1

Chapter 14Emerging Global Players:The Companies

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Emerging countries competitors

Haier Group

Tata

Petronas

Cemex SABMiller

HuaweiRanbaxy Laboratories Ltd

Lenovo

3 3

Globalization and local firms: the traditional views

Local firms are weak Local firms are competingwith global firms

• Strong positioning of local enterprise

• Local firms dominate

• MNCs tend to dominate

• Local firms can take advantage of blind spots

High

Low

Pressure toglobalize

Local knowledge Competitive advantage of local firms

Global markets

Multidomestic markets

Global competences and capabilities (costs, resources)

4 4

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

Globalization and local firms: recent views

5

Korea

China

1970’s 1980’s 1990’s and beyond1960’s

1980’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

••

• -

Time

Sour

ces

of c

ompe

titiv

e ad

vant

age

Labor

• Brand creation and development• Investment in research and develoment•

Invest in advanced production technology

• Proprietary Technology• Own brand• International marketing

1960’s1960’s

Development of national champions

Globalization and local firms: recent views cont.

66

Time

• 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

• Compete head-on with traditional global firms

Step 1Domestic player

and exporter

Step 2Internationalization

Step 3Global player

Development of national champions

Globalization and local firms: the recent views cont.

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Performancesand products/ServicesFunctionalities

Time

High-end marketsDominated by multinationals

Canon in Japan in the 60’sHonda motorcycles in the 60’sGalanz in China in the 90’s microwavesTCL in China inTVSamsung in Korea with microelectronics in the 80’sReliance in India in the 90’s in pharmaceuticals

High

Low

Low-end marketsdominated by domestic firms

Disruptive

development paths

National champions: building the business

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Domestic players both large and small

Multinational firms from USA, Europe, Japan, Korea and Australasia, plus emerging

Indian and Chinese mutinational firms)

Technology and marketing

Contextual andpolitical know-how

Low resourcecosts

Competitive approaches

Scope

Global

Local

Emerging competitive battlefield

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Technologyand

marketing advantages

High

Low

EMERGINGBATTLEFIELDLow costMass distributionDifferentiated

HighLow Local knowledge and preferential advantages

DIFFERENTIATEDPOSITIONING APPLIED

TO HIGH-END SEGMENTSPrice premiumLow volumeHigh costsGood technolgyStrong brands

Most Western competitors

COST LEADERSHIPPOSITIONING APPLIEDTO HIGH VOLUMELOW END SEGMENTS

Low priceMass distribution

Large Chinese competitorsE.g. Kanko, Haier

Emerging competitive battlefield: China

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“Dragons at your door”

See Ming Zeng and Peter Williamson, Dragons at Your Door: How Chinese Cost Innovation is Disrupting Global Competition.Harvard Business School: 2007

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

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Earth-moving equipment: wheel loaders

Global market: 720,000 unitsChina market: 120,000 unitsProduction 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 20043,500 units in 2005

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• 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

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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.

14

Kelon

Haier

China’s appliancesmarket share in 2002

Other

Xinfei

Meiling

The market is dominated by local players

The Whirlpool Story in China cont.

0%10%20%30%40%50%60%70%80%90%

100%

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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

An example of a Chinese champion

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Pharmaceuticals

• 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

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

Conglomerate

TATA

RANBAXY LABORATIES LTD

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Multinational corporations from China and India

China India

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

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

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0

2000

4000

6000

8000

10000

12000

14000

16000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

India China

Cross-borders acquisitions from China and India

Million US $

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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

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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”

Business groups in emerging countries cont.

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Overseas Chinese in South East Asia: traditional role

CREDIT

DISTRIBUTE

URBANAREAS

DISTRIBUTE

BUY

CREDIT

IMPORTRURALAREAS

FOREIGNCOUNTRIES

P/OC/K/K 5

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Evolution of overseas Chinese groups in Southeast AsiaBanking andfinancial services

Real estate

Progressive verticalintegration inupstream activities

Investment inindustrial activities(assembling, downstream)either direct, through joint venturesor licensing

Start upin

“trading”

Diversifiedactivities

Diversifiedactivities

Diversifiedactivities

Diversifiedactivities

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Overseas Chinese groups: organization and management

24

Charoen Pokphand200 companies8 billion USD before crisis

Animal Feed

Poultry Milk

Pig FarmingFeedmill machinery

Planatation Animal health

SausageMeat

Farm

Aqua FeedShrimp

Chemical

Seeds

Plant Protectiony

Logistics Trading

TrucksMotorcycles

Drill

HealthyDrinks

Supermarkets Frozen FoodsDistrib.

Real Estate Condominium

Golf

PVCLuggages

Toys SpongeLeather

Telephone

CableTV

FiberOptics

SwitchingEquip

Petroleum

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Why so strong? Why so diversified?

• Scarce resources

• Market imperfection

• Lack of reliable information

• Inefficient judicial systems

• Over-regulated economies

• Monopolies

• Opportunities

• Simplified “business systems”

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Do business groups add value?Modern Western managerialand financial theories aboutthe value of a group

Emerging countriesSource of value added

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

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

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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

Innovation LogisticsProduction

Marketing

Obtained through licensing and joint ventures

Key operationaltask

Concentrate on sales and distribution in oligopolistic markets. Brands and products sourced externally.

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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

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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