China’s Globalization Plans off to a rocky start

“Going global is a must, rather than a choice”

Chinese manufacturers are eager to go global – their gargantuan market share at home, their deep expertise in large scale (contract) manufacturing, and their nascent (but world class) R&D capability has given the Chinese companies the confidence to go global.

Chinese firms feel the urgency to go global – and want to expand rapidly. But their early steps seem to be faltering. In the last 2-3 years, three Chinese firms experimented with acquisitions as a path for globalization – and are struggling.

BenQ’s Loss Making Acquisition

BenQ experimented with the acquisition of Siemens’ cell phone unit. BenQ wanted to piggyback a ride to become a global brand on Siemens brand image via acquisition. The mounting losses in the handset unit forced the company is shut down Siemens cell phone unit – BenQ realized that Siemens unit will not take it global. (see: http://arunkottolli.blogspot.com/2006/10/when-brand-buying-is-not-good-idea.html)

TCL’s Struggle

TCL was hailed as China’s answer for Sony. TCL is a home grown manufacturer of electronic goods, which started out as a contract manufacturer and commands a large market share for Televisions, Audio players, DVD players etc. in China. In 2003 TCL purchased Thompson’s television and DVD player operations – along with the right to use Thompson brand name for four years. In 2004, TCL purchased Alcatel’s cell phone business. With these two acquisitions, TCL became one of the first Chinese manufacturer to go global.

TCL’s problems started immediately after the acquisitions. These loss making brands had to be turned around rapidly else it can drag TCL’s image and cash down the drain. TCL struggled to make its cell phone division profitable, and in 2005 TCL ended its venture with Alcatel. A similar fate now hangs over its Thompson branded television business.

Lenevo Takes a Hit

Lenevo purchased IBM’s personal computer business in 2005 – along with the right to use IBM’s brand name and it’s “Think Pad” brand name. In 2006, Lenevo’s profits were down 85% - and the IBM’s unit (global) is still making losses – which is wiping out the profits Levenvo makes in China.

Globalization Strategy that Went Wrong

In a previous post on why it was a bad idea to buy a global brand. The problems faced by the three biggest Chinese manufacturers are similar. Their rush to go global – by acquisition of well known (but struggling) brands was not a well thought out idea.

Buying a brand – without understanding the cultural issues associated with the brand can be lethal. Companies must understand what they are buying. A brand name is also a promise which the seller makes to customers and that brand promise must be fulfilled to attain brand value. If a company is buying a famous brand name, then the acquiring company must fully understand the brand image and the brand promise – which can vary significantly from cultures to cultures.

Chinese organizations seem to have purchased the brand names – without understanding its cultural significance, without understanding its brand promise. As a result, these acquired brands fell from customer grace very rapidly.

Chinese firms were also buying the operations – these operations were loss makers to begin with. These firms underestimated the challenges of managing a global organization, when they did not have a global operations and supply channel experience to begin with.

Closing Thoughts

In a stark contrast to Chinese experience, Indian companies seem to make rapid progress in their global acquisition strategy. Tata Tea has successfully gone global with the acquisition of Tetley. Tata Motors has successfully acquired Daewoo’s truck division. Tata Motors has successfully expanded into South Africa. Ispat steel (now called Mittal Steel) has been extremely successful in global M&A strategy. Wipro, Videocon, Ranbaxy, Wockart, and others have been making global acquisition – and their profits are soaring.

The key difference I can observe here is that the acquiring company must know the markets, the customer and the consumer in the global context. Marketers must understand the cultural nuances of their global customers. Company managers must fully understand the challenges of running and managing a global supply chain and distribution channels.

Chinese businesses which were built ground-up: Haier, ZTE & Huawei are thriving. While hurried up acquisitions are struggling. This is a good learning example for other Asian firms which are now planning to go global via the acquisitions route.

Also See:

When Brand Buying is not a Good Idea
Brand Management
Developing a Brand Position
Selecting a specific brand position