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The night before China’s entry into the World Trade Organization in December 2001, Motorola Inc. held its global board meeting in Beijing for the second time and announced an ambitious plan to increase investment, revenue and sourcing by $10 billion each in China over the next five years. Other companies have had similarly grand visions. Telefon AB L.M. Ericsson announced that it would more than double its investment in China to $5.1 billion, also over a five-year period. General Motors Corp.’s plans call for Chinese operations to generate more than $3 billion of revenue by 2008. By that same year, Bayer AG intends to have the second phase of its $3.1 billion production facility up and running to meet forecasted growth in its China sales. These represent just a handful of the thousands of multinationals that have ambitious growth in revenues from China etched into their strategic plans. As China’s accession to the WTO gradually opens new markets and as its growth continues at better than 9% per year, even those that have long resisted China’s temptations are jumping in.
Experienced multinationals are aware of the many challenges they must overcome, summed up by the old adage that in China “everything is possible, but nothing is easy.” Learning from the experience of pioneering companies, savvy investors know they have to contend with a minefield of competing local interests, overloaded infrastructure, difficulties in retaining skilled people, tortuous supply chains, unfamiliar local HR practices and communication barriers.1 But few predicted what is fast becoming the most formidable obstacle to success: the emergence of tough competition from local Chinese players.
A decade ago, the possibility that Chinese companies would pose a serious competitive challenge to multinationals looked improbable. It wasn’t surprising, therefore, that, in 1995, just a few years after China’s personal-computer market opened up to foreigners, The Economist predicted that by 2000, multinationals would have captured an 80% market share from their hapless Chinese competitors. And it appeared that this prediction would be on target, as multinationals like IBM, Hewlett-Packard and Compaq quickly won more than 50% of the market.
But the 80% figure was never reached — in fact, the numbers went in the opposite direction. Just one year after The Economist’s confident pronouncement, the Chinese company Legend Group Ltd. (known as Lenovo Group Ltd. outside China) became the No. 1 PC supplier in China.
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1. P.K. Jagersma and D.M. van Gorp, “Still Searching for the Pot of Gold: Doing Business in Today’s China,” Journal of Business Strategy 24, no. 5 (2003): 27–35.
2. The industries were home appliances, televisions, personal computers, telecom equipment, mobile phones, elevators, batteries, beer, drinking water and detergent. We also collected less systematic information on such industries as animal feed, cameras, office equipment, retailing and fast food.
3. D. Ahlstrorn and G.D. Bruton, “Learning From Successful Local Private Firms in China: Establishing Legitimacy,” Academy of Management Executive 15, no. 4 (November 2001): 72–83.
4. Under the new law, a joint venture is treated as a local joint-stock company with limited liability. A key difference is that under the old regulations, the local minority shareholder of a joint venture had wide-ranging powers of veto. Now it will be treated as a typical minority shareholder represented in the board.
5. W.R. Vanhonacker, D. Ko, L. Manlu, M. Downing and A. Wong, “Kodak in China (A), (B) & (C),” case no. 02/2000-4881 (Fontainebleau, France: INSEAD/CEIBS, 2000).
6. J. Kynge, “Fuji Considers Chinese Tie-Up To Rival Kodak,” Financial Times, Feb. 27, 2001, p. 24.