Chinese Companies Coming to Your Shore
Americans buy hundreds of Chinese-made products from Wal-Mart and other stores, from towels to radios to glasses, though most would be hard pressed to name a single Chinese brand. Maybe some now know that Haier is Chinese, as is BYD, following Warren Buffet's investment in this car company. Mr. Buffet has driven a BYD, though the average American could not take one for a ride as BYD cars are not widely available in the US, and will not be in the near future.
While Chinese companies are good at manufacturing products efficiently, they have not proven very competent at bringing their products to overseas markets with their own brands and channels. As discussed in another article, most exports from China are either sold by Western firms in China, or private labeled, such as Foxconn making Ipads for Apple.
Going international is a lot more complicated than just making an inexpensive but usable product. Complying with certification and other regulatory issues can be difficult, especially in industries such as automotive. Coming in with one's own brand can entail years of marketing, advertising, and other brand investment. Channels to market, even in industrial industries, can be tricky and expensive to master, and after these follow important factors such as service and customer support. Direct investment means not only a good amount of money to build a plant, but also adapting management practices to foreign markets. Just making the product and shipping it sounds a lot easier, but many leading Chinese companies clearly now understand that to increase their scale, power, and profits they have to be in overseas markets.
And this is coming at a time when some, though certainly not most Chinese companies have both the products and management to take this leap. In recent years Chinese industrial firms have been very active in selling capital goods similar products to developing countries, such as in Southeast Asia, the Middle East or Africa. For example, Shanghai Electric, the giant state-owned maker of power equipment, motors, and other industrial machinery, has a range of projects in countries like Botswana, India, Thailand, Iran and elsewhere - sometimes as an equipment supplier only, and sometimes as an EPC.
Large engineering projects have also been popular, mainly in developing countries, such as rail systems, water projects, stadiums, etc - often with financing. For example, railways in Angola, pipelines in Sudan, a hydropower plant in Nigeria, among dozens of other projects - often with financing. Sales for these projects are often done government to government, or SOE to SOE, which the Chinese understand well.
But both of these are limiting. Some developing countries such as India and Brazil have their own set of engineering and equipment companies, and are less welcoming to the Chinese. A good number of engineering and resource projects are done in difficult environments, such as in Pakistan or Sudan.
It certainly makes sense to target developing economies, where much of the world's growth is taking place. However, the economies of developed countries as a group are much wealthier, and represent a higher amount of latent opportunities. Germany's GDP, for example, is nearly 20 times larger than Pakistans, and Europe's GDP nearly 12 times larger than Africa's. ?And these economies purchase more value-added products and services. We suppose that China does not want to be limited to engineering projects and heavy machinery, though a recent Businessweek Article (April 9, 2012, p. 21) reports that the government is emphasizing just this. There is a world of other opportunities out there that the government cannot facilitate.
So while there is no official tally, we should expect to see a wider range of Chinese companies feeling their way into overseas markets, including developed countries, in the next several years. We should not expect a deluge like Japanese companies in the 1970s or Korean firms in the 1990s, but more like a slowly rising tide, with heretofore unknown Chinese brands popping up in numerous industries.
These products will be coming from a select scope of industries. Like any economy, the Chinese have their comparative advantages, such as in white goods like refrigerators, capital equipment like motors, some transport such as rail systems, some electronics, and some medical equipment. We should not expect to see many Chinese brands in fine chemicals, most fast moving consumer goods, retail, or pharma, as they lag in these fields. These are generalities of course, and the demographics in these latter industries are very large.
Automotive is tricky, because while there are up and coming Chinese firms such as BYD and Geely, getting an auto certified in many countries is tough, and there are already a range of solid but inexpensive brands such as Kia entrenched in these markets. Chinese auto firms may want to do a case study on the Yugo before pushing their cars into the American market prematurely. Telecom infrastructure, where China is strong with companies like Huawei and ZTE, is also tricky, for political reasons. And Chinese internet companies have a significant language barrier to overcome if they want to add value outside their home market.
What follows is examples of select Chinese companies - by no means a complete list - whose name you may be hearing in the next few years, by industry:
White Goods. Washing machines, refrigerators, air conditioners, etc. There are a range of competitive white goods manufacturers in China, most notably Little Swan, Midea, and Haier, all of which have some form of international presence. Of these Haier is the most international, having a factory in the US for over 10 years, as well as in other countries, and is now the world's largest manufacturer of refrigerators by volume. Another company to keep an eye on here is Midea, which claims 25% export sales, to the Philippines, India, and Brazil in particular. The company sells its consumer white goods, as well as heat pump components, and has made acquisitions in South America. Some of these companies also make electronics, competing with the likes of Samsung and the Japanese electronics firms.
Industrial Equipment. While Chinese companies have not made much progress in industrial controls, they are active in much of the industrial-factory space. Just a few examples here. Shenyang Blower Works Group(沈鼓集团) makes air blowers and water pumps, and is noted in China as a premium domestic supplier. The company has been talking about going international. Another example is the Shanghai East Pump Group (上海东方泵业), which specializes in water pumps. The company is large, and already has significant exports (about 20% of revenues), to Japan and Southeast Asia in particular, though not yet to Europe or North America.
Construction Machinery. Sany (三一重工)and Zoomlion (中联重科). These are the largest construction machinery firms in China, and two of the largest in the world, supplying everything from excavators to pile drivers to construction cranes. Given China's decades old construction boom, it is not surprising to see large equipment companies emerge from this. In the case of Sany, only about 7% of its current sales are international, but this is expected to increase as the company targets international expansion. The company already has manufacturing plants in over 5 countries, including the US, Brazil and Germany, and has also set up and R&D Center in the US. In addition, it recently acquired Putzmeister, a noted German pump manufacturer. It also has sales subsidiaries in Singapore, Belgum, Germany, and Japan. Zoomlion also has British and Italian acquisitions. Another notable company here is XCMG(徐工集团).
Engineering. Some of the largest engineering or EPC companies in the world are Chinese, and already have a long nameplate of foreign projects. One company to keep an eye on here is the Beijing Capital Group (北京首创股份有限公司), which focuses on water and wastewater projects. The company already has international projects in Malaysia, the Philippines, Iran, and also the UK.
Transport. Chinese auto companies such as Chery and Geely are making an export push, from a small base, exporting about 150,000 units in 2011. The company has or will open plants in Myanmar, Venezuela, and Africa. More notable though is high speed rail transport, where China excels. The China Railway Engineering Corp (CREC) has built numerous high speed rail lines in China, and CSR makes advanced rolling stock. These and other Chinese rail firms have projects in countries such as Saudi Arabia, Kazakhstan, and Venezuela, and are aiming for projects in the UK and California.
Finance. Chinese banks are among the largest and most profitable in the world, bad loan fears notwithstanding. And these banks are now making an international push, with ICBC just having received permission to acquire the US operations of BEA, and begin a general US push. Another company to keep an eye in finance is Unionpay, the Chinese payments organization. In both the US and Europe, as well as Southeast Asia Unionpay is trying to expand its services to a wider customer base, to attract not just traveling Chinese but locals as well.
As this shows, there will be fewer consumer companies compared to industrial, as this is where Chinese firms are stronger. China is largely an SOE driven economy, and SOEs are less adept in consumer markets. So these will be less visible, but just as valid. There will be a mix of private companies and SOEs, as well as those like Haier which could check both categories. As many large Chinese companies have significant cash, there will also likely be a good number of acquisitions.
The manufacture cost would not be significantly higher than in China if a company has decided to launch production facility abroad. So if the industry is capital intensive, the chances are higher, as China still has a real competitive advantage in labor. Furthermore, a Chinese company that goes international is most likely to be a leader in the domestic market, with significant market share as well as cash. These companies may also run into limits in the home market, and feel it best to keep growing by expanding internationally.
So in a few years of one passes by a construction site Chicago and sees a crane with the interesting name of Zoomlion, you'll know where it came from.
About GCiS China Strategic Research
GCiS (www.GCiS.com.cn) is a China-based market research and advisory firm focused on business to business markets. Since 1997, GCiS has been working with leading multinationals in sectors ranging from technology to industrial markets, medical, chemicals, resources, building and constructions and a few others.