Chinese companies investing in familiar brands...

05 july 2005

Article By: DAVID BARBOZA - THE NEW YORK TIMES
Published by: Seattle Post-Intelligencer SHANGHAI, China -- Never heard of brand names such as Great Wall, Hisense, Konka, Amoi and Panda? Outside China, few have. That may change someday, but in the meantime, some Chinese companies are taking a shortcut and adopting widely known names to make their presence felt abroad. China's leaders have been quietly encouraging Chinese companies for years to set up overseas operations, acquire foreign assets and transform themselves into multinational corporations -- in other words, to make themselves more competitive in a world increasingly dominated by Wal-Mart, Microsoft and Coca-Cola. Now, it seems, Chinese companies have gotten the message. Earlier this year, Lenovo -- the Chinese computer maker -- acquired IBM's personal computer business. Haier, one of China's biggest companies, made a bid last month for the Maytag Corp. And in the same week, in the biggest move of all, one of China's state-owned oil giants made a hostile $18.5 billion bid for Unocal Corp., one of the world's largest oil companies. Yet many of the companies seem to be acting partly out of desperation, as more foreign brands line shelves of retailers in China. "Chinese companies are now facing serious foreign competition at home," said Marshall Meyers, a professor of management at the Wharton School at the University of Pennsylvania. "So they have to do something. They've got to grow to global scale." The fact is, despite restrictions on foreign competition here, few powerful brands have emerged in China over the past two decades. And now that some of those restrictions are being lifted as part of China's ascension into the World Trade Organization, some of China's biggest companies are being forced to adopt global strategies. With its IBM computer purchase, Lenovo, a major Chinese computer maker but virtually unknown outside of China, is suddenly the world's third-largest computer maker after Dell and Hewlett-Packard. TCL, another Chinese company, became the world's biggest television maker last year after it acquired the television business of Thomson of France, which also owned the old RCA brand. And then there was the bid in June by the China National Offshore Oil Corp., or CNOOC, for Unocal, an offer that touched off a Wall Street-style takeover battle with the American oil company Chevron. Experts say that whether these deals succeed or not, they are symbolic of China's rapid economic rise and its global ambitions. "The Chinese government has been preparing the top 100 to 150 companies to go overseas and expand," said Jack J.T. Huang, a chairman of the China practice at the law firm Jones Day. "The government wants to use this as a testing ground, to see how well the companies stand up to international competition." Dozens of Chinese companies stand in waiting and are not shy about their global ambitions. "The future goal of the company is to make the name Great Wall known across the world," said Liu Rengang, a spokesman for the state-controlled Great Wall Computer Group. A spokesman for Ningbo Bird, one of China's biggest cell phone makers, sounded equally ambitious: "Our future goal is to become one of the top three cell phone manufacturers in the world." Last month, China's Ministry of Commerce issued a report that said that even though China's exports were dominated by consumer products, there were few famous Chinese brands involved in the export trade. Most goods are being shipped abroad with foreign brand labels. To rectify the situation, the ministry called on Chinese companies to start exporting their own "famous brands." Every region was ordered to produce its own famous brands. "We need to cultivate a group of independent famous brands that have international influence," the report stated. "Each industry needs to have its own famous brand for export." The memo reads like a Communist Party document from a state planning commission. But the thinking behind the effort seems to be simple: Imitate the foreigners. Japanese and Korean companies such as Toyota, Sony and Samsung made the moves from national to global brands quite successfully. But it took years. Analysts say Chinese companies do not have that luxury because the rapid pace of globalization means that markets are now quickly won and lost. "Chinese companies don't have that much choice but to acquire overseas companies," said Joe Chang, a China specialist at McKinsey & Co. "Very few companies can build organically any more. If they wait 10 to 15 years, they could be dead." By acquiring well-known brand names, experts say, Chinese companies are hoping to get access to global distribution networks, sophisticated research and development, and recognizable brand names. "What these companies are looking for is to build up capabilities," said Oded Shenkar, a professor of management at Ohio State University and author of "The Chinese Century." "This is a shortcut. They don't have billions of dollars to invest in the growth. But here in one fell swoop, you're acquiring a venerable brand name." One advantage some Chinese companies have is that they have worked for years as joint venture partners or suppliers for some of the world's biggest corporations, giving the Chinese an eye into the process of making premium-priced products. And the amount of manufacturing done in China is astounding. According to CLSA, an investment bank, 80 percent of the world's clocks and watches, 50 percent of its cameras, 30 percent of its microwave ovens, a quarter of its washing machines and a fifth of the world's refrigerators are now "Made in China." "Japanese and Korean companies initially came to the U.S. with a low-end product image," said Douglas Beal, a partner at the Boston Consulting Group. "It took a long time to take Japanese brand names and turn them into high-end products. Sony now commands a premium because it's Sony. But 20 years ago, they couldn't do that." The hurdles, however, are high. The most serious problem facing Chinese companies, analysts say, is a lack of international experience and weak marketing and management structures. That, experts say, is precisely why some big Chinese companies are bidding for Western icons such as IBM, Maytag, RCA and even MG Rover, the English carmaker that has been pursued by at least three Chinese automakers in the past year. And this is why after acquiring IBM's personal computer business earlier this year, Lenovo asked the IBM managers to stay on and run the entire company from New York. "The most valuable asset we have acquired through IBM's PC business is its world-class management team and their extensive international experience," Liu Chuanzhi, the chairman of Lenovo said in an interview in December. But can Lenovo run IBM's personal computer business? Can Haier, the Chinese appliance giant, manage Maytag? Analysts are skeptical because, they say, most mergers fail. "It's very difficult to make overseas acquisitions," said Gavin Geminder, a partner at KPMG, the global advisory firm. "Chinese companies have the same issues, and they probably have less-qualified management teams." Chan Chun, a professor of finance at the China Europe International Business School in Shanghai, said Chinese companies had also struggled to manage their finances in a corporate environment. "In terms of managing for shareholder value, they are weak," he said. "They lack international experience and have poor financial controls." But no one expects that to slow China's deal-making. In fact, largely unnoticed last month was a $1.4 billion bid by China Mobile, one of the giant state-owned telecom companies, for control of a Pakistani telecom company. China Mobile lost out on the deal. But its cross-border bid is notable. Many of the Chinese companies are sparing no expense to hire Western lawyers and advisers. The Chinese companies are also backed by state-owned banks, private equity funds and company war chests. CNOOC's bid for Unocal, for instance, is backed by a $6 billion loan from the International and Commercial Bank of China, the largest Chinese state-owned bank, and an additional $7 billion in loans is coming from its parent company at rates considerably below what market financing costs. "There's probably a lot more deals to come," said Robert Morse, the chief executive for Citigroup corporate and investment banking in Asia. "Liquidity is at an all-time high for Chinese companies looking to fund overseas acquisitions." And being the world's low-cost factory floor is no longer the country's singular ambition, analysts say. That is perhaps why China Entrepreneur Magazine recently devoted a cover story to the question, "Should China Buy Wal-Mart?" Xiang Bing, the dean of the Cheung Kong Graduate School of Business in Beijing, wrote that if Chinese investors could pool their resources, they could acquire a controlling stake in the ultimate global retail brand: Wal-Mart Stores. That, he surmised, was one way a country with few global brands but lots of goods could move up the value chain. Article By: DAVID BARBOZA - THE NEW YORK TIMES Published by: Seattle Post-Intelligencer