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Most Likely to Expand Globally Over Next Ten Years....

BEIJING - 04 Apr 2006: Research undertaken by IBM and Fudan University, and released today, has found that Chinese companies are expanding globally to acquire technology and management skills, escape intense domestic competition and capture new market opportunities. The report, an in-depth analysis of the motivations, rationale, and challenges facing China’s companies as they expand globally, identifies 60 companies and the industries best positioned to succeed internationally over the next ten years as well as the attributes necessary for success.

Based on criteria including company size and characteristics as well as industry structures, the companies identified in the report: "Going Global: Prospects and Challenges for Chinese Companies on the World Stage" as being well positioned to become global players over the next ten years include: Haier (home appliances), Galanz (home appliances), Wanxiang Group (auto parts), Cosco (logistics), Lifan (motorcycles), BaoSteel (steel) and Huawei (telecom equipment).

Industries most likely to see the entry of Chinese companies are energy, steel, automotive, logistics, computers, brown goods, white goods, telecommunications equipment, textiles and consumer products.

"China has long been the destination for growth," said Alan Beebe, Research Director, IBM Institute for Business Value, China. "This paradigm is about to shift as China continues to open up to the world and its regulations for outbound investment and mergers and acquisitions are liberalized.

"Companies with the best prospects of succeeding in global markets are those expanding from a position of strength rather than weakness," he said. "Only those companies with clear, focused globalization strategies and strong execution capabilities can hope to become future global leaders in their industries.

"The potential rewards are great, not only for Chinese companies, but also their foreign partners with whom they may form alliances to win in the global marketplace, including within China," said Mr Beebe.

Companies considering global expansion identified the lack of qualified human resources and weak global brands as the top two challenges facing Chinese companies expanding overseas. Interviewees indicated a need to not only strengthen their management team for global expansion, but to also compete against foreign companies in China’s own domestic market. Mergers and acquisitions and strategic partnerships with foreign companies, despite their significant integration challenges, were cited by Chinese interviewees as important ways to shorten the time required to develop a global management team and build global brands.

Since 2001, when China entered the WTO, foreign companies have invested US$621 billion in China, US$60 billion in 2005 alone. In comparison, outbound direct investment (ODI) in 2004 was US$1.8 billion, accounting for only 0.25 percent of global ODI, ranking China 28th among all countries. As China’s overseas investment restrictions are relaxed or abolished in 2006, a sharp rise in ODI and merger and acquisition activity is expected. China’s Ministry of Commerce predicts outward investment will maintain an average annual growth of over 22 percent, exceeding US$60billion in new ODI between 2006 and 2010.

"Going Global: Prospects and Challenges for Chinese Companies on the World Stage" found that global success will be predicated on a globalization strategy that determines how a company will differentiate itself to capture value, identify the right business model for global expansion, and prioritize target countries for market entry. The report outlines four critical success factors to be addressed by Chinese companies wanting to go global:

Differentiation through branding and innovation

Virtually all successful global companies differentiate themselves in terms of both brand and innovation. Excellence in at least two dimensions -- product or process innovation, and industrial or consumer brand -- is almost always required.

While most Chinese companies remain anonymous contract manufacturers with little or no global consumer branding power, some companies are building from their origins as low-cost leaders to become innovative, branded players. Chinese companies are also looking to Asian companies, such as those in Taiwan and Korea, to learn how they have gradually built up their innovation and branding capabilities.

Market entry strategy

There is no single "right" market entry strategy for Chinese companies pursuing global expansion. For OEM manufacturers with significant exports, a strategy may be to gradually build their globalization capabilities by maintaining their OEM relationships with U.S. and European customers while pursuing emerging niche markets in Asia, Africa and Latin America with their own brands.

For Chinese companies with limited global experience, they often prefer to enter developing countries before trying to enter advanced markets such as the U.S. and Europe. Companies such as Huawei and ZTE (telecommunications equipment) and Geely and Chery (automotive) are pursuing this strategy. On the other hand, companies such as Haier are pursuing advanced markets in the US and Europe first and leveraging this experience to compete more effectively with multinationals in China and other countries.

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