Are You Ready for China?

By Kurlantzick, Joshua | Chief Executive (U.S.), July/August 2007 | Go to article overview

Are You Ready for China?


Kurlantzick, Joshua, Chief Executive (U.S.)


SIZING UP STRENGTHS AND WEAKNESSES OF A GLOBAL COMPETITOR.

For decades now, Western companies have been investing in China and learning how to deal with a market that can be both an enormous opportunity and a huge risk. But in the past three years, CEOs have begun facing another challenge: Chinese companies themselves are beginning to compete with Western corporations. Many Western CEOs and politicians are unsure how to react- witness the 2005 political furor over Chinese oil firm CNOOC's proposed purchase of American oil company Unocal, which ended with CNOOC withdrawing its bid.

Several trends are critical to understanding China's new multinationals. First, despite old images of China as a manufacturer of low-end goods, Chinese giants today, like white goods manufacturer Haier or computer company Lenovo, can play in some high-value industries. In Southeast Asia, for instance, China's mobile phone companies now compete with Western and Korean companies.

Second, Chinese chief executives enjoy cheap labor costs, since they often bring pools of Chinese labor with them overseas. In industries deemed essential by the Chinese government, Chinese firms investing abroad also can rely upon tax breaks and cheap capital from state-directed banks. One study by Accenture found that China Development Bank provided a low-interest $10 billion loan to telecommunications giant Huawei to expand overseas. And Chinese companies are more willing to transfer technology to foreign partners than Western firms would be. In Nigeria, where Chinese firms have won deals to build satellites, a politician told reporters, "They are also prepared to put more on the table. For instance, the Western world is never prepared to transfer technology- but the Chinese do."

Finally, for all their strengths, Chinese multinationals still face major weaknesses. Because of poor after-sales service and lack of marketing, they have created little brand loyalty, which is why they still often prefer to purchase well-known Western brands, like IBM's personal computer line or British automaker MG. …

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