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Chinese Firms’ Manufacturing Internationalization - Motives, Paths and Network Coordination. Kaimei WANG [email protected] Supervisor: Yongjiang SHI Advisor: Mike Gregory Center for International Manufacturing Institute for Manufacturing Cambridge, UK

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chinese firms manufacturing internationalization motives paths and network coordination

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

Kaimei WANG

[email protected]

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

slide2

Agenda

  • Background 3-7
  • Research Questions 8-9
  • Research Method 10
  • Case Companies 11-15
  • Case Analysis and Findings 16-17
  • Next-step 18
slide3

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

slide4

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%

slide5

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)

slide6

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
slide7

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.

slide8

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?

slide9

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

slide10

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
slide11

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

slide12

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.

slide13

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.

slide14

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)

slide15

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

slide16

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.

slide17

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.
slide18

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
slide19

Thank You Very Much!!

Comments and Questions, please!

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