Chapter 14 Emerging Global Players: The Companies

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

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

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 domestic front On the international front Dominate bottom of the pyramid Gain volume Progressively push their capabilities upward Eventually compete head-on with multinational players Export low cost products Buy ( copy?) technology 4

Globalization and local firms: recent views cont. Development of national champions Korea China 1970’s 1980’s 1990’s and beyond 1960’s 1990’s 2000’s 2005 and beyond Japan • 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 - Time Labor costs still moderate Brand creation and development Investment in research and develoment International expansion 1970’s’s and beyond Proprietary Technology Own brand International marketing Sources of competitive advantage Invest in advanced production technology

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

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

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 Contextual and political know-how Low resource costs Technology and marketing Competitive approaches

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

“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

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

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

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

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% 50% Xinfei 40% Haier 30% 20% 10% Kelon 0%

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

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

Multinational corporations from China and India 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

Cross-borders acquisitions from China and India Million US $

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

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”

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

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”

Overseas Chinese groups: organization and management

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

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”

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

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

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

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