Chapter 14 Emerging Global Players: The Companies

1. Chapter 14Emerging Global Players: The Companies

2. Emerging countries competitors Haier Group Cemex SABMiller Ranbaxy Laboratories Ltd Huawei Tata Lenovo Petronas 2

3. Globalization and local firms: the traditional views High Local firms are weak Local firms are competing with global firms Global markets Pressure to globalize Multidomestic markets • Strong positioning of local • enterprise • Local firms dominate • MNCs tend to dominate • Local firms can take advantage of • blind spots Low Competitive advantage of local firms Local knowledge Global competences and capabilities (costs, resources) 3

4. Globalization and local firms: recent views The strategic logic of emerging countries competitors • Use their knowledge of local environment • Use their ‘national’ preference • Use their low labor costs • Sometime use their natural resources On the international front On the domestic front • Dominate bottom of the pyramid • Gain volume • Progressively push their capabilities upward • Eventually compete head-on withmultinational players • Export low cost products • Buy ( copy?) technology 4

5. Proprietary Technology Proprietary Technology • • Own brand Own brand • • International marketing International marketing • • Brand creation and development Brand creation and development • • Investment in research and Investment in research and develoment develoment • • International expansion • • Sources of competitive advantage Invest in advanced production technology costs still moderate Labor Labor Low cost manufacturing based on low labor costs and financing Large part of activities based on original equipment manufacturing minimizing marketing costs - - • • Technology is acquired thru licensing or joint Ventures Japan Time Time 1960’s 1960’s 1970’s’s and beyond • • • Korea • 1960’s 1970’s 1980’s 1990’s and beyond China 1980’s 1990’s 2000’s 2005 and beyond Globalization and local firms: recent views cont. Development of national champions

6. Globalization and local firms: the recent views cont. Development of national champions • Compete head-on with traditional global firms • Start international expansion mainly by acquisitions • Invest in modern manufacturing technology • Start to build their own brand • Start their own R&D • Protected domestic markets • Low cost manufacturing based on low labour costs • In some cases access to natural resources • Technology is acquired through licensing or joint ventures • Large part of activities based • on original equipment manufacturing Time Step 1 Domestic player and exporter Step 2 Internationalization Step 3 Global player 6

7. National champions: building the business High-end markets Dominated by multinationals High Performances and products/Services Functionalities Disruptive development paths Low-end markets dominated by domestic firms Canon in Japan in the 60’s Honda motorcycles in the 60’s Galanz in China in the 90’s microwaves TCL in China inTV Samsung in Korea with microelectronics in the 80’s Reliance in India in the 90’s in pharmaceuticals Low Time

8. Emerging competitive battlefield Global Multinational firms from USA, Europe, Japan, Korea and Australasia, plus emerging Indian and Chinese mutinational firms) Scope Domestic players both large and small Local Low resource costs Technology and marketing Contextual and political know-how Competitive approaches

9. Emerging competitive battlefield: China EMERGINGBATTLEFIELD Low cost Mass distribution Differentiated COST LEADERSHIP POSITIONING APPLIEDTO HIGH VOLUMELOW END SEGMENTS Low price Mass distribution DIFFERENTIATED POSITIONING APPLIED TO HIGH-END SEGMENTS Large Chinese competitors E.g. Kanko, Haier Price premium Low volume High costs Good technolgy Strong brands Most Western competitors High Technology and marketing advantages Low High Low Local knowledge and preferential advantages

10. “Dragons at your door” Chinese companies disrupt global competition through cost innovation. i.e. they use cost advantages in radically new ways to offer customers around the world dramatically more for less • Start in China and overcome fragmentation • Export looking for loose bricks in competitors’ defenses (unexplored markets or products) • Move up market: technology at low cost (licensing, copying) and variety at low cost See Ming Zeng and Peter Williamson, Dragons at Your Door: How Chinese Cost Innovation is Disrupting Global Competition. Harvard Business School: 2007

11. Earth-moving equipment: wheel loaders Global market: 720,000 units China market: 120,000 units Production capacity in China: 200,000 units Prices: CAT, Volvo: 120,000$ Komatzu: 60,000 $ Chinese co.’s 30,000 $ Chinese co. exported: 2,000 units in 2004 3,500 units in 2005

12. The Whirlpool story in China • By mid 1990’s Whirlpool had big ambition for Asia • China was considered to be a key market • Very fragmented industry with 650 appliances manufacturers operating in China • Customer focus on local brands • Some emerging Chinese leaders: KELON, Haier

13. The Whirlpool story in China cont. • Whirlpool entered in 1994: • JV in Beijing for refrigerators (Snowflake) • JV in Shanghai for washers (Whirlpool Narcissus) • JV in Shendu for microwaves (MCV) • JV in Shenzhen for air conditioners (Whirlpool Raybo) • Plus bigger Chinese HQ in Hong Kong and a Design Centre in Singapore • Whirlpool exited the market for refrigerators and air conditioners in 1997 • Still produces compressors in Beijing, microwaves in Shendu and washers in Shanghai

14. The Whirlpool Story in China cont. The market is dominated by local players China’s appliances market share in 2002 100% 90% Other 80% 70% Meiling 60% Xinfei 50% 40% Haier 30% 20% 10% Kelon 0%

15. An example of a Chinese champion • HUAWEI TECHNOLOGIES • Telecommunication networks, products and solutions • Started in 1988: digital fixed switch • In 1997: launched GSM equipment • Established joint R&D labs with Texas Instruments, Motorola, IBM, Intel, Agere Systems, Sun Microsystems, Altera, Qualcomm, Infineon & Microsoft • As of 2005, Huawei Technologies has a total of 10 joint research labs • In 2000, Huawei established R&D centers in Silicon Valley and Dallas • Cisco Systems alleged that Huawei Technologies had infringed some of their technology patents (litigation was resolved) • 4 billion USD revenues in 2004

16. Examples of Indian Champions • India's oldest business conglomerate • Spread over seven business sectors: engineering; chemicals; materials; energy; consumer products; IT; communication • 98 companies operating in six continents • Sales of 28.8 billion USD in 2007 • Employs some 289,500 people TATA Conglomerate • Created in 1961 • India's largest pharmaceutical company • Ranked amongst the top ten generic companies worldwide • Manufacturing operations in 8 countries • Subsidiaries presence in 49 countries • Products available in over 125 countries • Went public in 1973 • Company global sales of 1330 million USD in 2006 RANBAXY LABORATIES LTD Pharmaceuticals 16

17. Multinational corporations from China and India India China Bajajauto – Automotive Cipla – Pharmaceuticals Hindalco - Metals Infosys – IT services Mahindra – Automotive Reliance – Chemicals Tata Steel – Steel Tata Tea – Food and beverages Videocon – Consumer electronics Wipro - Pharmaceuticals Aluminium Corporation of China – metals BYD – Consumer electronics China Netcom – Telecom services Sinopec – Fuels Erdos – Textiles Haier – Home appliances Nanjing Automobile Corp. – Automotive Shoushang - Steel Tsingtao Brewery – Food and beverages Wanxiang - Engineering

18. Cross-borders acquisitions from China and India Million US $

19. Business groups in emerging countries • In most emerging countries the industrial, financial and trading • sectors are controlled by three groups of players: • Government-owned enterprises • Multinationals • Domestic “business groups” • The domestic business groups exhibit the following typical characteristics: • They are highly diversified • They are personally controlled • They are most often controlled by families or ethnic groups

20. Business groups in emerging countries cont. • Business groups control large sectors of economies: • Overseas Chinese in South East Asia • Korean Chaebol • Indian family groups • Rejuvenated state-owned enterprises in China • Latin American “grupos”

21. Overseas Chinese in South East Asia: traditional role DISTRIBUTE BUY CREDIT IMPORT RURAL AREAS FOREIGN COUNTRIES CREDIT DISTRIBUTE URBAN AREAS P/OC/K/K 5

22. Evolution of overseas Chinese groups in Southeast Asia Banking and financial services Real estate Progressive vertical integration in upstream activities Investment in industrial activities (assembling, downstream) either direct, through joint ventures or licensing Diversified activities Diversified activities Diversified activities Diversified activities Start up in “trading”

23. Overseas Chinese groups: organization and management

24. Farm Seeds Animal Feed Shrimp Aqua Feed Poultry Milk Plant Protectiony Chemical Feedmill machinery Pig Farming Trading Logistics Animal health Planatation Charoen Pokphand 200 companies 8 billion USD before crisis Sausage Meat Trucks Motorcycles Healthy Drinks Drill Supermarkets Frozen Foods Distrib. Petroleum Telephone PVC Fiber Optics Cable TV Luggages Real Estate Condominium Switching Equip Toys Sponge Leather Golf

25. Why so strong? Why so diversified? • Scarce resources • Over-regulated economies • Market imperfection • Monopolies • Lack of reliable information • Opportunities • Inefficient judicial systems • Simplified “business systems”

26. Do business groups add value? Source of value added Modern Western managerial and financial theories about the value of a group Emerging countries Yes - in developing markets, personalised control reinforces discipline Some resource transfer, vertical integration, otherwise little Yes definitely Yes - as long as market imperfections stay Not per se but pride to belong to a reputable corporation Discipline: Implementation of rigorous management practices Synergies: Resource pooling and transfer; asset sharing; competencies transfer Leverage: Access to scarce resources; political clout; image Innovation: ability to develop new businesses

27. How groups in developing countries handle such diversity • In each of the businesses - limited competition (monopolies, oligopolies) • Innovation (products, processes) is purchased (licensing, joint ventures) • Marketing is essentially a matter of sales and distribution - brands are sourced externally, as are products • The key managerial task is to run logistics and production efficiently Logistics Production Innovation Marketing Concentrate on sales and distribution in oligopolistic markets. Brands and products sourced externally. Obtained through licensing and joint ventures Key operational task

28. What has changed? • Markets pressures: globalization, deregulation • Increased competition both domestic and international • More complexity in management because of the need to develop • its own R&D and marketing capabilities • Increasing financial stakes due to the move towards capital intensive • activities • Overcapacities • Higher dependencies on foreign capital

29. What are the consequences? Since mid-1998, a large number of Asian entrepreneurial conglomerates have announced a series of moves under the generic heading ‘restructuring’. • COST CUTTING: wage cuts; bonus freezes; headcount reduction • DEBTS RESTRUCTURING: the 200% D/E ratio imposed in Korea • PORTFOLIO REDEFINITION: definition of core business; concentration of similar activities in the same group; inter-group mergers • DIVESTMENT OF NON-CORE ACTIVITIES: spin off; selling off • REORGANIZATION: flatter structures; decentralization of decision-making