Wuhan
International Business and Management
September 9
9:00 – 12:00
Latin America
China’s Global Enterprises
In 2011, 61 Chinese firms with revenue of $2.89 trillion and $176 billion in profits placed in the Fortune Global 500 companies
Only a handful of these firms operate on a global scale, with this scale of marketing, production and distribution capabilities.
According to forecasts by economists at the Hong Kong monetary Authority, if China does liberalize its capital account, Chinese ODI stock could rise from Us$310 billion in 2010 to Us$5.3 trillion by 2020.
China must lower regulatory barriers. At the moment, a company wishing to invest directly overseas has to obtain approval from three different government departments: the national development and Reform Commission, the ministry of Commerce and the state Administration of foreign Exchange.
Chinese companies also tend not to invest in areas where they already have a comparative advantage. Instead, they focus on three key areas of investment: first, companies operating in the same industry as the investor, but which have advanced technology, management or brand names;second, commodities which are used intensively in Chinese production; and third, service companies that could facilitate exports from China-based factories.
The Achilles heel of Chinese multinationals is human resources— particularly management. multilingual and multicultural managers are few and far between, and all assessments of Chinese corporations note this to be a fundamental weakness.
MBA plus international experience is rare.
Chinese firms rarely escape their own system of business practices and business culture. Western business culture emphasizes teamwork and cooperation between management and staff, detailed long-term planning, transparency and oversight, multiculturalism, prosecution of corruption, and the institutionalization of relationships.
Mergers and acquisitionshave become the preferred modality for Chinese corporations to go global because they are a quick means of acquiring advanced technology, sales networks, established brand names and other strategic assets overseas.
Most of these M&A’s have not been very successful so far. One report estimates that 90 per cent of China’s 300 overseas mergers and acquisitions conducted between 2008 and 2010 were unsuccessful, with Chinese companies losing 40–50 per cent of their value after the acquisition. This has particularly been the case in the technology, communications and natural resource sectors.
Big Chinese firms— and the Chinese government is no exception—are extremely hierarchical. Chinese organizational culture stresses discipline and conformity, which creates a climate of risk aversionand discourages initiative.
Being entrepreneurial (which Chinese companies certainly are) is different from being innovative and creative.
The Chinese notion of teamwork is geared towards following leaders’ instructions, rather than the more egalitarian and collegial model prevalent in Western organizations.
This preference for clearly defined workplace roles and hierarchies often means that Chinese do not adaptwell to management structures that prize decentralization and individual initiative—and this has resulted in repeated culture clashes in Chinese mergers with Western companies.
Chinese companieshave demonstrated difficulties in adapting to foreign legal, regulatory, tax and political environments. transparency and corporate governance are not exactly attributes associated with Chinese companies, which have a reputation for opaque decision-making processes, frequently corrupt business practices, and often- fraudulent accounting procedures.
China’s Latin American Expansion
The Chinese government provides direction and leadership for foreign investment and a strong diplomatic, political and economic support system for these ventures.
Argentina
Exports of soybeans and soy oil (80% of soy crop to China) and seek sales of corn and other agricultural products.
Sales of $6.2 billion; purchases of $10.6 billion
China wants a FTA with Mercosur, but this will be difficult to achieve
Brazil
$30 billion swap agreement to protect in financial crises
2010 trade totaled $56 billion
Uruguay
Agreements on various forms of additional trade
Worries About China
There is substantial worry in Latin America that trade with China will be putting Latin America back into a world of primary product dependency and fiercely outperforming Latin America in global manufacturing markets. Many fear that the old pattern of Latin specialization in low value-added primary products will condemn this area to a position of low economic dynamism and poor terms of trade. Selling commodities to China and buying manufactured goods yields poor terms of trade for Latin America.
Main Characteristics of Latin American-China Trade
•For almost all of LAC’s top commodities exports, China is responsible for a large part of global demand and is affecting price increases and exports for LAC; yet,
•LAC exports to China were only 3.8 percent of all LAC exports. In other words, 96.2 percent of all LAC exports do not go to China;
•LAC’s exports to China comprised 5.8 percent of Chinese imports, the same level of LAC exports to China in the 1980s;
•74 percent of all LAC exports to China were in primary commodities;
•Growth in LAC exports to China was only 8 percent of all LAC export growth since the boom began in 2000;
•10 sectors in six countries account for 74 percent of all LAC exports to China and 91 percent of all commodities exports to China;
- For the other countries in LAC the potential to trade with China is very low.