese economy up the value chain so that it is not held in the middle-income trap or stagnation. The paper will explore changes in business and economic development, cultural values and systems to analyze whether the traditional Chinese company can operate globally.

Why Go Global?

Enter New Markets

Faced with the problem of overcapacity, firms in the traditional industries such as steelmaking and construction sought to diversify production or relocate to other countries, which offer better prospects for growth. For instance, Sany Heavy Industry entered the Indian market after the end of the boom in the Chinese construction sector. India on the other hand, has enjoyed massive growth in infrastructure and construction, which increases the domestic consumption of the steel (Child & Rodrigues, 2005). Sany decided to set up production plants in India and offered a range of trucks mounted cranes, crawler cranes, excavators through localization (Rui & Yip, 2008). By believing in the idea of made in India, the company was able to win the trust of the locals and the government and enter a market that is fast growing. Such local cooperation has been crucial in supporting the growth expectations of the companies and offered a model, which they could use in other markets.

Chinalco, a Chinese aluminium mining company is yet a different business, which has enjoyed achievement in the global market through collaboration with the native societies. In Australia, the business decided to involve openly with the Wik community, earned their conviction, and therefore given permission of excavation of bauxite in Aurukun during that particular time. It manages to mine over 250,000 to 300,000 pieces monthly (Child & Rodrigues, 2005). The collapse of the aluminum prices in the global market made the company diversify into iron ore mining. Again, the company was successful in winning the support of the locals who endorsed them to mine the iron ore despite disaffection by Australians over concerns of auctioning national assets. The community noted that the cooperation with Chinalco was more beneficial to them compared to the previous miners. Essentially, firms such as Chinalco are setting standards, which may help other Chinese enterprises such as Wensli to pursue global market. The two examples show that Chinese companies can enter into the worldwide market and succeed, if they pay due attention to the interests of the local people and governments and follow standards.

Technologies

Another reason why firms such as Wensli would wish to expand and become global is to have access to high technologies that would make them more competitive in both the domestic and international market. One such approach that the Chinese firms have used to gain access to these high technologies is the acquisition of firms with high tech capacities (Deng, 2009). For instance, the acquisitions of Pirelli by CNCG have helped the company in acquiring technologies that made the latter produce high-end quality tires. Conspicuously, the kind of methods assists the business to deal much better with antagonism in the country by offering first-class leading tires to local consumers. This number has risen in previous years from 50,000,000 to 78,000,000 consumers of the product annually (Child & Rodrigues, 2005). On the global scale, these new technologies help the company in winning the trust of customers by giving them value. Another acquisition of Vensys by Goldwind (Chinese company) helped the latter in acquiring technologies that make their wind turbines more efficient and thus competitive in the market (Rui & Yip, 2008).

Tapping into the Global Talent

Acquiring global management expertise is a motivation for the Chinese firms seeking to operate in the international market (Boateng, Qian & Tianle, 2008). The success of the Chinese firms in the global market requires relying on a mix of global expertise of management to ensure successful implementation of innovation and enhancement of efficiency and competitiveness. Shanghai Tang was able to enjoy growth both in the Chinese market and overseas by tapping into global management talents. The hiring of designers and managers of luxury brands from France and Sweden helped the company in introducing new brands that were modern but immersed in the Chinese culture (Yim, 2018). Notably, before these managerial hiring, the company efforts to expand globally, especially in the American market had failed spectacularly, with the firm closing its signature stall in the Madison Avenue 19 months after opening (Yim, 2018). Mostly, this shows that by tapping into the international pool of talent to manage the brand, Chinese firms can enjoy success in the global market. Lenovo is also another Chinese firm that has been able to expand into the worldwide market by incorporating the global management expertise. Necessarily, by recruiting globally, the firm can tap into the talent of people working in firms such as Apple, IBM among others.

Gaining Established Brands

For many Chinese businesses operating domestically, they do not have extensive international exposure and thus are not well known. Expanding into the global market offers a chance for these companies to gain an international reputation. However, because foreign buyers are unaware of the Chinese brand, they may be skeptical about trusting the brands given the status of the country as a manufacturer of low-quality cheap products. Therefore, when Chinese firms expand globally by acquiring known international brands, forming joint ventures or strategic alliances, they can close the trust gap. Consumers see the association of the company with an established brand as assurance that the products are of high quality. Although significant regarding capacity, many of the Chinese businesses are relatively young and are inexperienced in building globally recognized brands. Acquisitions and partnership with brands that have made a reputation help in closing the gap.

Supporting Government Agenda

Chinese economy in the recent past has experienced a decline in the growth, which has also resulted in massive industrial overcapacity (Bajona & Chu, 2010). Going out has been the policy of the government to encourage firms to look for the new markets for their products overseas. If a firm succeeds in the international arena, the political players back at home may view the business as a national champion. Primarily, this point stresses the interactions between the federal and industry interests. COSCO, being a company that has the largest dry bulk carrier in china and worldwide has gained trust among many people as the best shipping operator worldwide. Majority of people across the world prefer using the company for shipping (Bajona & Chu, 2010). Such successes in the international market motivate others towards pursuing an international brand status.

The Concept of Going Global and Impacts in International Markets

Figure 1. Adapted from the partial power, (Shambaugh, 2013).

The traditional model of the Chinese investment is based on acquisition. Firms will seek to become global so that they can gain an international brand identity; a factor highlighted in figure 1 above. Since the new markets are unpredictable in their reaction to taste and preferences or association, uncertainty avoidance becomes a crucial concept in the process of the Chinese businesses seeking new markets overseas. One approach these Chinese companies can use to reduce uncertainty is by ensuring that they conform to the standards, regulations, and rules governing international markets. Western governments have clear laws regarding mergers and acquisition. In particular, they pay regard to the ownership of the company to avoid undue state influence or cases of espionage. If a company is state-owned, as is the fact with many Chinese enterprises, seeking to expand into the global market, mergers or acquisition may be denied depending on the sensitivity of the industry and the laws. Therefore, by being aware of the business culture of these international markets, the Chinese firms can reduce chances of being caught flat-footed.

Another concept that will become very crucial to the Chinese company understanding of the culture is the long-term orientation. In its policy of outward, the Chinese government has sought for long-term engagement in the international market as the engine of future growth. Notably, these firms are expected to support the development of new markets in Africa, Latin America among others so that they can help the long-term growth of the Chinese economy.

The fact that Chinese businesses will be expanding and gaining more influence in the international arena will not go unnoticed. The theory of political realism argues that because states are inherently self-serving, they will inevitably be heading for competition of power (Shambaugh, 2013). The expanding stature of China in the global trade in the recent past means that it will be in direct competition with the US for global influence and prestige. If the Chinese firms expand through significant acquisitions, it may be considered by other players as an attempt by China to establish global hegemon in the international trade. Consequently, the US and EU are more prone to collaborate in countering the influence of China in the global arena to prevent outright domination. For instance, if the Chinese firms through buyouts seek to have majority control in the sci-tech industries, EU and US may react by banning or revoking such acquisitions to prevent China having a monopoly in the high-tech economy. If China eventually emerges dominant in the world commerce, it will be very assertive in pushing for rules and policies that advance its interests. Therefore, the value of the dollar-dominated financial system may be replaced with renminbi a situation that would see the dollar decline in the international trade as Yuan gain in value and prestige (Shambaugh, 2013). Notably, these radical changes would see the influence of the US as the global superpower diminishes.

The concept of transformationalism may also help in predicting the impact of changes in the business environment practices in China to the local and international markets. In the local market, consumers will become more conscious of the global marketplace. Within the global economy, the outwards investments by Chinese companies are prone to lead to greater economic, the political and social interconnectedness of China and the rest of the world (Shambaugh, 2013). Typically, these interconnections or associations may be transcontinental or interregional. Notably, the associations may enhance the interaction between people and power. Essentially, transformationalism envisions a situation where people will be brought together by globalization so that there is a greater exchange in culture, political and value systems. Therefore, this approach to globalization will support the efforts of the Chinese firms to enter into the global markets. In particular, cross-cultural and social exchanges would mean firms such as Wensley, which have traditionally operated in China, would have structures to enter and perform in the international markets. Moreover, this approach would make the process of acquisitions, strategic alliances and joint ventures less restrictive for the Chinese firms seeking entry into the global market.

As Chinese firms grow and become more global, the struggle for power to influence international market will become greater. For instance, the move by China to set AIIB to rival Bretton Woods’s lending institutions is suggestive of the assertive approach China will seek to shape the international market for her interests. Importantly, the US financial system may lose value, as the world commerce would be formed more by China thus denying US influence in applying unilateral sanctions. Notably, this could lead to a more structured engagement of the world powers in the international affairs through a set of rules than the whims of hegemons. Therefore, this may herald a more stable global investment climate with firms investing long-term without the fear of being hit with economic sanctions for spending in perceived hostile countries.

The policy of outward investment adopted by the government in China is prone to support greater international collaboration in research and development. Therefore, global firms would be more willing to seek partnerships with Chinese firms in conducting research. For the local consumers, they will realize more value and quality from the purchase of the domestic products. Equally, these collaborations will help in providing goods that are of high quality to the consumers in the international market. Therefore, changes in government policies, business practices, among others are expected to support the efforts of Chinese firms such as Wensli to move from being locally based to serving the international market. Importantly, this is supposed to improve their management styles, allowing the firms to be more global in appeal and value delivery.

Development in Chinese Business Environment

Standardization Reform

The concept of adopting international standards is meant to set a common language in the technical world and reduce national rules that may bar international trade (Buckley, 2009). The move by the Chinese government towards the adoption of standardization of industries to work within the framework of standards such as ISO, IEC, and ITU is in line with the government agenda of opening the Chinese economy to the foreign investments, by supporting FIES collaboration with domestic enterprises. The review of the standardization law is expected to allow the market to have a greater input in setting standards and implementing them. For the traditional Chinese firms such as Wensli, these reforms in the international standards offer a chance for them to pursue collaboration with global brands. Moreover, standardization helps them to build capacity to make products that meet international standards. Therefore, reform of the national rules will help Wensli efforts to operate in the global market.

Easing up Restrictions

As part of the effort to change the Chinese economy in the face of declining growth, the government has adopted policies meant to improve the Chinese investment environment and make China market more open to foreign investors (Owen, Sun & Zheng, 2008). Notably, this is part of the effort to make the Chinese economy more innovative by leveraging business-to-business cooperation for both FIES and domestic enterprises. Consequently, the government has relaxed restrictions regarding access to foreign capital (Chuang-Lin, 2009). Easing up on the restrictions allows international banking institutions and futures companies to set up base in China. Besides, securities investments, insurance institutions, and intermediaries also can set up base in China. Notably, this opening up allows Chinese businesses to seek greater global cooperation that will support them in becoming international brands. Moreover, Chinese companies can also tap into the best management expertise thus, helping them to be more innovative in design and product line (Luo, Xue & Han, 2010). As Shanghai Tang demonstrated, using global management expertise can help to bring a turnaround in the performance of a Chinese enterprise seeking a foothold in the worldwide market (Yim, 2018).

Further relaxations of the regulations on access to the foreign capital allow Chinese businesses to source capital from the international markets, thus giving them financial muscles to finance their expansion into the global markets. Importantly, this opening up of the Chinese economy will undoubtedly create diversity regarding the ownership and control of businesses. Consequently, they will be more effective in entering global market by borrowing on best practices. For the foreign companies, the reduction in restrictions makes it easier for them to set up operations in China. Notably, it is encouraging to know that the reforms, seek to make the process of registering FIEs similar to that of the domestic enterprises (Chuang-Lin, 2009). For companies such as Wensli, the opening of China economy means increased competition in the local market. Notably, because of the high technology of the new entrants, failure to close the gap may herald tough times for companies such as Wensli and may affect their ability to enter the international market. However, pursuing acquisitions and partnerships, as Wensli has done will help domestic businesses maximize their capacity within the local market by giving consumers high-quality products. Moreover, increased competition will assist domestic companies in upgrading their technological level to remain at par with foreign brands. Consequently, this may support faster innovation and development of Chinese companies to become global brands.

Reform of SOE

Foreign political players decry SOEs in China as the source of unfair competition because government subsidies that allow them to outbid private companies in projects (Li & Putterman, 2008). In the domestic front, SOEs are seen as inefficient, especially because they are not market oriented. The point to be considered is that the government will be willing to pursue privatization of these companies owing to substantial public investments, but their reforms are inevitable. The changes of the Chinese SOEs has been a long time coming following overcapacity occasioned by a decline in the domestic and global demand. Moreover, due to slow industrial upgrading, SOEs have also suffered inefficiencies (Li & Putterman, 2008). Reforming the SOEs to help them move from traditional industries to high-tech so that they are driven by expansion in the investments to boost growth will be the key to sustaining them. Moreover, the reforms of the SOEs will reduce monopoly that is enjoyed by SOEs, and give the domestic private sector a more significant opportunity to pursue business locally even before venturing into the international arena. The reform of SOEs makes the Chinese market more competitive for foreign companies, thus helping them to seek more commercial interests in China. Moreover, the improvement of SOEs and FDI will allow international businesses to put more investment in China and collaboration with local companies will help them to build capacity and could help in making them global.

Reforms in Investments and Property Rights

Government policy to gradually liberalize the Chinese economy and the possibility of giving equal treatment to foreign and domestic investors (Owen, Sun & Zheng, 2008) herald good times for foreign investors seeking to establish operations in China. Redrafting of laws that govern foreign investments to streamline them so that all businesses operate under the same basic rules will make foreign investors more open to pursuing commercial interests in China (Li & Putterman, 2008). Notably, the reforms of the investments are part of the broader strategy of reducing market access barriers for the international businesses wishing to set up operations in China. The improvements in the finances also seek to open regions such as the Northeast, Central and Western areas to greater investments (Li & Putterman, 2008). For the local businesses, these changes imply more market to pursue thus helping them to capitalize their domestic capacity before going global. Wensli could, therefore, seek to obtain on the new markets in the north-eastern and west side of the country to build its internal capacity before going global.

Changes in the property laws are another aspect that will bring benefit to domestic and foreign businesses. Primarily, these new laws will ensure that there is better protection of the corporate property, thus motivating international and local companies to invest more because of clarity of ownership and control. If guarantees are given concerning the protection of the external IP holders, this may help in stimulating innovation. For traditional businesses such as Wensli, these reforms will support securing long-term partnerships with international brands. Mainly, with foreign firms gaining more guarantees on the property ownership, they will be willing to invest in China, thus giving a chance for companies such as Wensli to seek greater collaboration in both domestic and international markets.

Chinese Culture and Sino-Foreign Business Management Practices

Partnerships and joint ventures are seen as better approaches to escaping regulatory red tape, sharing of resources, knowledge, and skills for foreign businesses wishing to establish operations in China. Strategic alliances and joint ventures are not only beneficial to foreign businesses, but also Chinese enterprises (Vogt, 2012). For instance, by seeking partnership with Luis Vuitton and Prada, Wensli has been able to gain a brand reputation that gives it better appeal to clients in the international market. Because of the growing Sino-foreign relations as more businesses that are global seek joint ventures and strategic alliances with Chinese firms, foreign firms must make due regard to the Chinese culture and how it affects business practice and management. Hofstede and Hall offer an excellent cultural framework to analyze the Sino-foreign interactions, as shown in figure 2 below.

Hofstede Conceptualization of Cultural Assessment

Figure 2. Adapted from Neal Cole how do design and culture influence digital marketing (Huettinger, 2008).

Analysing from the perspective of power distance, Chinese business culture and management practices are high power. In this regard, the subordinates and the managers are not seen as equal in power. The Chinese business culture is also influenced by the philosophy of the Confucius, which is highly structured with a well-defined chain of command. Employees must therefore always obey the orders given by the superiors because of the virtue of the position they hold (Huettinger, 2008). For the foreign companies seeking partnership in China, this type of power distance may appear alien, especially for the western enterprises, which are used for greater cooperation and harmony between managers and employees through the decentralized structure (Huettinger, 2008). Chinese companies such as Wensli, which harbors the ambition of becoming a global brand, must pay regard to the impact of these business culture and management practices so that they do not export inefficiencies to the international market. Cultural creativity has been a critical aspect of Wensli move to innovate and become a global brand. Necessarily, the artistic creativity implies that the company will continue to give to the market products that meet the contemporary culture. For the Shanghai Tang, cultural creativity helped it to respond more robustly to changes in lifestyle at home while also export part of the Chinese culture to international customers.

Chinese culture has high uncertainty avoidance when looked at from the perspective of tolerance and uncertainty. Necessarily, this implies that there are strict rules regarding procedures and process that are closely followed by people. The result, of these strict rules and procedures, is that they offer security and stability for businesses. Chinese business culture includes managers who show more propensity towards adopting low-risk decisions, aggressiveness by employees such as go-slows and strikes are limited and lifetime employment are common (Wang & Juslin, 2009). For the Chinese firms such as Wensli that are seeking to enter into the global market, they cannot export these types of business and management practices in the worldwide market. Instead, they have to pursue cross-cultural learning that allows them to respond more appropriately to the risks by adopting organizational structures that are less tall and flatter. For instance, fostering decentralization instead of the Chinese traditional business culture of centralization will help Wensli to be more effective in responding to market needs of each country autonomously instead of waiting for commands from headquarters in China, which may not have a good understanding of the market needs or consumer dynamics.

Another aspect of Hofstede concept that is crucial in the analysis of Sino-foreign business culture is individualism versus collectivism. Chinese culture is highly based on socialism. Employees therefore may depend more on the organizations in driving up initiatives than starting their own. Moreover, actions are seen from the perspective of ‘we’ than ‘I’ (Wang & Juslin, 2009). Overall, Chinese culture promotes the interest of the group than championing the importance of self and family. For the foreign businesses seeking partnerships or setting operations in China, integrating these aspects of business culture in the services is quite essential in ensuring success. Equally, Chinese firms (Wensli for instance) seeking to establish a global reach must pay regard to mainstream western business culture to be successful in those markets.

Chinese culture and business management practices can be said to be high masculinity (Wang & Juslin, 2009). In this regard, achievement is given a lot of importance and is defined regarding recognition and money. Therefore, firms such as W