The competitive capabilities of multinationals from Mainland China
The shift in global rankings of multinational companies across the world reveals the significant changes that affect the competitiveness of these firms. In the recent past, Chinese firms have had a substantial representation in the ranking of top-tier companies in the world. Most of these enterprises comprise of automobiles manufacturers, steel producers and other processors of natural resources. Traditionally, these companies have been benefitting from the government support, a large home market and low labour costs as their competitive advantage. However, the recent trends in international trade are prompting them to look for other methods to achieve a competitive edge. The reasons for the shift in trends is the intensification of competition among the Chinese multinational organizations and local companies in the host countries. There arises a need to innovate and understand the local markets to become competitive. Proper marketing and the management of global talent are some of the new competitive strengths that these firms may achieve. The paper will analyse some of the activities of multinational entities from Mainland China to reveal some of their competitive capabilities.
Traditional competitive capabilities of Chinese multinationals
White (2000) argues that one of the major competitive capabilities that Chinese multinationals have is the fact that they are state-owned. Chan, Dang & Yan (2012) outline that in 2009, 67% of Chinese firms in the Fortune 500 lists of companies were owned by the state. Some of the advantages that state-owned enterprises in China receive is the preferential treatment both at home and in global markets. According to Gang & Hope (2013), these companies get preferential treatment when accessing government loans and procurement contracts in their local markets. The easier access to loans from governments and other state contracts make it convenient for the firms to compete against other businesses. The amount of support that state-owned multinationals receive from the government in their home countries also creates a competitive advantage in overseas jurisdictions.
Severe criticism of the ownership and management of these organisations prompted various structural and regulatory changes in the organizations. Corporatization is one strategic policy that the government proposed to eliminate its interference in their operation (Gang & Hope, 2013). Various local and foreign companies in China have continually criticized the preferential treatment that these firms get leading to the corporatization of some businesses. It is the process of separating the management of an enterprise from its ownership. The introduction of external directors and external audits in these firms have made it possible for the companies to run on their own. The lack of government influence in these companies prompted them to look for other competitive advantages against foreign and local firms. The use of initial public offerings has also relieved the government’s ownership of these companies.
The access to funds and loans from the government is another benefit that these firms receive. An abundance of financial resources gives them a competitive advantage over other undertakings in the host countries. A large market in their home country also provides for a significant portion of the finances that Chinese foreign multinationals have. China is a country comprising of about 1 billion people thereby has a large customer base. A company with a significant market share at home is likely to have a sound monetary base due to the large market. Fonseka, Yang & Tian (2013) posit that a company’s accessibility to funds will give them various privileges. The ability to drive expansion in host countries is a one privilege that a company with a sound economic base enjoys. According to Fonseka, Yang & Tian (2013), Chinese companies have the ability to expand their operations and networks due to the financial resources at their disposal. The inability of other corporations to access such funding creates a competitive advantage among Chinese multinational entities.
The ability to finance a company’s cash flows when there are delayed payments is also a crucial advantage that companies with a good financial capacity get. These firms also have access to bank loans and guarantees due to the capital they have and the revenues they generate. Vorasubin and Chareonngam (2007) argue that the ability to have a financial cushion during economic recessions is an extraordinary privilege that only specific firms have. A large pool of funds from their domestic market has thus been one of the competitive advantages that Chinese firms enjoy. One of the primary strategies that these firms in foreign countries use to deal with competitors is by buying them.
Low labour costs that China is well known for, has also been a critical competitive edge that Chinese multinational firms enjoy. Nolan (2012) postulates that China is still a developing nation due to the low level of income per person. The country is also the most populated nation in the world, and it thus has a vast pool of labour. The labour costs in the region are relatively low especially in its agricultural and manufacturing industries (Hugstad & Durr, 2015). It is because of this reason that various firms in the world outsource some of their production activities in the country. This is done to reduce the labour costs which will ultimately reduce the production costs. Chinese multinationals also have the privilege to outsource most of their activities to their home countries without experiencing any stringent regulations.
Low labour cost will reduce the revenues necessary for the manufacturing process of these firms. The Chinese companies are thus able to offer low prices and have better profit margins than their counterparts. A reduction in the prices of Chinese companies will create a competitive edge over other firms in the local and foreign countries. This ability of Chinese firms to outsource their activities to their local country is a benefit that other firms may not be able to exploit. Small enterprises do not have enough resources to outsource their production processes to cheaper destinations.
Factors influencing the changes in competitive capabilities of Chinese multinationals
Chinese multinational enterprises have recently had to adopt different business models in the global market to maintain the competitive capabilities they have over other firms. Changes in the world market and the adoption of different business processes prompted these new strategies. These corporations needed to change their models and modes of competition to compete effectively with other global business leaders.
The need to incorporate customer requirements in the business’ products and services is one of the changes that affected the competitiveness of various business. In the current society, consumers are becoming more aware of their needs and preferences in each product that they buy. It is thus imperative for a business to understand the preferences of various customers in the marketplace and to create their products according to these needs. An increase in the client’s knowledge about the products that they use has created a need for change in a variety of business models. The organization that can incorporate these needs in making their final product will have a competitive edge over others.
An increase in innovation from various companies have also led to changes in the competitiveness of firms. A lot of businesses are considering being innovative in making their products to assist them gain a competitive edge over their competition. For example, Toyota’s central principle, kaizen, proposes the continuous improvement of their products to increase their competitiveness. The importance of innovation has seen many companies initiate a research and development department whose primary aim is to find ways of improving their products. Firms are spending significant resources to create better products that would provide a competitive edge over their rivals. Due to such changes, a lot of companies are looking at ways to ensure constant innovation that would improve their products in the marketplace.
The crossing of international frontiers has brought about challenges for companies as they try to manage their staff and customers’ needs across different cultures. The ability to manage talent in a multicultural setting is thus an important component that multinational enterprises must achieve The production processes of international companies are likely to stall if they do not understand how to deal with the various cultures in their host countries.
Changes in the business processes that companies use also plays a significant role in defining the competitive capabilities of different firms across the world. Organizations are currently embracing efficient practices that propose a cut on wastage while maximizing the quality of production. An example of an efficient business practice is the lean production system that various companies have replicated. The primary objective of the lean process is to minimize the wastage of company resources in production while maximizing productivity in the firm. Changes in such practices are creating a shift in the traditional competitive capabilities that businesses had. The different competitive capabilities among companies in the global context prompt Chinese multinationals to change their strategies for effective competition. The recent activities of these enterprises in foreign countries will reveal some of their competitive capabilities in the global market.
Activities of Chinese multinationals in foreign countries and their effect on competitive capabilities
One of the principle activities that characterizes Chinese multinational enterprises in foreign countries is the ability to compete on more than cost. The price of a product or a service is crucial when companies are competing. Most consumers are sensitive to the price of a corporation’s product and tend to pick products that have reasonable prices. According to Zhu, Wittmann & Peng (2012), it is becoming increasingly hard for Chinese companies to compete on cost due to the rise of labour and manufacturing costs. China was one of the main manufacturing hubs that offered cheap labour in the production process (Zhu, Wittmann & Peng, 2012). Other countries that also had low labour costs in relation to other states included Brazil, Russia and Poland. However, in the last decade, the production expenses in these regions have risen to similar or higher levels than those of first world countries.
The increase in production costs has made it impossible for foreign multinationals to compete on price even after outsourcing production to their home country. Furthermore, most customers are becoming knowledgeable about their needs and have other important preferences besides the cost factor. An emphasis on good quality products and better technology is one of the special preferences that customers need today. One Chinese firm that is using this strategy is Mindray Medical International. It is the third largest company that produces patient monitoring devices to the public. Its previous plan was to compete on costs by undercutting its competitor’s costs by up to 30 percent.
Despite the low costs, it was not able to break into the international market as it expected. Recent changes in the firm to an aggressive approach saw an increase in market share and new competitive capabilities. An increase in the company’s products and its distribution channel were some of the changes made by the enterprise (Liao, Nettesheim and Lee, 2015). They also widened their customer base and tailored their products according to the preferences of their clients. In the next five years (2007-2013) after effecting these changes, it was able to achieve an annual sales growth of about 27 percent. (Liao, Nettesheim and Lee, 2015). The ability of these companies to compete on more than cost shows one of their fundamental competitive capabilities in today’s global market.
Another common activity of Chinese multinational entities is gaining better insights into the needs of a customer and using them to tailor their products. As more clients are becoming aware of their needs, companies that can acquire and understand their client’s need have a better competitive advantage than their rivals. Foreign businesses that are entering new markets need to research on the needs of the local customers in the host countries (Kothari, Kotabe & Murphy, 2013). The Chinese multinationals have been incorporating research and development departments in their companies to develop their products. Understanding the needs of the company’s clients will be instrumental in providing quality goods and services that are needed.
The primary aim of a corporation in gaining insights on the end customer is to create more value in the product according to the client’s preferences (Liu et. al. 2014). The Chinese multinational firms in foreign markets strive to understand the needs of the local consumers thereby creating a competitive advantage over others. Haier is an example of a Chinese company that sells home appliances to foreign markets. The company has been successful in determining some of the key preferences and needs of the clients and they incorporate this into their production systems. For example, the company carried out an analysis of what their US consumers wanted in their product and made their final product according to these specifications. They were able to carve out a niche in the market by creating high-quality, innovative but affordable products for its US clients (Liao, Nettesheim and Lee, 2015). Liao, Nettesheim and Lee (2015) assert that Haier was able to capture 30 percent of the market share in the home appliances sector. A look at this activity that Chinese enterprises practice reveals that reviewing the preferences of a company gives it a competitive edge.
Improving cross-cultural management in the countries that they establish their presence is also an activity practised by most Chinese companies. Issues arise where a company does not recognise the cultural differences and significance of the local market where it invests. Cullen & Parboteeah (2013) argue that it is important for a multinational firm to recognize the cultural barriers that it may face when entering an emerging market. Proper management of a business in a different locality will require the managers to establish how culture is likely to affect them and mitigate this effects. Cross-cultural negotiations are an example of a situation in which considering other people’s culture may be essential to achieving good results (Quer, Claver & Rienda, 2011).
Chinese firms that are entering developed or emerging markets employ the locals in the management of the business. The local managers will assist the company in navigating the new market. These corporations have learnt how to motivate people from different cultural backgrounds and respect their cultural differences (Quer, Claver & Rienda, 2011). They have also managed to set pragmatic and systematic training programs that can help build a multicultural professional staff.
Lenovo has been successful in integrating the cultural differences it experienced overseas to its business model. In its acquisition of IBM’s PC business, the firm has become one of the largest personal computer manufacturers in the world. The move to establish headquarters in North Carolina, USA and Beijing, China was meant to improve the relationship between the Chinese corporation and the newly acquired company in the United States. While setting up in the US, the firm recruited some of the most talented employees and started cultural-integration initiatives (Liao, Nettesheim and Lee, 2015). The ability to integrate different cultures in foreign countries is one of the competitive capabilities that is visible from this practice.
The strengthening of Chinese multinationals mergers and acquisition capabilities is one practice that they also use to increase their competitive capacities. Mergers and acquisition are a good way for a company to establish its global presence without making greenfield investments. Merging with other firms in an international context will incorporate the key strengths that each firm has and will eliminate the cultural barriers that a foreign company may face. However, for these mergers and acquisitions to work, companies need to ensure transparency in their operations. A lot of information concerning the merging details and other transactions should be made public to reveal the nature of the acquisitions and mergers. Ng et. al. (2012) argues that Chinese multinationals are known globally for the massive mergers and acquisitions that they make. According to Ng et. al. (2012) these mergers are significant since they help breach the cultural barriers in host countries while also forming strategic partnerships.
Chinese companies that employ the use of mergers and acquisitions can invest in foreign countries with a relatively smaller risk as compared to other firms. An example of an international merger was the acquisition of French Luo Sulphadiazine Company by National Bluestar Group. They acquired the patents of the company, its sales channels and also its production equipment. This purchase, at the time, made Bluestar the largest Chinese investment in Europe since it was the third largest producer of organic silicone in the world. The use of acquisitions reveals the competitive capabilities of Chinese firms. The access to a lot of economic resources gives them the financial strength to acquire and merge with foreign firms.
The use of strategic partnerships in global markets is also a common practice among Chinese multinational companies. Strategic alliances with other undertakings as equal partners aim at the creation and development of new products. They may also use these partnerships to create a stronger establishment and presence in the region. One key benefit of forging partnerships that the Chinese receive is the ability to acquire new technology. Two firms may partner up to acquire technology that would develop their products in a particular industry. These alliances may also help regulate the amount of competition between various multinational firms and local companies.
A meticulous research done by Zhang, Duysters & Filippov (2012) reveals that the use of strategic partnership is becoming a common trend among Chinese companies. They propose that these firms use the alliances to gain technological and marketing competencies in the host countries. Furthermore, it gives them the time to learn new skills and techniques before they can venture into individual businesses. A look at the strategic alliances that these firms engage in reveals some of the methods they use to deal with competition.
A keen analysis of some of the primary activities that Multinational Chinese enterprises practice reveals some of the important methods they can use to achieve competitive advantages. It was traditionally easier for the companies to obtain these competitive edges due to various factors. Some of these include their access to funds, government support and the low labour costs in the production processes. However, changes in the international markets and their local country made it necessary for them to change business models to get a competitive advantage over others. These practices reveal that Chinese multinationals are working effectively to enhance their competitive capabilities in foreign countries. They use their financial strengths, strategic partnership and other resources to increase their competitive capabilities over its rivals.
Chan, K, Dang, V & Yan, K. (2012). Chinese firms’ political connection, ownership, and financing constraints. Economics Letters, 115(2), 164-167.
Cullen, J & Parboteeah, K (2013). Multinational management. Cengage Learning.
Fonseka, M, Yang, X & Tian, G (2013). Does accessibility to different sources of financial capital affect competitive advantage and sustained competitive advantages? Evidence from a highly regulated Chinese market. Journal of Applied Business Research (JABR), 29(4), 963-982.
Gang, F & Hope, N, (2013). The Role of State-Owned Enterprises in the Chinese Economy. China US Focus.
Hugstad, P. and Durr, M. (2015). A study of country of manufacturer impact on consumer perceptions (pp.115-119). In: Proceedings of the 1986 Academy of Marketing Science (AMS) Annual Conference. Springer International Publishing.
Kothari, T, Kotabe, M & Murphy, P. (2013). Rules of the game for emerging market multinational companies from China and India. Journal of International Management, 19(3), 276-299.
Liao, C., Nettesheim, C. and Lee, D. (2015). Will China’s Global Challengers Be the Next Global Leaders?. [online] www.bcgperspectives.com. Available at: https://www.bcgperspectives.com/content/articles/globalization_growth_will_china_global_challengers_next_global_leaders/ [Accessed 6 Dec. 2015]
Liu, W, Guillet, B, Xiao, Q., & Law, R. (2014). Globalization or localization of consumer preferences: The case of hotel room booking. Tourism Management, 41, 148-157.
Ng, A, Chatzkel, J, Lau, K, & Macbeth, D. (2012). Dynamics of Chinese emerging multinationals in cross-border mergers and acquisitions. Journal of Intellectual Capital, 13(3), 416-438.
Nolan, P (2012). Is China Buying the World?. Challenge, 55(2), pp.108-118
Quer, D, Claver, E & Rienda, L. (2011). Political risk, cultural distance, and outward foreign direct investment: Empirical evidence from large Chinese firms. Asia Pacific journal of management, 29(4), 1089-1104.
Vorasubin, P. and Chareonngam, C. (2007). Strategic assets driving financial capability of Thai construction firms. Journal of Financial Management of Property and Construction, 12 (2), 87-94
White, S. (2000). Competition, capabilities, and the make, buy, or ally decisions of Chinese state-owned firms. Academy of Management Journal, 43(3), 324-341.
Zhang, Y, Duysters, G & Filippov, S. (2012). Chinese firms entering Europe: Internationalization through acquisitions and strategic alliances. Journal of Science and Technology Policy in China, 3(2), 102-123.
Zhu, Y, Wittmann, X & Peng, M. (2012). Institution-based barriers to innovation in SMEs in China. Asia Pacific Journal of Management, 29(4), 1131-1142.
Originally posted 2017-10-07 16:45:08.