Insight July 10, 2009, 10:12AM EST

Globalization Challenges Facing China Inc.

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• The second challenge pertains to the skills needed to create and manage horizontal organizations in which key resources are distributed across borders and which are under the control of managers separated from one another by geographic, cultural, and language distances. China's is a command-and-control economy embedded in a culture that respects hierarchy. Most Chinese organizations view information as a source of power resulting in a much lower degree of intra-firm transparency than at Western corporations. China is also a relatively homogenous society in terms of race, religion (or lack of it), and language. Importantly, too, most Chinese managers—especially those at senior levels in major companies—have at least rudimentary fluency in English, the business language of the world.

• The third challenge pertains to the fact that, while many Chinese companies are champions at competing through cost efficiency, they have yet to master the art and science of competing through differentiation. Lenovo has made a determined effort to differentiate itself through branding and product design. Other prominent companies such as Huawei (telecommunications), Haier (appliances), and Li Ning (athletic shoes and apparel) are making a similarly concerted effort in this direction. However, for a majority of Chinese companies, competing through differentiation remains a distant concept.

• The fourth major challenge pertains to political sensitivity and barriers to potential acquisitions by Chinese companies in other developed economies. Prominent examples include roadblocks faced by CNOOC in its attempt to acquire the U.S.-based Unocal and by Huawei Technologies in its attempts to acquire stakes in Marconi and 3Com. This challenge remains alive and well, as demonstrated recently by the decision of Rio Tinto's board to not accept Chinalco's offer to increase its shareholding in the company. The roots of this political sensitivity lie in the fact that most big acquirers from China tend to be state-owned or state-supported enterprises and governments are reluctant to cede control over "strategic" assets to a foreign government.

Minority Stakes

These are major challenges, and overcoming them will be neither easy nor quick. An incremental step being undertaken by many Chinese companies to build the needed organizational capabilities is to acquire a minority stake rather than complete control. While these moves are laudable, minority stakes suffer from severe limits to the amount and quality of learning they can yield. Learning by observation can never be as deep as learning by doing. Any company that became a master at the mergers-and-acquisitions game—look at General Electric (GE), Microsoft (MSFT), and IBM—did so by acquiring a controlling stake in and integrating a large number of smaller acquisitions before attempting to swallow a giant.

Having acquired Manganese Bronze (a British manufacturer of London's taxicabs) and Australia's DSI (an auto-parts manufacturer), Geely is on the right track to learning-by-doing and thereby building the needed organizational capabilities. It is an open question, however, whether the company is ready to acquire a company as large as Volvo or Saab, let alone both. The restructuring of the global auto industry has barely started. The next 10 years will bring many opportunities for acquisitions in this industry and others. Going on an acquisitions spree after having built the necessary organizational capabilities will be much wiser than the hasty moves that today are driven largely by ambitions rather than ability. Just ask the shareholders at Daimler who lost a bundle after the botched acquisition of Chrysler.

Anil K. Gupta is the Ralph J. Tyser Professor of Strategy & Organization at the University of Maryland's Smith Business School. Haiyan Wang is managing partner of the China India Institute, a research and consulting organization. They are co-authors of Getting China and India Right, released by Jossey-Bass/Wiley in February 2009.