Insight July 10, 2009, 10:12AM EST

Globalization Challenges Facing China Inc.

China has been a champ exporter, but the country's growth depends on developing other avenues of business, too

Story Tools

As China continues its march to become the world's largest economy in 20 years, it is entirely logical that many of its leading enterprises (such as Huawei, Haier, Lenovo, Geely, Chinalco, and MinMetals) should aspire to become global champions within their respective industries. No wonder, then, that, as U.S. icons such as General Motors and Ford (F) have stumbled, Chinese companies have been rumored to be interested in buying some of their subsidiaries. For instance, Beijing Automotive Industry has made a bid to buy Opel from bankrupt GM.

However, the ability to buy is not the same as the ability to swallow. Shanghai Auto has seen its nearly $500 million investment in South Korea's Ssangyong Motor wiped out. The jury is still out on whether Lenovo was wise to have acquired the PC business of IBM (IBM). And, as electronics group TCL's difficulties acquiring the cell-phone business of Alcatel and the TV business of Thomson demonstrate, failed acquisitions—especially if they're big—can actually make companies weaker rather than stronger. Indeed, reported moves by China's regulators to block Tengzhong's acquisition of GM's Hummer could well be a blessing for Tengzhong's owners.

Of course, many Chinese companies have had great success with two types of globalization. The first is conquering global markets via exports from China. The second is acquisition of natural resource assets in Africa, Australia, and Latin America. These are important accomplishments.

Approaching a Limit

Both of these globalization models, however, are close to reaching their natural limits, and neither is particularly demanding in terms of cross-border organizational capability. Exports will never again be as important for China's growth as they have been. China is already the world's No. 1 exporter. If its exports were to continue growing at the same rate as the past 10 years, they would rocket from 10% of the world total to almost 50% by 2020—an economic and political impossibility. Similarly, political sovereignty issues in other countries will soon begin to put major constraints on China's ability to acquire natural resource assets.

The next wave of globalization by Chinese companies, therefore, will have to be different. It will require smart acquisition of established companies in some of the world's major economies. It will require skillful management of geographically dispersed marketing, manufacturing, and R&D operations. It will require distribution of managerial decision-making authority to senior executives coming from different national cultures and located thousands of miles away. And it will require the ability to integrate all of these dispersed resources and run a cohesive global enterprise. Chinese companies will need to overcome four major challenges in pursuing this type of globalization.

• The first challenge pertains to financial skills critical to ensuring that any cross-border acquisition is properly evaluated for its strategic and financial merits and done on the right terms. Given an abundance of capital in China and a well-recognized propensity on the part of China's state-owned enterprises to put national policy goals ahead of shareholder value maximization, Chinese corporate leaders are still at a relatively early stage in developing world-class finance skills. Nor can sound financial analysis be outsourced to investment bankers. Investment bankers earn their fees by making deals happen. As is well known, they can scarcely be relied upon for objective analysis.