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BEIJING and GUANGZHOU – The headquarters factory of Lenovo north of Beijing is light-years away from the classic Chinese sweatshop. No rows and rows of regimented cheap labor. Instead, everything is automated. An immense computer-controlled arm, installed at the end of 2000, wanders around grids of components and gradually feeds the production lines. According to a company spokesman, robotics – and not the Stakhanovist (highly motivated, productive and rewarded Soviet) masses – is the key to increased productivity.
“And the system also allows for automatic replenishment from our suppliers.” This is globalized China at its best: “Globalization is not only a matter of selling our products abroad. It’s a question of applying international standards in terms of design, production, management of human resources, and culture,” the spokesman said.
Lenovo is organized in a fascinating mix of strict Chinese discipline and regimentation and more creative, Silicon Valley-style methods. Every worker’s performance, every day, is assessed by a color-coded system. Red is bad; blue is normal; purple is very good. Every Friday the senior management team drinks a cup of after-lunch coffee with all the staff. Everybody is allowed to talk, as everybody sports his own “c time” cup of coffee – meaning “coffee and communication.” Workers even enjoy a stock-option plan. Salaries and stock options are evaluated on a quarterly basis by management and staff alike. Every department head is evaluated both by senior management and his or her own colleagues.
Only a few months ago, few around the world could name a well-known Chinese brand. Lenovo instantly changed the equation last December when it became the no 3 global producer of personal computers by acquiring the PC arm of IBM – three times its size – for US$1.25 billion. According to the terms of the deal, Lenovo has only five years to become a global success. Before the end of 2010, it will have to market its own brand and be accepted as being as reliable as Big Blue IBM, the company that invented the concept of the personal computer.
Lenovo is a shining example that once in China’s “market socialism” a decision is made on top, things always proceed at breakneck speed. It helps a lot that Liu Chuanzhi, Lenovo’s founder, and still at the helm, is an influential member of the Communist Party Central Committee, a fact that explains his freedom of action.
Lenovo is a state-owned enterprise (SOE), which sprang up from the belly of the Chinese Academy of Sciences only two decades ago as Legend, with no international experience. The “Legend” brand had to be dropped two years ago because it was already copyrighted in many countries. Legend/Lenovo started out as a computer distributor of other brands, among them IBM. It only started making its own computers in 1990, profiting from state commissions and practically no competition, until getting a real run for its money with the arrival in the Chinese market of giants Dell and Hewlett-Packard.
Even with stiff competition, Lenovo has been on top of PC sales in China since 1997 (market share of 27%) – quite a performance in what is already the second-largest PC market in the world, only behind the United States. This also means that Lenovo is already the No. 1 PC maker in the Asia-Pacific region, excluding Japan. Growth possibilities are immense: Lenovo is a major sponsor of the 2008 Beijing Olympics – the perfect window for brand recognition all over the globe.
Bought by China
Made in China, move over: make way to Bought by China. The Middle Kingdom is no longer happy to be “just” the factory of the world, inundating us all with low-tech and mid-tech goods, from textiles to cell phones, from computers to toys, from cameras to bedside lamps. Former president Jiang Zemin and former premier Zhu Rongji, stalwarts of the Communist Party’s “third generation,” decided in the mid-1990s that up to 50 state-owned enterprises should be destined to become globally competitive multinationals by 2010. Inside China, all of these companies profited from unlimited tax breaks, abundant cheap land and torrents of yuan flowing from state-owned banks. More than a dozen are now in the Fortune 500.
Beijing’s strategy calls for the development of world-class multinationals able to impose Chinese bands and Chinese technology. With an educational system designed to produce hundreds of thousands of scientists and technologists, China in theory can easily compete in advanced technology. Except at the very top post-university level, Chinese scientific education has already outpaced Germany, France and the United Kingdom.
From the Chinese Academy of Social Sciences to Tsinghua, China’s leading university, the impression is that even with so much internal inequality for the Chinese to deal with, one of the most extraordinary events in economic history is almost taken for granted: the possibility that before 2015 China may overtake both the US and the European Union as the world’s No. 1 economic power. Not by accident in Brussels, from the top (the new European Commerce secretary, Peter Mandelson)down, the crucial strategic challenge is the relation with China, which is already the EU’s second-largest trading partner, behind the US. The only way out, European diplomats say, is to lay off any national policy of grabbing market share and to define a common European strategy towards China.
This Asian tiger on steroids instills enormous fear, as Western alarmists now invoke comparisons with the emergence of Japan and South Korea in the 1960s and 1970s. According to Francoise Lemoine, an economist at the Cepii in Paris and a China specialist, “The implications of China’s emergence, because of its size, are closer to the emergence of Japan. Japan’s share of world exports went from less than 1% in 1950 to 3% in 1960 and 8.6% in 1986; China’s share went from 1% in 1980 to 5.5% in 2003. China’s emergence is indeed shaking the global hierarchy.” But for the Chinese that is not enough. Zhang Zhigang, vice minister at the Ministry of Commerce, recently told a corporate seminar that “China urgently needs more local export brands.”
Lenovo is only one of the budding Chinese multinationals. Electronics giant TCL (TCL Holdings Co Ltd) – whose chief executive officer (CEO) is also a member of the Communist Party’s Central Committee – was unknown outside Asia before it bought the TV arm of France’s Thomson and became the world’s No. 1 in terms of production; and then it kept going, buying the cell phone arm of France’s Alcatel. Shanghai Automotive Industry Corporation (SAIC) bought South Korean Ssngyong Motors – whose luxury SUVs are extremely popular in Asia – and is also saving British Rover from bankruptcy. SAIC received its training as a passive partner of both Volkswagen and GM in China, assembling the Santanas and Buicks which today clog the streets of China’s big cities; now SAIC will take over the majors directly. Its aim is to be in the global top six by 2020.
Greencool, an obscure maker of buses and refrigerators, bought a British firm of transport engineering and a French maker of auto parts. But none of this even compares to the appetite of China’s oil and gas giants. CNOOC (China National Oil Offshore Corporation), with a market capitalization of US$21.5 billion, now wants to buy American Unocal (market capitalization of US$11,7 billion) for $13 billion.
The three big Chinese oil companies – PetroChina, Sinopec and CNOOC – are on a buying spree in more than a dozen countries, as well as involved in building pipelines across Central Asia in response to China’s increasing thirst for energy. CNOOC is already Indonesia’s largest offshore oil producer.
Baosteel, China’s top steel producer, based in Shanghai, by 2010 will have become the world’s No 3. The biggest foreign investment ever made by a Chinese multinational will be by Baosteel in Brazil. China Minmetals, a base metals giant, wants to buy Noranda, a Canadian copper and nickel miner, for US$7 billion. Wanxiang, an auto parts group founded by a farmer’s son as a bicycle repair shop, is already doing business in 40 countries.
Beijing’s master strategy is always twofold: to get access to technology or research centers that cannot be found in China, at least not yet; and to enter with a bang in Western markets. Last October, Beijing announced measures to facilitate the acquisition of foreign companies by budding Chinese multinationals. Bought by China, in its breakneck speed, aims to turn unknown Chinese brands into both household names and high-tech powers. But adaptation also has to proceed at lightning speed, because these companies have absolutely no experience in multicultural management. They’re getting there
Bought by China has also its mirror face: Have China Will Travel. Haier, China’s No. 1 household appliances maker, based in Qingdao, didn’t buy anything and went abroad by itself: now it has a factory in the United States and branches in Europe. Haier holds a domestic market share of as much as 70% for most home appliances and it is represented in more than 100 countries. Its challenge now is how to compete with foreign brands, considering it lacks things like cost control and sales support teams.
Telecom equipment maker Huawei is selling its killer technology abroad at unbeatable prices – 30% cheaper than the competition. Huawei is another facet of globalized China at its best. It does business in more than 70 countries. More than 40% of its more than US$5 billion in revenues in 2004 came from abroad. And more than 3,000 of its 24,000 employees are foreigners. Huawei’s multi-billion-yuan headquarters on the outskirts of Shenzhen includes, in pure Silicon Valley style, four football fields, a smattering of swimming pools, model apartments for 3,000 families and a Disneyland-like research center complete with Doric pillars. It is already a highly respected Chinese global brand. But Beijing’s hand, as usual, is not far behind. One of Huawei’s founders, Ren Zhengfei, was a People’s Liberation Army officer, and speculation is rife that the company is still controlled by the military.
The key question seems to be what kind of Chinese multinationals will be successful. Analysts in Hong Kong bet on component manufacturers or processors of intermediate goods, rather than global consumer brands like Sony or Samsung, although to become a Chinese Sony or Samsung is the avowed long-term goal of TCL Corp, China’s top TV and cell phone maker.
More than with Japan, a contrast with South Korea can be enlightening. It took 20 years for South Korea to build successful chaebol, family-owned business conglomerates, and lay the groundwork for their high-tech and consumer brands, such as LG and Samsung, to take over the world. China, with leader Deng Xiaoping’s reforms launched a little more than 25 years ago, is still far from this stage. China’s corporate landscape is still dominated by lots of struggling state-owned enterprises, lumbering, inefficient and saddled with bad debts, plus very powerful foreign multinationals, with very few private giants such as Huawei.
Businessmen swarming the White Swan Hotel in Guangzhou acknowledge that most of China’s high-tech manufacturing is in fact low-value-added assembly. The really high-tech parts – integrated circuits, for example – are imported. Foreign multinationals control virtually all intellectual property in China; they are also responsible for 85% of China’s high-tech exports. American companies excel in innovation. Japanese companies excel at process and incremental innovations. Chinese companies may excel at making everything cheaper. This may be the essence of their own, typically Chinese, “market socialism” model.
But they’re learning. And learning fast. TCL, for instance, depends on Thomson’s rear-projection technology to make slim TV sets and thus take on Samsung’s relentless competition. Sooner or later TCL’s technicians will be inventing their own ground-breaking technologies.
The US sells two top-of-the-line stealth fighters to Israel. Israel – secretly – then sells one of them to China. One day the Pentagon tells the Israelis it’s sending technicians for a routine inspection of the fighters. Tel Aviv anxiously contacts Beijing. The Chinese then send an army of technicians to Israel, where they build in record time an exact replica of a stealth fighter. The Pentagon technicians are deceived. One day the Israelis decide to conduct their own checks. And they discover that their original stealth fighter is also a fake. The Chinese technicians absconded with the genuine article.
This joke is currently making the rounds in Guangzhou. In a few years, it may cease to be just a joke.