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October 18, 2005 6:04 pm

Starting a walk on the wide side

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A few years ago China’s government decided it was time for the country’s companies to zou chuqu – a term that literally means “walk outside”, but which is officially translated as Go Global.

For some observers, the edict heralds an unstoppable rush into international markets by powerful Chinese ventures, buoyed by a supportive government and by enormous and fast-growing domestic demand.

The next Sony or Samsung will come from China, they say, as the world’s most populous country reshapes the information technology industry in ways even more profound than did Japan or South Korea.

Ammunition for such predictions is easy to find. Lenovo’s purchase of IBM’s personal computer business last year turned it instantly into the third largest PC producer and a truly global brand. Telecoms equipment manufacturers Huawei and ZTE have been winning international contracts even for advanced “third generation” networks – and driving down the prices as they go. And Chinese brand electronics goods such as DVD players are filling shop shelves around the world.

But forecasts of imminent Chinese domination are vastly exaggerated.

Nobody knows the challenges better than those leading the charge. Liu Chuanzhi, founder and former chairman of Lenovo, has compared going global to sailing out into a storm-tossed sea. Mr Liu’s decision to buy the IBM unit was driven in large part by eroding margins in the PC business and the steady encroachment of foreign brands such as Dell into Lenovo’s dominance of a liberalising Chinese market.

“If Dell and Hewlett-Packard weren’t becoming strong here, Lenovo would have been happy to stay in China,” says one person familiar with the company.

Lenovo was following in the footsteps of pioneers such as BOE Technology, which in 2003 acquired the TFT-LCD screen business of South Korea’s Hynix.

The move – followed by rapid construction of a new fabrication plant in Beijing - thrust BOE into the centre of the pitiless global fight for screen market share, but Wang Dongsheng, BOE chairman and chief executive, makes clear that the company had little option.

“Chinese companies must stride out boldly if they are to survive in leading-edge global sectors such as TFT-LCDs. It can’t be avoided,” says Mr Wang. “We have no choice but boldly to face this fierce competition.”

The Hynix acquisition gave BOE access to some cutting edge screen technology. However, Mr Wang is now reconsidering plans to quickly build a new “sixth generation” plant in Beijing to try to keep up with South Korean and Japanese rivalsand may expand using cheaper 5G fifth facilities instead.

Such a strategy shift could prove a wise recognition of the need for Chinese companies to choose carefully the markets they contest and to play to their strengths.

“Now the country is constantly offering encouragement to Go Global, but doing so is not a simple matter,” warns Hou Weigui, ZTE chairman. “You have to make huge efforts and suffer hardships, while more importantly bringing your management ability to meet or surpass international standards. If you cannot, then Going Global will be a trap that will lead you to bankruptcy.”

ZTE is undoubtedly one of China’s success stories, with rapid growth in international sales and reputation – but Mr Hou admits that it still has to rely heavily on low prices to win sales. Indeed, ZTE officials say it sometimes charges well below cost to seal network building contracts in new markets, a tactic that is not be sustainable long-term.

Costs are particularly hard to control overseas. When ZTE or Huawei hire local managers to help them expand in Europe or the US, they have to pay them more than indigenous companies would. Chinese companies still often struggle to retain foreign staff and to manage the cultural conflicts that come with overseas acquisitions and investments.

A joint venture between a unit of electronics group TCL and Alcatel to make mobile phone handsets foundered after just a year. TCL is a relatively cosmopolitan venture, and the management burden of heading offshore will be even heavier for the many Chinese companies that have few English-speaking staff and little international management nous.

Mr Hou rues a lack of support given to ZTE and other local equipment manufacturers by the government – a complaint that will come as a surprise to observers who see China as a state-led economic monolith.

Central planning is still a feature of Chinese policy, but the economy is far more open than Japan’s or South Korea’s were when their IT companies started to expand abroad. With the exception of areas such as telecoms, foreign brands are en-trenched in most Chinese markets and often serve them from Chinese production bases.

Chinese IT companies also compete fiercely with each other on price in the domestic market. So while pampered Japanese and South Korean electronics manufacturers enjoyed rich profits at home that allowed them to be aggressive overseas, many Chinese companies are attracted to foreign markets because they seem to offer wider margins.

None of which is to say that all IT Chinese companies will struggle overseas. Some of the best-run will prosper. But for many, Going Global will mean not campaigns of conquest, but battles for survival.

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