volume 16, number 3, december 2005

nbranalysis

Informing and Strengthening Policy in the Asia-Pacific

The Globalization of Corporate China

Friedrich Wu

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although China’s economic growth has been making headlines for more than two decades, most of corporate China’s ventures into the international market have occurred discretely below the radar. This certainly was not the case with China national Offshore Oil Corporation’s (CnOOC) bid for Unocal in June 2005, which ignited a Congressional furor and raised the specter of the “China threat.” China had seemingly transformed itself overnight from simply a magnet for foreign direct investment to an economic jug-gernaut. The reality, of course, is much more complex. Though Congressional opposi-tion and the prospect of a prolonged approval process ultimately doomed CnOOC’s bid for Unocal, other Chinese firms are encountering more fundamental hurdles in their attempts to internationalize their businesses, from overcoming inexperience and little-known brands to plugging gaps in managerial expertise. at the same time, we know that Chinese policy encourages strategic investments overseas and that China has piled up an enormous reserve of foreign exchange that is fueling the purchase of considerable foreign assets.

This issue of the NBR Analysis examines the political and economic forces that both “push” and “pull” Chinese firms to expand into international markets. WTO acces-sion strengthened the level of competition and brought a host of new pressures to bear on China’s domestic market. Firms now struggle with difficult choices regarding how to internationalize while maintaining a competitive edge in more demanding environ-ments. The research developed in this essay provides a new baseline for understanding the reasons, goals, and methods of Chinese firms in their evolution from domestic to global players.

Professor Friedrich Wu brings extraordinary experience from the public and pri-vate sectors and academe, serving most recently as Director of Economics in singapore’s Ministry of Trade and industry. Prior to entering government service, he was Vice President for Economic research at the singapore-based Dbs bank. Dr. Wu was a fel-low at the institute of southeast asian studies after earning a Ph.D. from the University of Washington, and is currently engaged in university teaching and research.

richard J. Ellings President The national bureau of asian research

Foreword

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Executive Summary

This essay examines the forces that are pushing Chinese firms to expand their overseas operations, the obstacles to their success, and the implications for policymakers in China and abroad.

Main Argument: Fierce economic competition and declining domestic revenues, combined with govern-

ment encouragement and financial support, are pushing Chinese firms to globalize in order to establish local sales and distribution networks in host countries, support exports and open up new markets, secure access to raw materials and natural resources, and acquire technology, cutting-edge manufacturing know-how, and global brands. as late entrants to transnational commerce, however, Chinese firms are disadvantaged in a number of ways, including lacking experience in managing mergers and developing local and brand recognition.

Policy Implications:• China’s emergence as a capital exporter, accomplished largely through the recycling of its

huge domestic savings and foreign currency reserves, should benefit the global economy and improve China’s global standing. in addition, the relocation of China’s light manu-facturing to other emerging economies should enhance China’s image in the developing world.

• if Chinese firms prove capable of successfully managing and turning around new acquisi-tions, China will likely be able to make the leap from a manufacturing center to a global corporate powerhouse.

• The aggressive efforts of Chinese firms to secure new resource suppliers are renovating the moribund commodity and industrial sectors in various countries, supplementing beijing’s diplomatic efforts to increase international support for China, and may even reduce the willingness of U.s. allies to support Washington in disputes with beijing.

• as Chinese companies increasingly compete in developed markets, greater competition will force these companies to conform to higher standards of corporate governance, ac-countability, transparency, and social responsibility.

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The Globalization of Corporate China

Friedrich Wu

recent high-profile international acquisitions and takeover bids by Chinese com-panies have shifted media attention away from spotlighting China as the world’s major recipient of global inward foreign direct investment (FDi) to characterizing the country as a cash-rich “predator” on a global buying binge. Despite the latest public frenzy stirred up by accelerated cross-border merger-and-acquisition (M&a) forays by Chinese com-panies, a large number of these enterprises have already been discreetly international-izing their operations for many years without attracting much media limelight.1

This paper therefore sets out to accomplish two tasks: (a) update the macro pic-ture on China’s rising outward FDi with the latest available data, and (b) offer a more micro analysis based on a firm-level perspective.2 The main findings are as follows.

China’s accession to the World Trade Organization (WTO) has enhanced the role of market forces in the domestic Chinese economy. as profit margins fall and competi-tion increases at home, the economic pressures of trade liberalization combined with the entry of foreign firms into the domestic Chinese market are pushing Chinese firms

1 Friedrich Wu, “China’s rising speculative Capital Outflows,” Asian Wall Street Journal, March 7, 1994, 6; and Friedrich Wu, “stepping Out the Door: Chinese Companies are becoming Major investors abroad,” China Business Review 20, no. 6 (november-December 1993): 14–19.

2 The most recently published delineation at the macro level is rather dated, as it was based on 2000–01 data. see John Wong and sarah Chan, “China’s Outward Direct investment: Expanding Worldwide,” China: An International Journal 1, no. 2 (september 2003): 273–301; and Mark y.l. Wang, “The Motivations behind China’s Government-initiated industrial investment abroad,” Pacific Affairs 75, no. 2 (summer 2002): 187–206.

Friedrich Wu is adjunct associate Professor for the Msc. Program in international Political Econ-omy at singapore’s nanyang Technological University, and a Visiting senior research Fellow at the East asian institute of the national University of singapore. From 2001 to 2005 he was Director of the Eco-nomics Division at the Ministry of Trade and industry, republic of singapore. He can be reached at <eaiwuf@nus.edu.sg>.

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to internationalize. Equipped with financial support and official government encour-agement to go abroad, Chinese enterprises are simultaneously seeking out new markets and attempting to adapt to the pressure-cooker of the global economy. Though China’s emergence as a manufacturing center has shaken the international economy, the ques-tion of whether China can become a global corporate powerhouse remains unanswered. The challenges of developing local and brand recognition and turning around failing ac-quisitions continue to present barriers to even the most successful Chinese companies. How these firms adjust to and learn from the global marketplace will not only impact China’s economic future, but may influence China’s relations with other countries.

Macro Forces

Government-accelerated Outward FDI Since 2000

Though cross-border acquisitions and takeover bids by Chinese companies have only recently captured international headlines, beijing has been formulating and exe-cuting its “go out” policy ever since the early 1990s. This policy was conceived as a criti-cal component of the larger “open door” policy that was promulgated more than a de-cade earlier. as former President Jiang Zemin declared in 1992, in order “to open wider to the outside world … we should encourage enterprises to expand their investments abroad and their transnational operations.”3 between 1991 and 1997 the state Council assembled a “national team” of 120 state-owned industry-groups that were created in order to spearhead the internationalization of Chinese enterprises.4 These enterprise-groups were provided with high levels of protection, generous state financial support, and special rights in management autonomy, profit retention, and investment decisions. in 1997 Jiang re-emphasized the government’s drive to nurture globally competitive firms: “the state-owned sector must be in a dominant position in major industries … we shall effectuate a strategic reorganization of state-owned enterprises by managing large enterprises well … China will establish highly competitive large enterprise-groups with … transnational operations.”5

3 Jiang Zemin, “accelerating reform and Open Up,” Beijing Review, October 26, 1992, 9–32. 4 These groups were assembled from “strategic sectors” such as power generation, mining, automobiles, elec-

tronics, iron and steel, machinery, chemicals, construction, transport, aerospace, and pharmaceuticals. see Peter nolan, China and the Global Economy: National Champions, Industrial Policy and the Big Business Revolution (new york: Palgrave, 2001).

5 Quoted in noland, China and the Global Economy, 17.

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This official sanction spurred Chinese outward FDi flows to surge to an average of $3.7 billion per year during 2001–03, compared to an annual average of $2.3 billion dur-ing 1991–2000 (see Table 1). by the end of 2003, the accumulated outward FDi stock of Chinese companies reached $37 billion, which was higher than the $34.5 billion of south Korea—a country with a much longer track record of internationalization (see Table 2). in order to facilitate the investment of Chinese firms abroad, by early 2003 beijing had signed bilateral investment treaties with 103 countries and double taxa-tion treaties with 68 countries. increasingly aggressive cross-border M&a purchases by Chinese companies likewise accelerated outward FDi during 2000–03. averaging $904 million annually, these purchases nearly doubled ($575 million per year) during 1995–99.6 China’s Ministry of Commerce (MoC) has consistently reported significantly lower outward FDi value figures in comparison to UnCTaD statistics, which adopt the more inclusive data based on balance of payments statistics from the People’s bank of China. by failing to capture the amounts invested abroad by firms using earnings from exports or loans raised in international capital markets, for instance, MoC has grossly underestimated the total value of China’s outward FDi.7

6 United nations Conference on Trade & Development (UnCTaD), World Investment Report 2004: The Shift Towards Services (new york and Geneva: United nations, 2004), http://www.unctad.org/en/docs/wir2004_en.pdf.

7 Friedrich Wu and yeo Han sia, “China’s rising investment in southeast asia: Trends and Outlook,” Journal of Asian Business 18, no. 2 (2002): 41–61; and Wu and Tang, “China’s Mysterious Money Flows.”

Table 1: China’s Outward FDI Flows in Comparative Perspective (average annual US$ bn)

Country 1980–90 1991–2000 2001–03China 0.4 2.3 3.7

south Korea 0.5 3.3 2.8Taiwan 1.6 3.6 5.3

singapore 0.4 4.9 8.8Malaysia 0.2 1.7 1.2Thailand 0.0 0.4 0.3indonesia 0.0 0.7 0.1

india 0.0 0.1 0.1

Source: UnCTaD.

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Corporate China’s Global Reach

by the beginning of the 21st century, Chinese enterprises were present in almost every corner of the world. according to MoC, by the end of 2003 there were 7,470 Chinese foreign affiliates spread across 168 economies (see Table 3). Perhaps not unex-pectedly, a disproportionately large number of these companies were located in Hong Kong (2,336 such firms), reflecting the former colony’s special role as an offshore plat-form designed both to raise funds for and to spearhead the regional business activities of Chinese firms. surprisingly, the next biggest host country for Chinese foreign affiliates was the United states (786). With regard to regions, Central and Eastern Europe (865) as well as asEan (857) were also important hosts for Chinese enterprises, followed by the Middle East and africa (769), the European Union (EU) (432), and latin america (384). Much like MoC’s reported outward FDi value figures, however, the enterprise numbers may be significant underestimates. For example, although MoC claimed that there were only 188 Chinese enterprises conducting business in singapore in 2003, singaporean officials asserted that the number was approximately 1,500.

in terms of value, the geographic distribution of China’s outward FDi stock seems to mirror the regional and country spread of enterprises (see Figure 1). aside from Hong Kong, which claimed a significant 40% share at the end of 2003, Chinese out-

Table 2: China’s Outward FDI Stock in Comparative Perspective (US$ bn)

Country 1985 1995 2003China 0.1 15.8 37.0

south Korea 0.5 10.2 34.5Taiwan 0.2 25.1 65.2

singapore 4.4 35.0 90.9indonesia 0.1 1.3 2.7Malaysia 1.4 11.0 29.7

Philippines 0.2 1.2 1.0Thailand 0.0 2.3 3.3

india 0.0 0.3 5.1Japan 44.0 238.5 335.5

United states 238.4 699.0 2,069.0United Kingdom 100.3 304.9 1,128.6

Source: UnCTaD.

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ward-bound capital seemed to favor developed economies such as north america, the EU, and australia/new Zealand, which together accounted for 23% of China’s outward FDi stock. according to MoC’s rankings, australia, Canada, Denmark, and the United states were also among the top ten country-destinations for Chinese outward FDi. by the end of 2003, asEan had managed to attract more (8.2%) Chinese outward FDi than both africa (8.1%) and latin america (5.8%). Of the five largest asEan member countries, indonesia and Thailand also headed the top 10 country-destinations list for China’s outward FDi. by the end of 2003, resource-rich russia, with a 4.8% share, had emerged as the third most important country-destination for China’s outward FDi—a change that reflects a continuous thaw in bilateral relations.

Motivating Factors

both the geographic distribution of China’s outward FDi as well as the recent his-tory and patterns of overseas acquisitions and takeover bids suggest that Chinese firms are motivated to internationalize their operations through a variety of “push” and “pull” factors. a 2003 survey of China’s 50 largest, “industry-leading” firms by the shanghai

Table 3: Number of Chinese Enterprises Abroad by Country/Region

region End-1995 End-2003Hong Kong/Macau 182 2,336

Central and Eastern Europe 280 865asEan 289 857

United states 229 786Middle East and africa 241 769

EU-15 102 432latin america 130 384

Japan 80 250australia 88 225Canada 76 155

rest of the World 185 411Total 1,882 7,470

Source: Ministry of Commerce, China.

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office of the Germany-based roland berger strategy Consultants corroborates the fol-lowing four motivations:8

• to establish local sales and distribution networks in host countries, particularly in in-dustries with excess production capacity and diminishing domestic demand at home�

• to support exports and open up new markets10

• to secure access to raw materials and natural resources11

8 Eugen von Keller and Wei Zhou, “From Middle Kingdom to Global Market: Expansion strategies and success Factors for China’s Emerging Multinationals,” roland berger strategy Consultants, shanghai, 2003, http://www.rolandberger.com/pdf/rb_press/public/rb_from_middle_kingdom_2_global_market_ 20030818.pdf. The examples in the following four footnotes all stem from this source.

9 Examples include kitchen-appliance maker Haier’s manufacturing plant and distribution center in the Unit-ed states, and TCl’s acquisition of schneider Electronics aG in Germany.

10 Examples include the worldwide trading offices of sinochem, COFCO, and China Minmetal, all of which are designed to purchase and sell raw materials as well as intermediate and finished goods.

11 Examples include CnOOC’s failed takeover of Unocal and CnPC’s proposed purchase of PetroKazakhstan in Canada.

Figure 1: Geographic Distribution of Chinese Outward FDI in Value Terms, End-2003

Source: Ministry of Commerce, China

HK/Macau39.9%

asEan8.2%

rest of asia5.2%

north america12.2%

EU6.0%

Tax Havens1.4%

latin america5.8%

africa8.1%

Oceania5.1%

Others8.1%

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• to acquire advanced technology, cutting-edge manufacturing know-how, or global brands12

Each of these four motivations is examined below.

Local sales and distribution networks in host countries. The gross overcapacity in many sectors of the Chinese economy, combined with falling profit margins at home, are pushing Chinese firms to seek new markets. Chinese companies, however, currently lack the necessary access to existing local sales and distribution networks so essential to successful operations abroad. Even though Chinese commodities such as steel could ul-timately prove competitive, China’s corporations must face fiercely competitive foreign markets while simultaneously attempting to develop the local networks necessary to the distribution of their products to retailers.13

New markets. slightly more than 50% of the participating firms, many of them large trading houses and manufacturers, named “seeking new markets” as the over-riding imperative for globalizing their business activities (see Figure 2). This group of firms, manufacturers in particular, cited growing competitive pressure from multina-tional corporations (MnC) in the domestic Chinese market, excess capacity, and sliding profit margins as key reasons to search for new markets abroad. For example, according to McKinsey & Co., overcapacity within China’s home-appliance market is estimated at over 30% in washing machines, 40% in refrigerators, 45% in microwave ovens, and 87% in televisions.14 little wonder then that Chinese home-appliance and consumer-electronics manufacturers such as Haier, TCl, and Huawei Technologies have made repeated forays into the more affluent developed economies such as the United states and the EU in the hope of gaining some market shares. The United states and the EU together now garner more than an 18% share of China’s outward FDi stock.

Securing resources. The next most compelling reason for China’s top 50 “indus-try-leading” firms to look offshore was to “secure resources,” a response that was given by 20% of the participating enterprises in the roland berger survey. in light of China’s rapid ascent in recent years to become the world’s largest or second-largest consumer15

12 Examples include TCl’s majority joint venture with French television maker Thomson, lenovo’s purchase of ibM’s personal computer business, and Haier’s aborted takeover of U.s. home-appliance maker Maytag.

13 The three case studies presented in the Appendix show that Chinese firms are utilizing acquisitions and joint partnerships as a means to circumvent this problem.

14 Jonathan r. Woetzel, Capitalist China: Strategies for a Revolutionized Economy (singapore: John Wiley & sons, 2003).

15 China is the world’s largest consumer of iron ore, aluminum, steel, copper, and cement, and second-largest consumer of crude oil.

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of many key natural resources and commodities (see Table 4), such an aim is not sur-prising. This explains why resource-rich countries such as australia, Canada, indonesia, Peru, and russia were, circa 2003, among the top ten country-destinations for China’s offshore investment. in fact, estimates show that resource-rich countries account for roughly 25–30% of Chinese outward FDi stock, a share that will certainly rise in the future as China’s consumption needs increase. Occasional setbacks—such as CnOOC’s failed bid for Unocal in 2005 and China Minmetals’ aborted takeover of Canadian min-ing giant noranda in 2004—are unlikely to deter Chinese commodity companies from scouring the world for resource assets.

Technology and brand names. The third critical motivation behind international acquisitions has been to “obtain technology and brands,” the response given by 16% of China’s top 50 “industry-leading” firms. Chinese consumer-product manufacturers suffer from the “twin deficits” of global branding power and advanced technology (in-cluding critical design knowledge). yet, as the experiences of Japan and south Korea have demonstrated, building these capabilities through in-house, organic growth would likely require a multi-billion dollar commitment over two to three decades. in the cur-rent climate of rapid technological change and shorter product cycles, Chinese com-

Figure 2: Motivations of Chinese Outward FDI

Source: survey of China’s “Top 50 industry-leading Firms,” roland berger strategy Consultants, 2003.

seeking new markets56%

Obtaining technology and brands

16%

Others8%

securing resources

20%

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panies simply do not have the luxury of time to pursue this protracted option. Thus outright acquisitions and strategic joint ventures within developed economies such as the United states and the EU (see the examples of lenovo-ibM, TCl-Thomson, and the aborted Haier-Maytag deals in the Appendix) become the shortcut route to addressing these twin deficits. acquiring advanced technology also necessitates the establishment of r&D facilities in developed economies in order to tap the cutting-edge knowledge of foreign engineers, designers, and scientists. Haier, for instance, has founded r&D and design centers in both Germany and the United states, while Huawei Technologies and ZTE Corporation have established separate r&D centers in sweden. in light of the growing global ambitions of Chinese consumer-goods manufacturers, corporate Chinese boardrooms will place increasing weight on brand and technology acquisitions as rationales for internationalization.

The Firm-level Perspective

after more than a decade of incremental steps toward globalization during the 1990s, some Chinese companies finally began to attract international attention at the turn of the century. in recognition of this phenomenon, in 2002 UnCTaD published a list of the “top 12” Chinese transnational corporations (TnC), which collectively man-aged over $30 billion in overseas assets, over 20,000 foreign employees, and $33 billion in offshore sales (see Table 5). Of these TnCs, at least six had amassed foreign assets worth between $2.8 and $9.4 billion, seven had recorded offshore sales of between $1.2 and $9.1 billion, and four employed between 2,000 and 6,800 overseas workers. Most of

Table 4: China’s Consumption of World Commodities as Share of World Total

Commodity 1995 2003iron Ore 30 35

aluminium 9 19steel 12 27

Copper (refined) 10 20Zinc (refined) 12 20

Cement 33 37Oil 5 8 (2004)

Source: Ubs investment research; and international Energy agency.

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Table 5: UNCTAD’s List of 12 Largest Transnational Corporations from China, 2002

rank Corporationassets (Us$ million) sales (Us$ million) Employment (no.)

Foreign Total Foreign Total Foreign Total

1China Ocean shipping

(Group) Company (COsCO)

9,382 16,926 2,149 6,757 4,124 74,669

2China national Off-

shore Oil Corporation (CnOOC)

4,814 8,635 976 3,669 13 24,406

3China state Construc-

tion Engineering Corporation

3,739 8,099 1,818 5,790 6,833 236,464

4

China national Cereal, Oils and Foodstuff import & Export

Corporation (COFOC)

3,707 5,014 6,446 13,004 359 25,000

5China national

Petroleum Corporation (CnPC)

3,350 83,254 1,600 41,089 4,400 1,167,129

6

China national Chemi-cals import & Export Corporation (sino-

chem)

2,788 4,928 9,148 16,011 350 7,950

7 shougang Group 969 6,678 467 4,401 2,086 179,997

8

China national Metals and Minerals import

& Export Corporation (China Minmetals)

729 2,797 998 4,277 570 7,145

9China Harbour

Engineering Company (Group)

520 3,271 6,579 17,826 812 70,160

10shanghai baosteel

Group Corporation383 19,389 1,211 8,643 50 113,896

11Haier Group Corporation

328 3,188 976 7,260 803 31,281

12Zhongxing

Telecommunications (ZTE Corporation)

17 1,205 260 1,685 120 12,961

Source: UnCTaD, World Investment Report 2002.

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the TnCs on the UnCTaD list would later move on to capture international headlines through global M&a forays.

in 2003 BusinessWeek published a list of “Top 200 Emerging-Market Companies,”16 among which were 20 Chinese companies (or 10% of the total).17 Though BusinessWeek’s ranking yardstick was not a measurement of the extent of a company’s global reach, some Chinese companies did make the list: notably the CiTiC Group, CnOOC, COsCO Group, lenovo, PetroChina (listed concern of CnPC), and sinOPEC. Most of these companies were already making waves in the international business scene prior to be-ing listed.

16 as ranked by market value. 17 “Emerging Might,” BusinessWeek, July 14, 2003, 66–69.

Table 6: Chinese Enterprises on “Fortune Global 500” List

Enterprise revenues (Us$ millions)

Profits (Us$ millions)

sinOPEC 75,076.7 1,268.9state Grid 71,290.2 694.0

China national Petroleum 67,723.8 8,757.1China life insurance 24,980.6 74.3

China Mobile Communications 23,957.6 4,077.9industrial & Commercial bank of China 23,444.6 279.2

China Telecommunications 21,561.8 2,422.0sinOCHEM 20,380.7 229.7

shanghai baosteel Group 19,543.3 1,537.3China Construction bank 19,047.9 5,846.2

China southern Power Grid 18,928.8 231.4bank of China 17,960.4 2,529.0

agricultural bank of China 15,284.6 242.0COFCO 14,189.4 121.4

China First automotive Works 13,825.4 293.4

Source: Fortune, July 25, 2005.

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The latest 2005 “Fortune Global 500” roster lists 15 Chinese companies (see Table 6), meaning that China now boasts the largest number of companies on this list among emerging economies, surpassing south Korea (11). China also compares favorably with developed economies (see Table 7), overshadowed only by the United states (176), Japan (81), France (39), Germany (37), and britain (35).

because total revenue, as opposed to overseas assets and sales, is the ranking cri-terion for “Fortune Global 500,” a majority of the 15 Chinese companies can only be considered as state-owned domestic corporate behemoths rather than internationally active business concerns. notable exceptions include CnPC, COFOC, sinochem, and shanghai baosteel (all on the 2002 UnCTaD list of “top 12 Chinese TnCs”), in addi-tion to bank of China and sinOPEC. The financial performances of these six firms, however, are quite uneven. according to Fortune magazine’s 2004 figures, though bank of China, CnPC, and shanghai baosteel recorded a respectable average profit-to-rev-enue ratio of 11.6%, the average ratio for COFCO, sinochem, and sinOPEC was a dis-

Table 7: Geographical Breakdown of Enterprises on “Fortune Global 500” List

Developed Economies

no. of companies on Fortune Global 500

Emerging Economies

no. of companies on Fortune Global 500

australia 9 brazil 3belgium 3 China 15britain 35 india 5Canada 13 Malaysia 1

Denmark 2 Mexico 2Finland 3 russia 3France 39 singapore 1

Germany 37 s Korea 11italy 8 Taiwan 2

Japan 81 Thailand 1netherlands 14

norway 2 spain 8

sweden 7 switzerland 11

United states 176

Source: Fortune, July 25, 2005.

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mal 1.2%. These numbers suggest that, for Chinese firms with high global ambitions yet low profitability, reliance on government coffers is the only way to sustain international expansion. such government support, however, carries the attendant risks of provoking political opposition from the host countries.

Evidence from the aforementioned roland berger survey concerning China’s “top 50 industry-leading firms” indicated that organic growth (the response given by 48% of participating firms) was the preferred method of cross-border expansion compared to strategic alliance/joint venture (39%) and outright acquisition (13%). More recent trends suggest, however, that the latter two routes are increasingly vogue within China’s corporate board rooms, particularly for commodity companies and consumer-goods manufacturers (see Table 8). as McKinsey management consultants have aptly point-ed out, “it took years, and a great deal of money, before the giant Japanese and south Korean consumer-goods companies established themselves abroad.”18 The three case studies presented in the Appendix illustrate this shift in the globalization strategy of “corporate China.”

18 Paul Gao, J.r. Woetzel, and yibing Wu, “Can Chinese brands Make it abroad?” McKinsey Quarterly, special edition, 2003, 55–65. an article in the New York Times concluded that “Chinese companies don’t have that much choice but to acquire overseas companies. Very few companies can build organically any more. if they wait 10 to 15 years, they could be dead.” see “China seeks Known brands To Go Global,” New York Times, June 30, 2005.

Table 8: Recent Actual and Proposed Overseas Acquisitions by Chinese Firms

buyer Target Us$ Millionnanjing automotive MG rover Group (UK) not yet disclosed

CnPC PetroKazakhstan 4,180lenovo Group ibM PC Division (Us) 1,250China netcom PCCW (HK, 20%) 1,000

shanghai auto industry ssangyong Motor (Korea, 49%) 500

bOE Technology Hynix semicon Flat-Panel Display Division (Korea) 380

Petro China Devon Energy (indonesia) 262China national Chemical

import/Export Corp atlantis Holding as (norway) 215

sinOPEC northern lights Project (40%, Canada) 124TCl international schneider Electronics aG (Germany) 8

Source: Various press reports.

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Conclusion

Globalization: Obstacles and Facilitators

several conclusions can be drawn from the foregoing macro and micro analyses. as late entrants—compared to their asian and Western counterparts—to transnational commerce, and with less than two decades of globalization experience, Chinese firms are likely to find themselves disadvantaged in a number of ways. Majority government ownership of many of these enterprises can post additional roadblocks to their inter-national acquisition trails, particularly in foreign assets that may be deemed “strategic resources” by host countries.

For example, economic nationalism not only foiled CnOOC’s high-profile take-over attempt of Unocal in July 2005, but also derailed China Minmetals’ proposed pur-chase of the Canadian mining giant noranda in early 200519 as well as sinOPEC’s bid for slavnet, russia’s ninth biggest oil company, in December 2002.20 Chinese firms may not, however, be particularly vulnerable to such political risk. Denying foreign investors control over a host country’s strategic resources has occurred even between friendly allies. For instance, in 2001 the Canberra government blocked a bid by shell to acquire Woodside Petroleum, an australian oil and gas company, on grounds that the takeover was not in the “national interest” of australia.21 as such, Chinese firms, much like other MnCs, must accept the fact that certain politically sensitive cross-border targets are beyond their reach, even if the Chinese government’s share in ownership were to be greatly reduced.

Chinese enterprises have also not yet demonstrated—largely due to their limited M&a experiences—the requisite skills to turn around, integrate, and sustain the brands that they have acquired. Failure to address these tasks in a swift and urgent manner in the post-acquisition phase can not only lead to financial costs but can also threaten the future of the merged entity. as the case studies in the appendix to this paper show, fail-ure to quickly repair Thomson’s bottom line has hurt TCl’s own profitability, whereas successful integration and maintenance of the ibM brand will constitute a litmus test of lenovo’s management savvy in the critical months ahead.

19 “Canada Welcomes China’s Cash,” Asian Wall Street Journal, July 15, 2005. 20 “Win or lose, CnOOC remains Key Player in ‘Go Out’ Policy,” South China Morning Post, July 12, 2005. 21 Asian Wall Street Journal, august 15, 2005.

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The obstacles described above are not sufficiently formidable to deter Chinese firms with global ambitions from internationalizing their operations. Within the domestic Chinese market, accelerating competitive pressure from foreign MnCs will continue to relentlessly “push” Chinese enterprises to globalize. as beijing works to complete its services sector liberalization by 2007, intense pressure will fall upon the services companies over the next two years. because WTO accession requirements allow ma-jority foreign ownership in many services industries, local services firms will see their profit margins squeezed and “push” them to look for offshore growth opportunities. Furthermore, with an expected medium-term average-trend growth rate of 7–9% per annum, China’s ferocious appetite for key commodities will not abate. rapid urbaniza-tion, increasing numbers of automobiles, and accelerated infrastructure construction (especially in the western region) will spur China’s resource companies to scour the world for energy resources, building materials, and key minerals.

The Chinese government, which had amassed $711 billion in official foreign ex-change reserves as of mid-2005, will back these foreign acquisitions with massive finan-cial resources. During the eighteen months between the end of 2003 and mid 2005, such reserves rose at the astonishing pace of an average $17 billion per month.22 Moreover, with the rMb’s recent modest revaluation and new peg against a basket of currencies rather than solely the U.s. dollar, market consensus expects that the rMb will begin to appreciate, eventually reaching rMb 6.8/Us$1.0 by 2010, down from rMb 8.3 before the change in the exchange-rate regime in July 2005.23 With a stronger rMb (similar to Japan’s surging yen after the 1985 Plaza accord), Chinese companies are expected to drastically enhance their international acquisitions portfolio.

Finally, China is not expected to scrap the “go out” policy in the medium term. if anything, beijing has recently enacted policies that will further enable Chinese com-panies to pursue outward FDi. in October 2004, for instance, MoC announced that it would not only begin to accept outward FDi applications and issue approvals online, but would also cease to scrutinize the feasibility of each proposal.24 This was followed nine months later by the announcement that the Export-import bank of China (Chexim) would receive a substantial capital injection that would enable the bank to support the cross-border expansion of Chinese companies.25 as Chinese Vice Premier Wu yi force-fully articulated, “We will actively foster our own multinational companies [and] we

22 an amount equivalent to sixteen Unocal bids. 23 survey of foreign exchange traders, Bloomberg Financial News, July 22–25, 2005. 24 “China Cuts red Tape on investing abroad,” Asian Wall Street Journal, October 13, 2004. 25 “China increases reserves for ‘Go Out’ Plan,” Asian Wall Street Journal, July 12, 2005.

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will create all kinds of favorable conditions to help our multinational companies fur-ther explore overseas markets and engage more strongly in global economic competi-tion and operation.”26 Consequently, recent high-profile international acquisitions and takeover bids by Chinese companies should be seen only as the tip of the iceberg that constitutes the first step in the ascent of corporate China to the international business stage. a recent issue of China Entrepreneur magazine has fittingly illustrated China’s oversized global ambitions: the cover brashly poses the question: “should China buy Wal-Mart?”27 Despite emerging bruised and battered from the foiled takeover bid of Unocal, there is no reason to doubt the ambition and tenacity of corporate China. The day may soon come when a Chinese firm takes aim at the top company on the “Fortune Global 500” scoreboard.

Policy Implications

Overall, the emergence of China as a significant capital exporter (due to a continu-ous recycling of its huge domestic savings and external surpluses) should be beneficial to the global economy, and result in a “win-win” situation for all. Chinese acquisitions of distressed assets in developed markets could help resuscitate failed or near-failed companies and prevent job losses. such successful turnarounds would generate political goodwill in the host countries in place of the hostility and suspicion characteristic of that experienced by CnOOC during its takeover bid for Unocal.

The relocation by Chinese producers of labor-intensive light manufacturing facili-ties to emerging economies would translate into deeper capital investment as well as employment creation, skills-transfer, and wage improvement for the poor and unskilled workers in these capital-scarce economies. These effects would further raise China’s stature among developing economies.28

investment in commodity-rich countries by China’s resource companies would not only help revitalize some once-moribund industrial sectors, but also spur commodity prices and raise export earnings for these countries. some of the recipients of Chinese investment (e.g., australia, Canada, and various countries in south america) are politi-cal allies of Washington; over time, however, they might refrain from leaning toward

26 China Daily, november 7, 2003. 27 “China seeks Known brands To Go Global,” New York Times, June 30, 2005. 28 China, through generous technical assistance programs in the 1960s and 70s, has already successfully culti-

vated goodwill in some developing economies.

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the United states when bilateral disputes between beijing and Washington arise. More neutral countries, such as indonesia and russia, may even side with China.

last but not least, Chinese companies operating in developed markets would bene-fit from the need to conform to higher standards of corporate governance, accountabil-ity, transparency, and social responsibility. This is because any failure to do so will result in China’s censure by foreign market regulators (such as the case of China aviation Oil in singapore). Thus, if Chinese transnational corporations want to be regarded as respectable global corporate citizens, they must come to accept and implement interna-tional “best-business” practices. Parent companies domiciled in China would also feel transnational pressure that would spur them to accelerate enterprise reforms.

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Appendix

There are three preferred methods of cross-border expansion for Chinese com-panies seeking to globalize their business operations—organic growth, strategic alli-ance/joint venture, and outright acquisition, the latter two of which are increasingly in vogue within China’s corporate boardrooms. The following three case studies ex-amine these three methods of international expansion.

Case Study #1: Haier—Limits to Organic Growth

The Qingdao-based home-appliance maker has come a long way since its humble beginnings in 1984 as a near-bankrupt Original Equipment Manufacturer (OEM) re-frigerator producer for MnCs. by the mid-1990s, under the direction of new and disci-plined management, Haier had built a reputation in the domestic market for excellent prices, quality, innovation, and customer service that enabled the company to gain a dominant position within China’s home-appliance market.

During this period, Haier also began to adopt a typical “organic-growth” route that led to expanded growth abroad. beginning with exports that now reach 160 countries, Haier subsequently built and currently operates more than twenty production plants outside China. by the first decade of the 21st century, Haier had become the world’s fifth-largest home-appliance producer, with a declared ambition to eventually become the third largest. Worldwide sales (80% of which were in China) reached $12.2 billion in 2004, compared to $4.9 billion in 2000.

Haier first entered the U.s. market in 1994. Though managing to persuade large retail chains (e.g., best buy, Home Depot, sears, and Wal-Mart) to carry a variety of its products (mostly air-conditioners, microwave ovens, washing machines, and dishwash-ers), Haier’s real success has occurred within the niche segments of mini refrigerators and wine coolers. because U.s. market leaders Whirlpool, General Electric, and Maytag have already abandoned these segments due to low profit margins and/or volume, Haier has been able to grab valuable market shares. by 2002–03 Haier had cornered 50–60% of the U.s. market share for these two products.

Having achieved some modest success in the U.s. market yet encountering rising competitive pressure from MnCs at home (especially after China’s WTO accession in January 2002), Haier harbors greater commercial ambitions in the United states. as Haier’s Chairman and CEO Zhang ruimin somberly pointed out, “after China joined

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the World Trade Organization, every multinational set up [operations] in China.”29 as an indication of the increasing competition within the domestic market (where 80% of Haier’s worldwide sales occur), in 2004 the company experienced zero-profit growth for the third consecutive year. Gross margins from sales of air-conditioners and refrigera-tors (together constituting 80% of core revenue and operating profits in 2003) fell to 11.2% and 16.5% respectively in 2004, down from 12.4% and 19.2% in 2003.30

Within the U.s. market, the biggest challenge for Haier is to expand its market shares in mainstream home appliances beyond niche segments and compete directly with the top three or four U.s. manufacturers. Toward this end, CEO Zhang has set an ambitious target of acquiring a 10% U.s. market share for full-size refrigerators by 2005, which would constitute a fivefold increase from the 2% share in 2002.31 if achieved, this target would exceed the production capacity of Haier’s $40 million manufacturing plant in south Carolina, and would require the balance to be made up through imports from China.

Despite the opening of a design center in los angeles and a rising r&D bud-get of up to 4% of revenue in 2004 (close to the international benchmark of 5% or more), Haier’s foray into the U.s. market is still handicapped in a number of ways. as the Economist bluntly observed, compared to Whirlpool and General Electric, “Haier lacks such firms’ r&D, their design skills, their distribution or their service networks … Haier does not have their established brands.”32 as the competition shifts from niche to mainstream product lines, Haier is beginning to confront some challenging barriers that the company’s hitherto “organic-growth” globalization strategy will not be able to overcome.

Haier executives have thus turned to acquisition as a means of enabling the com-pany to leapfrog to the next stage of development. in June 2005, Haier targeted loss-making Maytag—the third-largest U.s. home-appliance manufacturer (with a 15% mar-ket share) after Whirlpool (30%) and General Electric (20%)—for possible takeover. in partnership with bain Capital and the black stone Group, Haier jumped into the fray by offering $1.28 billion to Maytag shareholders, a sum slightly higher than the $1.1 billion bid put forth by ripplewood. as one Haier senior executive stated, “Haier’s tar-

29 “Haier’s Purpose,” Economist, March 20, 2004, 67. 30 “Haier’s net Profit is Flat Despite revenue surge,” Asian Wall Street Journal, april 8, 2005, 3. 31 yibing Wu, “China’s refrigerator Magnate,” McKinsey Quarterly, no. 3 (2003): 106–15. 32 “Haier’s Purpose,” Economist.

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get is Maytag’s prestigious brand name as well as its mature sales channels.”33 Had the takeover been successful, the merged entity would have catapulted Haier to the position of third- or even second-largest home-appliance producer in the U.s. market. Despite doubts over whether Haier would have had the management skills necessary to inte-grate the two concerns successfully, this new company would have posed an immediate threat to Whirlpool and General Electric.

Whirlpool foresaw the menace to its market-dominant position from this merg-er, however, and thwarted Haier’s aspiration with a counter bid of $1.35 billion that prompted Haier to abort its takeover attempt. Though temporarily foiled, the Maytag setback is unlikely to deter CEO Zhang’s ambition “to make americans feel that Haier is a localized U.s. brand instead of an imported Chinese brand.”34 as such, corporate america will undoubtedly see Haier returning to the M&a scene when the next take-over opportunity arises.

Case Study #2: TCL-Thomson—A Not-Yet Profitable Strategic Alliance

Much like Haier’s humble inception, the Huizhou-based TCl began as a small-scale producer of cassette tapes in 1981. The company diversified into telephone production in 1985, and television manufacturing in 1992. by the late 1990s, TCl had emerged as the largest television producer in China.

aside from selling its own brand of televisions within China and exporting them to developing countries, the firm’s manufacturing prowess and quality control were rec-ognized by OEM contracts with international brands such as Philips and Toshiba, and even the luxurious bang & Olufsen of Denmark. Due to protectionist barriers such as import quotas and high tariffs (e.g., 21.25% from the United states), however, TCl lacked a market presence in both Europe and north america. nonetheless, these ob-stacles were not formidable enough to deter TCl management’s declared ambition to becoming a “global brand.”35 as Chairman and CEO li Dongsheng articulated, “our goal is to become a Chinese sony or samsung.”36

in order to circumvent Europe’s import quotas, in 2002 TCl established a pres-ence in Germany by purchasing schneider Electronics, an insolvent television maker,

33 “Haier’s Maytag bid Taps brand loyalty,” Asian Wall Street Journal, June 23, 2005. 34 Wu, “China’s refrigerator Magnate.” 35 Far Eastern Economic Review, august 28, 2003. 36 “The struggle of the Champions,” Economist, January 8, 2005, 57–59.

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for $8.0 million. schneider’s production capacity, distribution network, and brand pro-file proved too small and insignificant, however, to help the ambitious and impatient TCl executives realize their aspiration for global reach. Thus when the loss-making French television manufacturer Thomson Electronics, which also owns the venerable rCa brand in the United states, was looking for a cash-rich partner to help resuscitate its moribund business, TCl saw the opportunity of using a joint-venture vehicle to leapfrog entry barriers and penetrate both the European and U.s. markets simultane-ously. Much like Haier, TCl executives recognized that trying to implement the “or-ganic-growth” globalization strategy would be both time-consuming and tortuous for latecomers. as TCl Chief Financial Officer Vincent yan admitted, TCl would require five to ten years “to reach the level of recognition that Thomson and rCa have in their markets.”37

in fact, yan’s time-frame for TCl to conquer the European and U.s. markets by go-ing it alone must be considered as highly optimistic when compared to the globalization experiences of Japanese and south Korean MnCs in the 1980s and 90s. in november 2003 TCl and Thomson announced a $520 million strategic alliance that created TTE (TCl-Thomson Electronics), the world’s largest television manufacturer, with the Chinese partner owning a majority stake of 67%; industry leaders and the media mar-veled and approved of this bold move.38 representing corporate america’s endorsement of the deal, Fortune magazine named TCl Chairman li as “asian businessman of the year” for 2003. The merger combined 29,000 employees as well as a dozen produc-tion facilities worldwide (in China, France, indonesia, Mexico, Philippines, Poland, Thailand, and Vietnam), and allowed for the use of common designs for chassis and chipsets. Executives from both sides touted the enhanced efficiencies, cost savings, and improved profits that the joint venture’s size would likely yield.

Unfortunately, instead of focusing sharply on turning around the unprofitable Thomson,39 TCl soon jumped into another ill-fated joint venture with the mobile-phone arm of alcatel, the world’s biggest supplier of broadband internet equipment. in august 2004 TCl paid $60.5 million for a 55% stake in a $110 million joint venture with alcatel to manufacture and sell mobile phones in Europe. The marriage proved to be short-lived, however. Citing losses ($45.7 million in first quarter 2005) and manage-ment discord, in May 2005 alcatel backed out of the joint venture and sold its entire

37 “returning to a Clear Picture,” Asian Wall Street Journal, november 26, 2004. 38 “China’s TCl Emerges on World screen,” Asian Wall Street Journal, november 4, 2003; and “bursting Out of

China,” BusinessWeek, november 17, 2003, 20–22. 39 Thomson posted a loss of €185 million in 2003.

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stake to TCl. as one alcatel senior executive lamented, “the cultural differences be-tween the two companies were huge … there was no synergy at all.”40 Meanwhile, TCl’s inability to make Thomson profitable resulted in unabated financial hemorrhage for the latter and dragged down TCl’s own profitability. as TCl’s CFO yan admitted on the one-year anniversary of the strategic alliance, “in the past [few] months of operations, we found out the challenges and difficulties are deeper than we thought.”41 as a reflec-tion of this belated realization, TCl’s net profits fell by half in 2004 to $41 million. in the first six months of 2005, TCl’s Hong Kong-listed concern, through which the company controls the 67%-owned joint venture, announced a surprising loss of $12.4 million. Much of the deficit came from Thomson’s $42 million in operating losses in the United states and Europe.

accordingly, the originally optimistic plan to make TTE profitable by 2005 has been pushed back by two years to 2007.42 While TCl’s executives might eventually succeed in swinging Thomson back into profitability, near-term prospects are less sanguine. as the Financial Times observed, “TCl’s buying spree has become a cautionary tale about the limits of Chinese companies’ management capabilities.”43 Thus there is still a steep and financially costly learning curve to climb for Chinese companies that opt for the “strategic-alliance” mode to globalization.

Case Study #3: Lenovo— Jury Still Out on Acquisition of IBM PC Business

When lenovo announced its $1.75 billion purchase of ibM’s PC business in December 2004, Financial Times hailed the deal as “the dawn of a new era in China’s M&a market,”44 while Asian Wall Street Journal praised the purchase as a “milestone in China’s integration in world business.”45 For lenovo’s founders (led by its former Chairman liu Chuanzhi), the purchase represented the culmination of a twenty-year climb to the global stage that began at the Chinese academy of sciences in 1984, when several entrepreneurial scientists succeeded in developing a circuit board that would

40 “China’s Push abroad Gathers Pace,” International Herald Tribune, July 29, 2005. 41 “returning to a Clear Picture,” Asian Wall Street Journal, november 26, 2004. 42 CFO yan delineated the extended time-frame. “TCl Multimedia’s Global agenda,” BusinessWeek Online,

august 22, 2005. 43 “Win-Win Turns into ‘Well … Maybe not’,” Financial Times, May 24, 2005. 44 “Deal Divides Opinion Over Further M&a Trends,” Financial Times, December 9, 2004. 45 “lenovo agrees to Purchase ibM Unit amid Doubts,” Asian Wall Street Journal, December 9, 2004.

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allow ibM PCs to process Chinese characters. This breakthrough research product en-abled these scientists to sell imported PCs, which in turn allowed them to gain both distribution experience and an understanding of customer needs. legend (the corpo-rate label before being re-branded lenovo in 2003) began to assemble PCs under its own brand name in 1990, and went on to attain a listing in Hong Kong four years later. by tailoring reliable products to the needs of local customers and keeping inventories and costs down, legend soon emerged to become China’s biggest PC supplier, having garnered a domestic market share of 27%.

by the first years of the new century, however, the entry of additional domestic and foreign players caused the PC market in China to suffer from falling margins and over-crowding: “Price wars are raging at the high-end of the Chinese PC market, and foreign competitors like Hewlett-Packard and Dell are nipping at legend’s heels.”46 Confronted by rising competitive pressure at home, legend—much like Haier—began to look over-seas for growth opportunities. as legend’s Chief Financial Officer Mary Ma pointed out, “if we just focus on China, we cannot generate returns for our shareholders.”47 although President yang yuanqing (who, after the ibM purchase, was later promoted to chairman) admitted in 2003 that lenovo was “a brand name no one knows” outside China, he stated that “we want to take ourselves to an international scale, to the scale of a world first-class enterprise.”48

Thus when ibM listed its unprofitable PC business for sale, lenovo saw the acqui-sition opportunity as a vehicle that could help the firm leapfrog from a local to global brand overnight. The $1.75 billion purchase was announced in December 2004 and sealed in May 2005. This deal has quadrupled lenovo’s annual revenue to $13 billion and catapulted the company to the status of the world’s third-largest PC supplier (after Dell and Hewlett-Packard) based on a 9–10% global market share. Over 72% of compa-ny revenue now comes from overseas sales, compared to almost zero before the acquisi-tion. not only has lenovo gained the rights to use the ibM brand under license for five years, but more significantly now also owns ibM’s premium “Think” trademark, which covers the prestigious ThinkPad notebook brand and the ThinkCenter desktop line. Equally important is lenovo’s new access to ibM’s international expertise, particularly in such areas as the management of manufacturing and distribution channels in the 160 countries where ibM had already established a presence. To secure ibM’s continuous

46 “legend Goes for the big league,” Far Eastern Economic Review, June 19, 2003. 47 “Chinese Companies abroad: The Dragon Tucks in,” Economist, June 30, 2005. 48 “legend Goes for the big league,” Far Eastern Economic Review.

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technical support and share in the company’s unflagging customer loyalty, ibM was given an 18.9% stake in the post-acquisition lenovo.

The takeover was not free from political controversy in Washington, however, with three republican congressmen raising national security concerns. Due to ibM’s status as a major U.s. government contractor and lenovo’s majority-ownership by the Chinese government, the deal was subjected to a prolonged review by the Committee on Foreign investment in the United states (CFiUs). Even though PC manufacturing had already become a low-margin, commoditized production, three months of investigation passed before CFiUs granted security clearance for the sale, and only upon the condition that lenovo agree to move the acquired PC division out of ibM’s headquarters at raleigh, north Carolina.

in april 2005, as a vote of confidence in the acquisition, three U.s. private-equity firms—Texas Pacific, General atlantis, and newbridge Capital—paid $350 million to buy a 10.8% stake in lenovo. in May 2005 lenovo finally took possession of an iconic global brand—ibM has been ranked the world’s third most-valuable brand (after Coca-Cola and Microsoft) by BusinessWeek/interbrand in their joint annual scoreboard of the “100 Top brands.”49

The multiple challenges facing lenovo, however, have only begun. The first chal-lenge is financial. ibM’s PC business has been unprofitable for several years (first half 2004 losses were $139 million, following losses of $258 million in 2003). Turning the business around will constitute a critical test for lenovo’s management expertise. should management fail to do so within the next two years, the acquired entity will begin to drag on lenovo’s balance sheet in the medium term.

The second major issue that the company needs to consider is integration. The Asian Wall Street Journal is right in asking “how a Chinese company with a proud his-tory and no experience running extensive overseas operations will integrate a flagship U.s. company with its own strong identity?”50 lenovo has inherited ibM’s 9,000 world-wide employees, most of who had been operating within a corporate culture very differ-ent from that of the acquirer.

lenovo’s initial responses to this second challenge were to relocate its corporate headquarters in new york and share management with ex-ibMers. Ex-ibMers cur-rently fill half of the top 30 executive positions in lenovo, including steve Ward, former head of ibM’s PC division and a 26-year veteran of the company, who was appointed

49 “Global brands,” BusinessWeek, august 1, 2005, 86–94. 50 “lenovo near Deal To Take Control of ibM’s PC Unit,” Asian Wall Street Journal, December 8, 2004.

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CEO. These moves do not guarantee a seamless integration of the two merged corpo-rate entities, however. CFO Mary Ma has candidly admitted the divide between the two management styles: “lenovo China would normally approach something top down. but the PC division of ibM has a very strong execution culture. it’s a very different approach.”51 The challenge for lenovo is to successfully meld the two distinctively dif-ferent corporate cultures and management styles into a unified whole that will help to advance lenovo’s global ambitions.

Third, and most crucially, lenovo must in the next five years tackle the challenges of sustaining the ibM brand and retaining customer loyalty, all while executing a cred-ible and effective brand-transition strategy before the ibM brand-use license expires. sustaining and managing an acquired brand is a much more arduous task than simply purchasing an internationally recognized brand. lenovo must convince existing and potential customers that the company possesses the ability to deliver the same high-quality products and after-sales service as ibM—a task that will become even more acute when the latter’s brand name exits the scene in 2010. in this respect, hitherto China-centric lenovo does not possess a track record. Only time will tell whether this bold acquisition will benefit or detract from lenovo’s ambitious global agenda.

51 “lenovo’s long March,” BusinessWeek Online, august 22, 2005.

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Vol. 9, no. 2, March 1998 China’s Intentions for Russian and Central Asian Oil and Gas, by Gaye Christoffersen

Vol. 9, no. 1, February 1998 Treacherous Terrain: The Political and Security Dimensions of Energy Development in the Caspian Sea Zone, by Rajan Menon

Vol. 8, no. 5, December 1997 Lost Opportunities: Energy and Politics in Russia, by Peter Rutland

Vol. 8, no. 4, July 1997 Promoting U.S. Interests in China: Alternatives to the Annual MFN Review, essays by David M. Lampton, Nicholas R. Lardy, Kenneth Lieberthal, Laura D’Andrea Tyson, and Douglas H. Paal

Vol. 8, no. 3, June 1997 The Hong Kong Transition and U.S.-China Relations, essays by Michel Oksenberg, Yasheng Huang, Joseph Fewsmith, and Merle Goldman

Vol. 8, no. 2, May 1997 Multilateralism: Is There an Asia-Pacific Way? by Amitav Acharya

Vol. 8, no. 1, February 1997 A Looming Entry Barrier: Japan’s Production Net-works in Asia, by Kozo Yamamura and Walter Hatch

Vol. 7, no. 5, December 1996 Multilateralism and National Strategy in Northeast Asia, essays by Nicholas Eberstadt and Ralph Cossa

Vol. 7, no. 4, november 1996 Advancing Intellectual Property Rights: Information Technologies and the Course of Economic Develop-ment in China, by Michel Oksenberg, Pitman Potter, and William Abnett

Vol. 7, no. 3, October 1996 Trade, Security, and National Strategy in the Asia Pacific, essays by Dwight Perkins, Andrew MacIntyre, and Geza Feketekuty

Vol. 7, no. 2, september 1996 Security, Democracy, and Economic Liberalization: Competing Priorities in U.S. Asia Policy, essays by Sheldon W. Simon and Donald K. Emmerson

Vol. 7, no. 1, June 1996 The New Russia and Asia: 1991-1995, by Herbert J. Ellison and Bruce A. Acker

Vol. 6, no. 5, December 1995 APEC in a New International Order, by Robert Gilpin

Vol. 6, no. 4, December 1995 Central Asia’s Foreign Policy and Security Chal-lenges: Implications for the United States, by Rajan Menon

Vol. 6, no. 3, november 1995 America, Japan, and APEC: The Challenge of Leadership in the Asia-Pacific, essays by Donald C. Hellmann, Akio Watanabe and Tsutomu Kikuchi, and Kenneth B. Pyle

Vol. 6, no. 2, august 1995 Northeast Asia in an Age of Upheaval, essays by Harry Gelman and Robert A. Scalapino

Vol. 6, no. 1, april 1995 APEC at the Crossroads, essays by 14 leaders in gov-ernment, business, and academia

Vol. 5, no. 5, December 1994 Chinese Views on Asia-Pacific Regional Security Cooperation, by Susan L. Shirk

Vol. 5, no. 4, December 1994 Recalculating Autonomy: Japan’s Choices in the New World Order, by Michael J. Green and Richard J. Samuels

Vol. 5, no. 3, October 1994 The Modernization of the Chinese People’s Libera-tion Army: Prospects and Implications for Northeast Asia, by Michael D. Swaine

Vol. 5, no. 2, september 1994 The Political Economy of North Korea, by Chong-Sik Lee

Vol. 5, no. 1, July 1994 MFN Status, Human Rights, and U.S.-China Rela-tions, essays by 9 leaders in government and academia

Vol. 4, no. 5, December 1993 Whither Japan? essays by Kenneth B. Pyle and T.J. Pempel

Vol. 4, no. 4, november 1993 Americans Speak to APEC: Building a New Order with Asia, edited by Richard J. Ellings, essays by 32 leaders in government, business, and academia

Vol. 4, no. 3, september 1993 North Korea: Reform, Muddling Through, or Col-lapse? by Nicholas Eberstadt

Vol. 4, no. 2, July 1993 Regional Issues in Southeast Asian Security: Sce-narios and Regimes, by Donald K. Emmerson and Sheldon W. Simon

Vol. 4, no. 1, June 1993 Memoranda to Policymakers, essays by Jeffrey A. Frankel and Douglas H. Paal

Vol. 3, no. 4, september 1992 The Collapse of the Soviet Union and the New Asian Order, by Robert Legvold

Vol. 3, no. 3, July 1992 The Future of China, essays by Nicholas Lardy, Ken-neth Lieberthal, and David Bachman

Vol. 3, no. 2, June 1992 Asia’s Challenge to American Strategy, by Richard J. Ellings and Edward A. Olsen

Vol. 3, no. 1, June 1992 The Regionalization of Defense in Southeast Asia, by Sheldon W. Simon

Vol. 2, no. 3, July 1991 The Soviet Crisis and Foreign Policy Toward East Asia, essays by James H. Billington and Herbert J. El-lison

Vol. 2, no. 2, June 1991 Redefining U.S.-China Economic Relations, by Nicholas R. Lardy

Vol. 2, no. 1, april 1991 The Regional Security and Economy of East Asia: Prospects for the 1990s, essays by Donald S. Zagoria and Robert Gilpin

Vol. 1, no. 3, December 1990 China’s Foreign Relations After Tiananmen: Chal-lenges for the U.S., essays by Harry Harding, Allen S. Whiting, and Robert S. Ross

Vol. 1, no. 2, november 1990 Japan and the World: Considerations for U.S. Policy-makers, essays by Kenneth B. Pyle, Edward J. Lincoln, and Chalmers Johnson

Vol. 1, no. 1, september 1990 China in the 1990s: Prospects for Internal Change, by Harry Harding

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Strategic Asia 2005–06: Military Modernization in an Era of Uncertainty, the

latest book from The National Bureau of Asian Research, assesses the military

balance in Asia and analyzes defense modernization programs in the region.

strategic asia 2005–06

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contributes enormously to that

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Visit http://strategicasia.org to preview or order online

Contributors include Stephen J. Blank, John H. Gill, Christopher W. Hughes, Roy D. Kamphausen, Kimberly Marten, Michael E. O’Hanlon, Dwight Perkins, Jonathan D. Pollack, Mitchell B. Reiss, David Shambaugh, Sheldon W. Simon, Michael D. Swaine, Ashley J. Tellis, and Hugh White.

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Gary Kaplan Chief Executive Officer Virginia Mason Medical Center

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John M. shalikashvili Chairman Joint Chiefs of staff (ret.)

David K. y. Tang Partner Preston Gates & Ellis llP

arnold F. Wellman Corporate Vice President Public affairs United Parcel service

Honorary DirectorsJoachim KempinThomas E. Fisher

Michael armacost stanford University

russell Cheetham asia-Pacific investment services Corporation

nicholas Eberstadt american Enterprise institute

Donald Emmerson stanford University

aaron Friedberg Princeton University

robert Gilpin Princeton University

lee HamiltonThe Woodrow Wilson international Center for scholars

stephen Hanson University of Washington

Harry Harding George Washington University

arthur Hartman aPCO associates

Donald Hellmann University of Washington

Mikio Kato The international House of Japan

Carol Kessler Pacific northwest national laboratory

David lampton Johns Hopkins University

nicholas lardy institute for international Economics

Chae-Jin lee Claremont McKenna College

robert legvold Columbia University

Kenneth lieberthal University of Michigan

John Maresca The business-Humanitarian Forum

Jack Matlock, Jr. Princeton University

Daniel Matuszewski Consultant

William McCahill, Jr. William Cutler Pickering Hale & Dorr

rajan Menon lehigh University

sam nunn nuclear Threat initiative

William Overholt ranD Center for asia Pacific Policy

Dwight Perkins Harvard University

robert scalapino University of California, berkeley

sheldon simon arizona state University

Judith Thornton University of Washington

raymond Waldmann University of Washington

NBR Board of Directors

NBR Board of Advisors

(continued on inside back cover)

Congressional Members of the NBR Board of Advisors

representative Gary ackerman (D-ny)

representative robert aderholt (r-al)

senator Wayne allard (r-CO)

representative brian baird (D-Wa)

senator Max baucus (D-MT)

representative shelley berkley (D-nV)

representative Howard berman (D-Ca)

senator Jeff bingaman (D-nM)

representative sanford bishop (D-Ga)

representative Earl blumenauer (D-Or)

senator Christopher “Kit” bond (r-MO)

representative Madeleine bordallo (D-GU)

representative sherrod brown (D-OH)

representative Michael burgess (r-TX)

representative Dan burton (r-in)

senator Maria Cantwell (D-Wa)

senator saxby Chambliss (r-Ga)

senator Tom Coburn (r-OK)

senator Thad Cochran (r-Ms)

representative K. Michael Conaway (r-TX)

senator Kent Conrad (D-nD)

representative Jim Cooper (D-Tn)

representative Joseph Crowley (D-ny)

representative Danny Davis (D-il)

senator Jim DeMint (r-sC)

senator Mike DeWine (r-OH)

representative norm Dicks (D-Wa)

representative lloyd Doggett, (D-TX)

senator Pete Domenici, (r-nM)

representative David Dreier (r-Ca)

senator richard Durbin (D-il)

representative Eliot Engel (D-ny)

representative Phil English (r-Pa)

senator Michael Enzi (r-Wy)

representative Eni Faleomavaega (D-as)

senator Dianne Feinstein (D-Ca)

representative randy Forbes (r-Va)

representative Paul Gillmor (r-OH)

senator Chuck Hagel (r-nE)

representative Doc Hastings (r-Wa)

representative Maurice Hinchey (D-ny)

representative rush Holt (D-nJ)

senator James inhofe (r-OK)

senator Daniel inouye (D-Hi)

representative Jay inslee (D-Wa)

representative Jesse Jackson, Jr. (D-il)

senator James Jeffords (i-VT)

senator John Kerry (D-Ma)

representative Mark Kirk (r-il)

representative Jim Kolbe (r-aZ)

senator Mary landrieu (D-la)

representative Tom lantos (D-Ca)

representative rick larsen (D-Wa)

representative James leach (r-ia)

representative sander levin (D-Mi)

senator Joseph lieberman (D-CT)

representative nita lowey (D-ny)

representative Don Manzullo (r-il)

senator John McCain (r-aZ)

representative Jim McDermott (D-Wa)

representative Cathy McMorris (r-Wa)

representative Michael Mcnulty (D-ny)

representative James Moran (D-Va)

senator lisa Murkowski (r-aK)

senator Patty Murray (D-Wa)

senator ben nelson (D-nE)

representative solomon Ortiz (D-TX)

representative Frank Pallone, Jr. (D-nJ)

representative Thomas Petri (r-Wi)

representative Joseph Pitts (r-Pa)

representative Earl Pomeroy (D-nD)

representative David reichert (r-Wa)

senator John rockefeller iV (D-WV)

representative loretta sanchez (D-Ca)

senator Charles schumer (D-ny)

representative rob simmons (r-CT)

representative adam smith (D-Wa)

senator Gordon smith (r-Or)

senator Ted stevens (r-aK)

representative Ellen Tauscher (D-Ca)

senator Craig Thomas (r-Wy)

representative Mac Thornberry (r-TX)

senator John Warner (r-Va)

representative Diane Watson (D-Ca)

representative Curt Weldon (r-Pa)

representative robert Wexler (D-Fl)

(continued from inside front cover)