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					The Development of Chinese
      Multinationals


               By
        Dr. TSENG C.S.
  Department of Marketing
 City University of Hong Kong
Rapid Economic Growth
   China ranks first as a global
   destination for FDI
Ministry of Commerce:
      Up to the end of 2003
         PRC set up more than 7400 enterprises in 160 countries
            Cumulative contracted investment US$ 33.2 billion
UNCTAD
   UNCTAD forecasts (2004) China mainland is expected to become
   the fifth largest investor after US, Germany, Britain and France
   FDI outflow from China: US$2.4 billion yearly   (1990 - 1994)

   Much higher than that of MOFTEC
   Many Chinese enterprises invest overseas without seeking approval
UK attract FDI from China
 British investment held seminar,
 talks, exhibitions in:
         Beijing
              Shanghai
                   Guangzhou
      To convey:
         Government policy
                Opportunities
                       Tax incentive
 Estimated:
   Up to 10 billion pounds to UK within next five years
  100,000 jobs
   Macro Perspective

Historical development of PRC outward direct investment


Stage I
  Only state owned import and export corporation

  Provincial and municipal economic and technological
  cooperation enterprises under the commission of
  foreign economic relation and trade

 Were eligible to invest overseas
185 non-trading enterprises

Mostly JV

Contracted investment    US$249 million
Share of Chinese         US$ 149 million

Mostly developing countries

Restaurants, engineering, finance/ insurance
Stage II    (1985 - 1990)


  MOFERT:     Legal entity

              Sufficient capital
              Technical and operation know-how
              Suitable partner overseas


 577 PRC enterprises were set up

 Contracted investment       US$2.3 billion
 PRC firm                    US$1 billion
  Spread more than 90 countries
        United States
               Thailand
                    Australia
                            USSR
      Many of them are developed countries

Business:
Metallugry/minerals, petro-chemicals, electronic/light
industry, transportation, finance/ insurance, medical
and tourism

Parent: include manufacturing
Emergence of large transnational corporations

1. China National Metals and Minerals Import and
   Export Corporation

      49 companies, JV and representative offices
      in 23 countries and regions (1989 figures)

2. China National Chemical Import and Export
   Corporation (Sinochem)

      62 overseas subsidiaries in Asia, Europe,
      United States and Australia
Stage III      (1991 - 1999)
1991   Chinese economy pick up drastic increase
       in terms of both the number and amount
       of investment
       207 overseas, non-trading subsidiaries
       Total contracted investment   US$759 million
       PRC contributed               US$367 million

1992   305 non-trading overseas enterprises were set up

       Total contracted investment    US$352 million
       PRC firms contributed          US$195 million
       Various seminars being organized
       Yuan Mu
       Li Peng
1992     Deng’s Southern visit
         Call for faster and further development of
         export oriented economy
         Especially in SEZ

Foshan

Director of foreign trade commission
   Encourage enterprises to set up manufacturing
   bases overseas to avoid discriminatory measures
Mayor of Shenzhen
  Asked 80 plus overseas enterprises to meet new target
  of performance

Other provinces and municipalities
  Liaoning
       Hubei
           Xiamen
 Expressed their intention to increase their FDI further

14th National Congress
Jiang Zemin
     Open the country wider
     Make more and better use of foreign funds,
     resources technology and management
     expertise
     Encourage enterprises to expand their investment
     abroad and their transnational operation
 1992         Turning point


  Macro economic control

  Stop approval - avoid loss of state asset



Stage IV        (1998 onwards)

 Encourage enterprises to set up oversees
 processing plant incentives
Market entry behavior of PRC multinationals

Most of the PRC investors are unlikely to consider alternative
countries in FDI decision making process

Majority of PRC overseas enterprises are relatively small in size
in terms of initial capital outlay with few exceptions

In order to reduce capital risk, most of the PRC oversea
enterprises are in the form of JV


Ethnic and culture ties play a very important role
Mainly Greenfield investment complemented by
acquisitions
    Micro Perspective
    Classiification of Chinese Multinationals
                            (Hai Yan Zhang and Daniel Van Den Bulcke)

1. Foreign Trade Corporations (FTCs)

2. Foreign Business Oriented Companies or Conglomerates (FBOC)
        E.g. C I T I C
             Yue Xiu (Guangzhou Municipal Government)

3. Large industrial corporations(LICs)

4. Small and medium sized firms (SMEs)
      Including township enterprises
1. FTCs
   Before 1980
          Monopolized foreign trade
          Single product
          Mono-function

   1984
          Gradual decentralization
          FTCs lost monopolized status in foreign trade

    Survival
       Vertical integration     Production
       Multi-functions      Finance, transport, insurance
Model:
     Japanese Sogo Shosha
     Korean Choebol

E.g. Sinochem
    Established 1950
    19 Dec 1987: State council Document 78 approved
                  Sinochem as trial enterprise (試點) for
                  transnational operations
    San-zhuan-san-hua 三轉三化
    (a) Import and export trade to international trade:
         Future trade, entrepot business of crude oil, barter
         trade of petroleum
(b) From single commodity trade to multi-functional
    operation
   -- production, transportation, finance, service, consultancy,
      information, insurance, high technology, tourism


(c) From trading to multinational enterprises

     In 1989
        62 overseas enterprises in Asia, Europe,
        United States, and Australia
        Overseas sales: US$3.7 billion
                                           25% of total value
        Overseas production value
1994

  Approved by state council as multinational conglomerates
  based on Sogo Shosha Model

 1. Sinochem finance company
     -- China Trust and Investment Corp for Foreign Economic
        Relation and Trade (Transferred from MOFTEC)
   Include Zhong Hong Life Insurance
            Joint Venture with Manulife

 2. Cross share holding with China Petrochemical Crop
       -- Sinopec and China National Petrochemical Crop
The first of Chinese 500 largest foreign trade firms since 1988

      Ranked 304th in Fortune 500 (1998)
      14th world trading house
      Turnover US$13.8 billion
      Profit US$67.63 million
      Total asset US$ 4.957 billion
2nd Trial enterprise

   Orient International

   Set up in Nov 1994
   Merger of five “Golden Flowers”
                   (five FTCs under Shanghai Municipal Government)
            Silk
            Garment
            Textile
            Knitwear
            Home textile
    Ranked 7th in the 500 FTCs in China
March 1997

  Approved as 2nd trial enterprise

   Core business
    -- Import and export trade
    -- multifunction conglomerate: production, finance,
               technology, service, information


Corporate headquarter: Centralized decision making

                           Centralized finance
                           Centralized management
High value added product
Diversified product: Light industrial product, electrical
                     instrument, specialty chemicals
                     and biological product

      Under Shanghai Government directive

Merger of Shanghai Silk Industrial Company and
Silk Import and Export Company
 Orient International: 80% equity
 Shanghai Textile Holding: 20% equity
Shareholder of security company
              Pudong Development Bank


Set up overseas enterprise division
         Better coordination
         Re-organized companies in
                  Japan
                     America
                        Hong Kong
2. FBOC
 CITIC

 Yue Xiu

 Guangdong Enterprises

 Other provincial and municipal investment trust

 Partner with industrial companies to invest overseas

 Portfolio investment
                 CITIC
CITIC hunting abroad for natural resources,
 capital, technology to boost economic
 development at home

A consortium led by CITIC pacific

Acquired giant Hong Kong trading house
                    CITIC
 Hang Chong investment co. for 6.94 billion Hong
  Kong dollars ( US $894.4 million) in early 1990.
 [ Wall Street Journal eastern edition New York
  Sept 4, 1991 A9)

 CITIC Australia major investment 10% stake in an
  aluminum smelter known as Portland
 [ Asian Wall Street Journal April 20, 1993]

 Acquired Naracoorte meatworks from Smorgon
  Meat group in 1995 . Made CITIC Australia the
  second largest exporter in Australia
3. LICs
   Capital Iron and steel
       Zhou Guanwu
        Zhou Beifang

July 1988   Purchased 70% of the share of the Mesta
            Engineering Company in Pittsburgh for US$3.4
            million

Oct 1992    Shougang spent US$20 million to purchase
            51% of the total share of Tung Wing Steel
            and Iron Ltd
            (Changed name to Shougang Concord in July 1993)
Feb 1993   Bought 25.12% interest in Eastern Century
           Holdings by 1993 controlled six listed
           companies:
           Shougang Concord, Shougang Grand,
           Santai Manufacturing, Eastern Century, Paul Y -
           ITC, and Hoi Shing

Oct 1992   US$15 million purchase the second steel
           converter of the California Iron Industry
           Company

Nov 1992   Shougang paid US$120 million to purchase
           Hierrs Iron Mine in Peru
By 1998   Shougang had 15 overseas enterprise and
          offices in 11 countries and regions

             America
               Europe
                 Southeast Asia
                     Hong Kong
                 Middle East
             Common wealth of the
               independent states
           Accumulated investment US$13.2 billion
Haier
  Qingdao

  Plants in Philippines, Indonesia and Malaysia

  Invest US$30 million in a factory in South
  Carolina to produce refrigerators

  Aim to be listed in Fortune 500
4. SMEs
   Kelon
   Galanz
   Huawei
Kelon
 Originally township enterprises
 Listed in Hong Kong Stock Exchange
 Merger with Huabao in August 1998 further solidified
 Kelon’s leading position
 Global strategy
 Moved headquarter to Hong Kong
  In July 1996
       Invested 1.1 billion Japanese Yen in Japan to establish
       Japan Kelon Co. (electronic appliances research and
       development)
 Chosen by Forbes in 1999 as one of the world’s 300 best
 small companies
Galanz
   78    Established in 1978

  80s    Garment factory
   93    Microwave oven
         Opportunities
         Korean and US (Whirpool) companies make
         acquisition
          capture their markets
   98    Enter the Europe market
         World largest microwave oven producer
         Marketing companies in US, Canada and
         South America

Dec 98   Set up R&D lab in Silicon Valley
Huawei
    Private enterprises

    One of the largest in China
                After 2000
After 2000, particularly after China joining
WTO
 Behavior changes
 More and more activities in outbound M&A

1.FTC
2.FBOC
3.LICs
4.SME
                    1. FTC
Sinochem
 In 2002, Acquired Middle East oil and gas
  exploration and production unit Atlantis from
  Petroleum Geo-Services (PGS), A Norwegian oil
  service company

 In Dec 2003, Sinochem paid US $100 million to
  buy a stake in an Ecuadorian oilfield
  2nd Acquisition of oversea oil and gas reserves
               2. FBOC
Many FBOCs encounter problems during late
90s
                     3. LICs
CNOOC purchased Repsol-YPF SAS interest in five
Indonesian oil and gas properties for $ 585 million in
2002

Petrochina
 Early 2003 bought six concessions from US-based
  Devon for $262 million
 June 2003 headed a consortium bought 30% stake
  in Jabung production-sharing contract (PSC) for
  $164 million
                  3 LICs
Huaneng power group
 In Dec 2003, Dollars 227m purchased of
  50% share in Ozgen in Australia, a
  subsidiary of Intergen, the Boston-based
  power company.
 It can gain experience and access to
  management and technology
                     3 LICs
Haier
In June 2001

 Haier Purchased a refrigerator manufacturer in
  Vicenza Italy

 1st Chinese enterprise purchasing factory in the
  European household appliance manufacturing
  center
                    3 LICs
Haier

 Haier not only acquire a white home appliances
  production base in Europe possess the condition
  for participation in local manufacturers’
  organizations and acquiring information

 Paving the way for achieving the goal of creating
  world name-brands by making use of local funds,
  intellectual resources and culture

 Favorable geographic location famous
  manufacturers whirlpool, Candy and Zanussi
                 3 LICs
TCL

 Purchased German Electronics Giant
  Schneider in Sept 2002

 Merged with Thomson in Nov 4 2003
 One of the biggest TV manufacturers in the
  world after the merger
                     3 LICs
Shanghai Electric Group
Acquired Japanese printing machine manufacture,
Akiyama Machinery Manufacturing Corporation in 2002
Shanghai Soap Group
Purchased of battery production plants from American
corporations multitech and Polystor
Dalian Machine Tool group
Acquired the production machine Division of American
Ingersoll milling machine co. in late 2002
SAIC
Acquired South Korea Ssangyong Motor Company
Lenovo
Acquired PC units of IBM in Late 2004
                    4. SME
 In early 2003, Holley Communication Group Inc,
  a Delaware company, wholly owned subsidiary of
  China’s Holley group Ltd

 Acquired Philips Semiconductors’ CDMA handset
  reference design operation with offices located in
  Vancouver BC Canada, and Dallas, Texas USA

 CEO’s Wang Licheng

				
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