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Dr. George Gu's Asia Watch
The Coming Age of Chinese Multinationals
By George Zhibin Gu
Contributing Writer
Chinese blue-chip company Lenovo

December 2004 will be remembered as a time when a faceless Chinese company, Lenovo, suddenly took the global stage. The bluest of blue-chip multinationals, IBM, got out of its personal computer business by selling out to Lenovo, making the faceless company the third-biggest global PC player. So are there other Chinese brands that could take the world by storm? A rising economy must create multinationals. The UK and US have done it. Japan and South Korea have followed. Now it's China's turn.

State-sector giants

There are several dozen Chinese companies that will eventually join the exclusive 500 club. That could happen within the next 10 years or even less. Currently, 15 Chinese companies are already in that club, including several telecom operators, four banks and State Grid, China Life, BaoSteel, and SAIC, the Shanghai based auto maker. They are all state-run.

China now builds a new power plant every week. The prize goes, mostly, to State Grid, the energy monopoly for several decades. Only in this reform era, private investors and overseas parties are allowed to enter the field. But still, nobody can compete with State Grid. It has been as powerful as the government. Complaining about its poor services invites trouble; its service people are a nuisance.

In the last few years, however, State Grid has been behaving more like a company, improving its management and services substantially. The energy company is already ranked 46th in the club. It could become a top-10 player as China's energy needs grow. In the last few years, there have been frequent power cuts in China, even though it is the biggest energy producer after the US. Naturally, there is room for more investments.

Among state companies, China National Petroleum Company (CNPC) and Sinopec are already global players. These two, together with China National Offshore Oil Corp, constitute the state monopoly in China's oil and petrochemical market. Their annual profits could reach US$4.5 billion or higher.

China National Petroleum Company (CNPC)
CNPC complained to Fortune magazine when its editors wrongly ranked the company 73rd, causing the magazine to upgrade CNPC to the 52nd slot. A booming Chinese economy has offered all the perks for these two giants. Since 1993, China has been a net importer of oil. In 2003, it consumed 7% of global oil supplies. By 2020, its oil demand will triple. Thus, CNPC and Sinopec must go out to acquire both supplies and assets.

So far, CNPC is competing with Sinopec head-on at home and abroad. Both have already cut more than a few dozen deals around the world. Both are aggressive and go anywhere there is a whiff of oil. CNPC is eyeing a unit of Russia's troubled oil giant Yukos and may hold a small stake in it. For many years, the erstwhile Soviet Union was a major oil trader with China. Now China just needs more oil from Russia, and beyond.

These two oil giants are clearly ahead of the curve in China Inc in terms of international expansion. But several others are not far behind. Take China Mobile and Unicom for example. They hold the sway over China's mobile communication market as private companies are barred here.

China is already the biggest mobile phone market; by Feburary 2005, it had 340 million connections. With billions in cash and 330 million consumers on hand, China Mobile and China Unicom can go a long way. Perhaps one day word will spread that Quest and French Telecom have been sold. The buyers? China Mobile and China Unicom, strange names.

After the IBM-Levono deal, what is not possible? In particular, both Qwest and France Telecom are performing poorly, much worse than IBM's PC unit. They could certainly do with some help. In investor conferences hosted by China Mobile and China Unicom, many investors ask for their plans and timetables. But the truth is that they have yet to gain international experience. Even at home, it has been a little rough of late, and their profits have been going down.

Baosteel Iron and Steel Co.

Shanghai-based steel mill BaoSteel is expanding fast beyond China. It is creating a major joint venture in Brazil worth $1.9 billion. China's steel market is already bigger than the US and Japan combined. Its fast economic expansion is creating ever-increasing demands for metals, steels and cements, among other basic industrial raw materials. So along with other Chinese companies, BaoSteel is reaching out to places where supplies are plenty: Canada, Australia, Africa and Latin America. Expect more deals from Chinese companies in these areas.

Now the big four Chinese banks: Bank of China, Industrial and Commerce Bank, Construction Bank, and Agriculture Bank. On an asset basis, they are already among the top 25 global banks but their health is terribly poor. They need booster shots, and the government is injecting more taxpayers' money - tens of billions of dollars - into them. Nobody knows for sure how long will it be before they return to health. But they must go through a painful transition to independent business organizations before that.

New giants in the making

There are dozens of relatively new, more entrepreneurial Chinese companies. They are more than eager to trot the globe. These include TCL, Huawei, Haier, Galanz, Chonghong, Ningbo Bird, Kelon, and Konka, among others. They are all manufacturers, still growing, and have a penchant for expansion beyond China. TCL, Chonghong and Haier focus on white goods and consumer electronics. They have now added handsets to their product list. Huawei and Ningbo Bird focus on handsets or telecom networks. One out of three handsets in the world is produced by Ningbo Bird and TCL, among others.

Galanz is the world's No 1 manufacturer of microwave ovens. Its global market share is around 40%. It takes Europe $80 to produce a simple microwave oven, but only $30 if it is done by Galanz. Watch out for Kelon too. It could become one leading global cooling product maker. This is partly because the old controlling shareholder, a government unit, is out of the game now that Kelon is a purely public company controlled by a very ambitious 40-something.

A Chinese father and his son are seen in this October 6, 2004 file photo looking at a mobile phone in Beijing. Mobile phone subscribers in China, the world's largest mobile telephone market, surpassed 334 million in 2004, the Xinhua news agency said based on a report from the Chinese Ministry of Information Industry. Photo Courtesy REUTERS/Guang Niu

How will these companies enter the big boy's club? Well, for starters they are players in the world's fastest-growing consumer market - China. In 2003, China produced 65 million television sets, 22 million air-conditioners and 180 million handsets. TCL alone produced 18 million TV sets and 20 million handsets.

But there are large issues to be settled before these Chinese firms can morph into competent multinationals. China will first need to transform all state and private companies into modern business organizations. Turning a state-run economy into a modern market economy will take some work. It demands the entire package, skipping any component will be disastrous - as can be seen from the mess in China's stock market; in January, about a dozen listed companies were found to be abusing the market and several dozens of senior executives were arrested.

At the next level, the overcrowding in every business sector has to be sorted. China has some 400 air-conditioner makers and more than 100 car makers. All these firms can only mean needless price wars, which could in the process pull down the really strong ones. So rational consolidation has to take place. If China's consumer electronics and home-appliances makers, now numbering 1,300, can be reduced to half a dozen companies, the resulting ones will be among the biggest multinationals.



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George Zhibin Gu, who serves as The Seoul Times special contributor, is a veteran business consultant based in China. Holder of a Ph.D. from the University of Michigan (1987), He has worked for Prudential Securities, Lazard, and State Street Bank, among others. His work covers M&A, venture capital, business expansion and restructuring. He authored of two books, "Chinas Global Reach: Markets, Multinationals, and Globalization" (Haworth Press, Fall 2005) and "China Beyond Deng: Reform in the PRC" (McFarland, 1991). Email: gzb678@yahoo.com.cn

 

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