Aug. 12, Atlanta, Doctoral Consortium, OM Division, AoM Chinese Firms’ Manufacturing...

Aug. 12, Atlanta, Doctoral Consortium, OM Division, AoM

Chinese Firms’ Manufacturing Internationalization- Motives, Paths and Network Coordination

Kaimei [email protected]: Yongjiang SHIAdvisor: Mike GregoryCenter for International ManufacturingInstitute for ManufacturingCambridge, UK

Stage in research: proposal defended, data collection almost done, with some data analysis


Background 3-7

Research Questions 8-9

Research Method 10

Case Companies 11-15

Case Analysis and Findings 16-17

Next-step 18

Agenda


China FDI outflow: in 2005, it reached US$ 6.9 billion, compared with US$ 5.5 billion in 2004, US$ 3.0 billion in 2003.

China outward FDI stock: by 2005, it has increased to US$ 52 billion - 0.46% of the worldwide outward FDI stock; 4.3% of that from developing economies; ranks 5th in developing economies, just behind Hong Kong, Singapore, Brazil, Taiwan Province of China.

Chinese investors:

Ownership: from 2003 to 2004, state-owned enterprises (43%35%), limited liability companies (22%30%), private enterprises (10%12%).

Industry distribution: 59% of the firms from manufacturing industry; 11% from trading industry

Background – China outward FDI: Data


China FDI outflow: in 2004 (5.5 b)

Background – China outward FDI: Characteristics

China outward FDI stock: by 2004 (44.8 b)

Industry

FDI flow amount

(US$ million)Percentage

Mining 1,800 32.7%

Transportation 830 15.1%

Trading 800 14.5%

Manufacturing 760 13.8%

Business Service 750 13.6%

Agriculture, Forestry, Fishery, Animal

290 5.3%

Other 270 4.9%

Industry distribution (source: Chinese Ministry of Commerce Report 2004)

Geographical dispersion:More than 90% flows to developing economies: Asia (54,5%);Latin America (32%); Africa (5.8%)Hong Kong is still the hottest investment destination: 47.8%Cayman Islands and British Virgin Island ranks 2nd and 3rdLess than 10% flows to developed economies: Europe (3.1%); North America (2.3%); Oceania (2.2%)Concentrated to US (2.2%); Australia (2.2%); UK and Germany

Industry

FDI flow amount

(US$ million)Percentage

Business Service 16,420 36.7%

Trading 7,840 17.5%

Mining 5,950 13.3%

Transportation 4,580 10.2%

Manufacturing 4,540 10.0%

Software & computing service 1,160 2.6%

Other Service 1,090 2.4%

Agriculture, Forestry, Fishery 834 2.9%

Construction 833 1.8%

Other 1,573 3.5%

Industry distribution (source: Chinese Ministry of Commerce Report 2004)

Geographical dispersion:Developing economies (94.8%): Asia: 74.6% (Hong Kong: 68%); Latin America: 18.5%; Africa: 2.0%Developed economies (5.2%): North America: 2.0% (US: 1.5%);Europe: 1.7% (Germany: 0.27%; Spain: 0.27%; Russia: 0.27%)Oceania: 1.1% (Australia: 1.1%) Japan: 0.31%


National Champions (natural resource industry & mfg industry)

Sector Revenue(US$ billion)

PetroChina Oil/gas 67.7

Sinopec Oil/gas 75.1

CNOOC Oil/gas 6.7

Baosteel Steel 21.5

SAIC Cars 13.8

Lenovo Pcs 12.5

Haier Home appliance 12.0

Hisense Home appliance 4.2

TCL TVs/electronics 6.3

Huawei Telecom equipment

8.2

ZTE Telecom equipment

4.1

Wanxiang Car parts 4.2

Background – Chinese Mfg MNCs

Outward FDI in mfg industry widely distributes in:telecommunication equipment industry; computer, electronics and electrical products manufacturingindustry; textile and closing industry; transportationequipment industry; medical equipment industry; etc.

Many mfg national champions are pursuinginternationalization.

Lenovo 08/12/2004, acquired IBM PC division by paying US$1.75 billion.

Haier 13 overseas plants, with 1 in Italy, 1 in US. >20% of annual sales from international market

TCL

01/08/2004, TTE (TCL38%-Thomson30% JV) was established. 4 oversea mfg plants in Thailand, Vietnam, Poland and Mexico. >50% annual sales from international market

Hisense 4 oversea plants: 2 in South Africa, 1 in Hungary, and 1 in France

Huawei 58% annual sales from international market

4 R&D centers in US, Sweden, India, Russia

Wanxiang 10+ mfg plants overseas, with Wanxiang America company managing global operations


Small to Medium sized Enterprises (SMEs)

Mainly distributed in Yangtze River Delta (YRD) and Pearl River Delta (PRD) International activity is primarily engaged in providing contractual manufacturing service (act

as OEM or ODM) to oversea branded manufacturers, retailers or branded marketers, via traders or oversea buyers.

Challenges include: Low value-added part – very low profit Highly depend on traders and oversea buyers; no direct access to retailers, branded

manufacturers or branded marketers – no oversea distribution network Highly depend on oversea orders – will face huge problem once oversea orders are transferred

to lower cost countries, such as India, Vietnam, etc.

Therefore: High value-added part: OEM ODM Most qualified, unchangeable OEM/ODM candidate: quality; capacity; mfg efficiency;

dependability; flexibility; etc. R&D capability; oversea distribution network; brand; HR Internationalization: M&A

Background – Chinese Mfg MNCs


China outward FDI is increasing rapidly and China is gradually becoming an important investor.

90% of China outward FDI flows to developing countries; investment to “Triad” – US, Europe, Japan – is growing fast.

In 2004, more than half (59%) of the investment is from manufacturing firms, but only 13.8% flows to manufacturing function Most Chinese manufacturing firms are on an early stage of internationalization, i.e. oversea agents, sales subsidiaries, trading companies (trading functions) are the preferable choices. However, Chinese firms’ mfg internationalization has become an inneglectable phenomenon.

Both mfg national champions and SMEs are considering pursuing mfg internationalization, through different paths to achieve their own aims.

Research Focus: Chinese (except Hong Kong, Macau and Taiwan) manufacturing firms, which serve oversea markets and own at least one oversea manufacturing plant.

Background – Highlight


1, Why do Chinese manufacturing firms put manufacturing function overseas? What kind of ownership advantages do Chinese mfg firms hold in pursuing production in

developing economies? What kind of ownership advantages do Chinese mfg firms hold in upgrade investment (to “Triad”

and industrialized economies) What kind of location advantages drive Chinese mfg firms do international production? Other drivers? (e.g. M&A opportunities)

2, How to define the paths of Chinese firms’ manufacturing internationalization?

3, How do Chinese manufacturing firms manage international manufacturing network?

Research Questions


Market 1

Market 2

…

Market N

Chinese Market

Headquarter

PositionMarket shareFactories and capacity

Export volumeMarket sharePresenceCMS / own-brand

Headquarter

Market 1

Market 2

…

Market N

Factories

Location decisionEntry modeMake or buyProduct / CapacityStrategic role / mfg taskCMS / own-brand

R&D – mfgProcurement – mfg

Mfg processProduct markets of the factory

Mfg – regional subsidiary1

2

3

Market 1

Market 2

…

Market N

Headquarter

Factories

R&D - mfgProcurement - mfg

Mfg processProduct markets of the factory

Mfg – regional subsidiary

1

2

3

4

5

Product categoryMfg processProduct market

Mfg processProduct market

Market 1

Market 2

…

Market N

1

23

R&D

Procurement

4

Product categoryMfg processProduct market

Mfg – regional subsidiary

Research Framework

1 2

34


Multiple-case study:

In headquarter (finished): interview with oversea business unit manager, product division operations manager, oversea marketing and sales unit manager; observation on production line; archive collection

In oversea factory (ongoing): interview with operations manager, global logistics promotion division manager; observation on production line

Research Method


…Export... (pre mfg-int’lization) FDI (Production Sites) Operating Mfg Networks

Case 1 CRT/FP TV4 oversea mfg plantsM&A + Greenfield

Case 2 CRT/FP TV4 oversea mfg plantsGreenfield

Case 3 CRT/FP TV4 oversea mfg plantsGreenfield

Case 4 Refrigerator & Freezer13 oversea mfg plants

Greenfield + M&A

Case 5 Metrological instruments6 oversea mfg plantsGreenfield + JV

Case 6 Automotive parts10+ oversea factoryGreenfield + M&A

Case 7 Electrical Tool Machine1 factory in GermanyM&A

Finished

On-goingFurther data-gathering needed

Haven’t started


Aug 1, 2004, TCL acquired Thomson’s color television business unit, co-founded TCL Multimedia Technology Holdings Limited (TCL38%-Thomson30%). All business is operated under TTE Corporation.

Since then, TTE has become the largest TV producer in the world, with global market share 9.15% and sales volume 23 million units in 2005.

(1) Marketing and Sales: 5 regional business centers (RBC) are established to manage marketing and sales functions in a global presence.

Case Company 1 - TCL

RBC Regions Brand Market segment Market position

China RBC China TCL (TCL King-branded TV) and ROWA

high to premium segment (A)

Top 1

21% market share (TCL18%+ROWA3%)

Europe RBC Europe except Eastern Europe Thomson (and Schneider)

high to premium segment (A)

Top 5

4.3% market share

North America RBC

US + Canada RCA low to medium segment (C)

9% market share

EM RBC

Southeast Asia, Eastern Europe, Middle East, Russia, Latin America and Africa

TCL medium to high segment (B)

S-OEM RBC OEM and ODM of TV products in all regions


(2) Manufacturing internationalization (124)

CRT TV plants: 6 in China (Inner Mongolia, Xinxiang, Wuxi, Nanchang, Chengdu and Huizhou), 1 in Thailand, 1 in Vietnam, 1 in Poland and 1 in Mexico, with production capacity 18 million.

FP TV plants: Huizhou, Wuxi, Thailand, Mexico, Poland, with production capacity 10 million.

P.S.: Plants in Thailand, Mexico and Poland are acquired from Thomson.

Case Company 1 - TCL


Top 3 TV producer in China. Annual sales in 2005 was US$ 4.2 billion, with 10% from international market. In 2006, acquired Kelon, and entered white good industry.

Manufacturing internationalization (123)

Case Company 2 - HiSense

Time Location Highlight

1996 South Africa Government assignment; Greenfield factory

No market presence before 1996

2003 South Africa

Purchase Daewoo’s TV factory to increase production capacity

CRT TV final assembly, component imported from China

Production capacity: 300k (2003), 500k (now); 2nd in SA market, next to Sony

Serve: South Africa and other African countries

2004.5 Hungary

FP TV (<37’) final assembly

Cooperate with Flectronics: HiSense provides production line, technology and component (imported from China), Flectronics provides workshop, labor and warehouse.

Production capacity: 150k (2004), 300k (now)

Serve: Europe except France

2005.8 France FP TV final assembly

Purchase a French factory which acted as OEM for HiSense

Production capacity: 100k, 2.5% in France FP TV market.

Serve: France


In 2005, annual sales reached US$ 12 billion. 2nd largest refrigerator producer in the world (6% global market). Top 1 white good producer in China (over 30% market share in Chinese refrigerator and washing machine market).

Case Company 4 - Haier

Manufacturing internationalization (1234):

22 oversea plants (final assembly) in total – 13 oversea factories + 9 OEM plants

Region Plant

North America 1 plant in South Carolina, US (2000); Greenfield

Europe 1 plant in Italy (2000); Acquired

EE 1 TV plant (ongoing); Greenfield

Southeast Asia

5 plants: Indonesia; Philippine; Malaysia washing machine factory; Thailand refrigerator factory; Vietnam A/C factory

South Asia 2 plants: Parkston industrial park; Bengal factory (ongoing)

Middle East 2 plants: Jordan industrial park; Iran factory

Africa 1 plant: Nigeria factory

OEM plants 9 distributed in Southeast Asia, South Asia, Mediterranean and Africa


Intra-industry analysis:

TV industry: to evade anti-dumping duty (44.6% to CRT TV)

7 Chinese domestic TV giants (>70% market share)- Haier, HiSense, Konka, Changhong, Skyworth, TCL, Xiamen Overseas – have all established oversea factories (and all of them own mfg plant in Europe) to avoid anti-dumping duty. E.g.: Konka in Hungary, Mexico, Indonesia and Thailand; Changhong’s FP factory in Czech Republic; Haier’s TV plant in Slovakia; HiSense’s CRT factory in South Africa and FP plants in France and Hungary; TCL in Thailand, Vietnam, Mexico and Poland; etc.

Most factories are for final assembly: 1, to make use of China low labor cost; 2, import of components and SKD parts from China will not be charged anti-dumping tariff; 3, to FP TV, the import tax rate of components and SKD parts is 1%, much lower than whole TV set import tax (14%)

All set up factory in East Europe to serve European market Concentrate on European FP TV market

White goods industry: as final product import tax rate to Europe and US is low, only Haier pursues mfg internationalization, from corporate strategy (brand promotion, distribution network build-up, R&D capability increase, etc.) perspective.

Case Analysis and Findings


Cross-case analysis

Ownership advantages includes high manufacturing efficiency, quality control, innovation in production techniques and processes, etc. which can be transferred to oversea plants, both in developing economies and in developed economies.

Location advantages: government support or assignment to SOE; In many sectors, Chinese market has been overcapacity, and become a global competition environment; customers have more loyalty to brand with global presence; etc.

New business model - low value-added mfg part is gradually given up by MNCs - offer Chinese mfg firms M&A opportunities

To set up or acquire mfg plants in developed economies (Triad), the dominating reasons are to evade trade barriers and to acquire strategic asset (such as brand, distribution network, R&D capability, managerial capability, human resource, access to capital, etc.)

In “Triad”, OEM or own brand in niche market; in emerging markets, own brand Most case firms’ mfg internationalization is in stage 3, which means oversea plants are

subsidiaries of product division in headquarter: final assembly; little cooperation with other oversea plants, local resources, local subsidiaries, etc. Only TCL and Haier are managing international mfg network, in stage 4.

Case Analysis and Findings


Fieldwork in Case 4’s US factory and Case 5’s US headquarter (Aug16-Aug23)

Interview in Case 1’s European headquarter (October) Case analysis and cross case analysis Fieldwork report to case companies Dissertation writing-up

Next…


Thank You Very Much!!Comments and Questions, please!

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