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

1. Chinese Firms’ Manufacturing Internationalization- Motives, Paths and Network Coordination Kaimei WANG kw259@cam.ac.uk Supervisor: Yongjiang SHI Advisor: Mike Gregory Center for International Manufacturing Institute for Manufacturing Cambridge, UK Stage in research: proposal defended, data collection almost done, with some data analysis

2. Agenda • Background 3-7 • Research Questions 8-9 • Research Method 10 • Case Companies 11-15 • Case Analysis and Findings 16-17 • Next-step 18

3. Background – China outward FDI: Data • 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

4. Background – China outward FDI: Characteristics • China outward FDI stock: by 2004 (44.8 b) • China FDI outflow: in 2004 (5.5 b) Industry distribution (source: Chinese Ministry of Commerce Report 2004) 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 3rd Less 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 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%

5. Background – Chinese Mfg MNCs Outward FDI in mfg industry widely distributes in: telecommunication equipment industry; computer, electronics and electrical products manufacturing industry; textile and closing industry; transportation equipment industry; medical equipment industry; etc. Many mfg national champions are pursuing internationalization. National Champions (natural resource industry & mfg industry)

6. Background – Chinese Mfg MNCs 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

7. Background – Highlight • 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.

8. Research Questions 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?

9. Research Framework 1 2 Market 1 Market 1 Chinese Market Mfg – regional subsidiary 3 • R&D – mfg • Procurement – mfg Headquarter 1 Market 2 Market 2 Headquarter 2 • Location decision • Entry mode • Make or buy • Product / Capacity • Strategic role / mfg task • CMS / own-brand • Position • Market share • Factories and capacity … … Factories Market N • Export volume • Market share • Presence • CMS / own-brand Market N • Mfg process • Product markets of the factory 4 3 Market 1 R&D • R&D - mfg • Procurement - mfg Mfg – regional subsidiary 2 Mfg – regional subsidiary Market 1 3 5 1 Market 2 Headquarter 1 3 • Product category • Mfg process • Product market Market 2 • Product category • Mfg process • Product market 2 … Factories 4 … Market N • Mfg process • Product markets of the factory 4 • Mfg process • Product market Market N Procurement

10. Research Method 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

11. Case 1 CRT/FP TV 4 oversea mfg plants M&A + Greenfield CRT/FP TV 4 oversea mfg plants Greenfield Case 2 Case 3 CRT/FP TV 4 oversea mfg plants Greenfield Refrigerator & Freezer 13 oversea mfg plants Greenfield + M&A Case 4 Case 5 Metrological instruments 6 oversea mfg plants Greenfield + JV Finished On-going Further data- gathering needed Case 6 Automotive parts 10+oversea factory Greenfield + M&A Electrical Tool Machine 1 factory in Germany M&A Case 7 Haven’t started

12. Case Company 1 - TCL 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.

13. Case Company 1 - TCL (2) Manufacturing internationalization (124) 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.

14. Case Company 2 - HiSense 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 (123)

15. Case Company 4 - Haier 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). Manufacturing internationalization (1234): 22 oversea plants (final assembly) in total – 13 oversea factories + 9 OEM plants

16. Case Analysis and Findings 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.

17. 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.

18. Next… • 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

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