1. Indian companies are increasingly looking to expand beyond their borders — especially to other emerging markets. What is driving this trend?
There are at least two good reasons for Indian companies to look beyond the borders. Firstly, we live and compete in a globalised world with highly integrated value chain processes that cross many borders. Therefore, any company — Indian or otherwise — needs to be global to be competitive. A Western multinational that competes in India will have global operations — it has access to brands from Europe or the US; raw materials possibly from Tunisia or South Africa; and, probably, manufacturing operations in China. Unless the Indian company also has a similar global reach, it cannot compete, even in India.
The second reason arises from aspiration. Most companies look for scale and size. With the Indian market just being 2.5 per cent of the global GDP, scale and size can only happen if a company looks beyond the country’s borders. As Ratan Tata once said to the heads of Tata’s many companies, it is important to diversify to other countries and build a buffer against the possible downturn of a single economy and, thus, hedge risks.
2. What are the main human capital challenges that Indian companies face as they globalise? And, to what extent is national reputation a factor?
Despite an abundance of human resources and a demographic advantage, the absence of adequate managerial and leadership talent is a major challenge to Indian companies. Talent pools are shallower than they appear at the first glance. Supply-demand gaps exist, not only in terms of total numbers, but also in terms of quality. The problem is particularly acute at higher levels of leadership. There was some initial hostility when Indian companies entered into an acquisition or joint venture. For instance, the employees of Brunner Mond (of the UK) and Magadi Soda (part of Brunner Mond and located in Kenya) did not initially want their names and identity changed after the acquisition by the Tata Group. Similarly, when the CUMI chairman invited senior leaders of their Russian acquisition for a dinner party, there were long faces and sullen expressions. But, to the credit of the Indian leaders of these organisations, these situations underwent a complete transformation within a relatively short time period. At a later stage, the same Brunner Mond employees asked the Tata leadership whether they had earned the right to be included as a Tata enterprise.
3. What are the leading global companies in India and what are the best practices of these companies? Is there an Indian way of globalising?
Business magazines such as Outlook and The Economist regularly rank India’s leading multinationals. Companies such as the Tata Group, Aditya Birla Group, HCL, ICICI Bank and Infosys are often cited.
Our research supports that, in terms of acquisitions, Indian companies tend to adopt a hands-off approach. They do not rush to assimilate the businesses that they have taken over. This can be seen in acquisitions made by CUMI. Initially, the leaders emphasised that they did not approach acquisitions with a conqueror mindset. Instead, whilst displaying humility and an openness to learn, the company did its homework and set clear guidelines by mobilising its engineers to clarify the change agenda in the form of growth stories. Growth stories indicate, in very specific terms, what the company would do differently to create additional value. This process helps set a defined set of goals, targets and pathways. At the same time, engineers of the acquired unit were invited to India to contribute to India’s operations. The implicit message said, “India has as much or more to learn from you.”
4. Are Indian companies focused on instilling a common corporate culture, globally? And, if so, what are some of the more interesting ways by which they do this?
Our research negates the view that Indian companies instill a common corporate culture as a part of their globalisation efforts. They are oriented to respecting other cultures, as opposed to instilling a common Indian culture, and tend to celebrate multiple cultures. One Indian leader told me that when he went to Russia, he’d drink vodka, and enjoy pelmeni, Russian-style dumplings. Indian leaders tend to be very comfortable with diversity, as India itself is highly diverse.
While some Indian leaders stated that they would not instill a common culture, they place an emphasis on establishing progressive values such as openness, ethical dealings, transparency, and work commitment. These underlie a company’s conduct of business, and, hence, guide operations.
5. Based on your research in India, what advice would you give Chinese companies looking to expand into India?
To address the question, let us begin with the case of Indian companies. The primary motivation for Indian companies to go to China was the low Chinese cost of production. In several cases, they were offering products at prices below the Indian variable costs. By replicating the Chinese experience, Indian companies hoped to obtain the Chinese advantage. Barring one or two exceptions, most Indian companies are presently losing money in China. Many of these companies have closed down their operations, and do only sourcing operations from China.
China offers low cost. Europe, the United States and Japan offer brands. India offers neither. In China, Indian companies cannot make products cheaper than the Chinese. At the same time, India does not have brand value for the Chinese buyer.
This is similar to the problem that the Chinese are going to face in India. If they make motorcycles in India, it has to be cheaper than what the Indians can make. Their brands are not well known. In general, Chinese acquisitions attempt to fill one of those gaps. They can make things cheaper but they need to get an acceptable, globally recognisable brand. That is why they bought companies such as Lenovo, whereas India has gone for Jaguar and Land Rover.
To a certain extent, India and China are where Japan was in the 1960s, when it was only known as source of cheap products. My advice to Chinese companies is: continue to develop your brand.
1. Chinese companies are increasingly looking to expand beyond their borders — especially to other emerging markets. What is driving this trend?
The global expansion of Chinese companies has been driven by both internal and external factors. Internal factors include management aspiration, the need to move up the value chain, and the acquisition of strategic assets to enhance their competitiveness. A common theme identified is that the internationalisation initiatives of most Chinese companies are driven by the aspirations of top management to build a strong brand and to become a world- leader.
External factors include the saturation of domestic markets and the need to seek new markets, trade barriers in the exporting markets, and the support of the Chinese government’s ‘Go Global’ policies. It should be noted, however, that over time these driving forces have varied. Leading up to 2002, Chinese companies were characterised by market and asset-seeking activities, such as importing and exporting; whereas following the 2008 financial crisis, they became characterised by strategic asset-seeking, including such activities as green field investment (a form of foreign direct investment where a company enters into a new market and builds its new facilities and operations from scratch), the building of research and development centres, and a surge in mergers & acquisitions.
2. What are the main human capital challenges that Chinese companies face as they globalise? And, to what extent is national reputation a factor?
In the process of globalising their business, Chinese companies are confronted with many human capital challenges. These include a lack of competent managers with international management experience, and poor adaptability to the business and institutional environment, as well as the culture, of host countries.
In the case of mergers and acquisitions, as Chinese companies are often associated with low price, low quality and low efficiency, gaining legitimacy in the acquired company can be difficult. China’s distinctive cultural and institutional legacy tends to increase the liability of foreignness of Chinese companies and, hence, further alienation.
As a result, retaining key talents with core technology and management skills has always posed a serious challenge. National reputation can also have an impact on the extent to which Chinese firms integrate into the global market. Chinese companies often encounter hostility for political reasons when investing in foreign markets, as in the case of CNOOC’s attempted acquisition of Unocal Corporation in the United States.
Shortly after CNOOC announced its intention to acquire Unocal Corporation in June 2005, the US House of Representatives approved a non-binding resolution on the grounds that the bid would pose a threat to homeland security. Although some US economists believed that acquisitions made by Chinese companies could benefit the US economy, American politicians argued that CNOOC was controlled by the Chinese government, and the technology acquired from Unocal might be used for military purposes. Thus, for Chinese companies, understanding the legal and political environment of the host country can be a key contributing factor to their success or failure.
3. What are the leading global companies in China and what are the best practices of these companies? Is there a Chinese way of globalising?
In recent years, an increasing number of Chinese companies have embarked on the journey of global expansion. Amongst the most globally competitive Chinese corporations are the likes of Huawei, ZTE, Lenovo, Haier and Zoomlion. Some of the best practices in these companies include the building of a strong position in the domestic market before expansion overseas; a willingness to learn when working with foreign partners; and developing and maintaining distinct cultural values.
For example, in the first 18 months of the acquisition of IBM’s PC business by Lenovo, the IBM business and management was kept almost intact in order to ease the anxiety and uncertainty of both IBM employees and its clients. The effort to maintain stability paid off, in that the turnover rate of IBM employees was less than 2%. The Lenovo upper management also assumed the role of students. As Chairman of the new Lenovo, Yang Yuanqing proposed the principle of openness, respect and compromise as the basis to work with the former’s American chief executive officer, Steve Ward. Lenovo is well known for its leadership development programmes. Following the acquisition, Yang Yuanqing was the first Lenovo executive to post himself on international assignment to the United States, in order to develop himself into a global leader. Many of Lenovo’s senior management have been involved in similar development programmes, including the company’s Top 100 Initiative, Succession Plan and its International Rotation Plan. According to a survey conducted by Fortune China and Hay Group China, Lenovo has been in the top 20 of China's Most Admired Companies for five consecutive years.
4. Are Chinese companies focused on instilling a common corporate culture, globally? And, if so, what are some of the ways by which they do this?
In many Chinese companies, the corporate culture is deeply embedded in the national culture. For example Haier Group’s core value of innovation is shaped by the thinking of Chinese traditional culture, with an emphasis placed on the need to identify patterns of change and to remain flexible.
Lenovo, for example, wants to instill in all employees having ownership. To achieve this, their Chairman Liu Chuanzhi travelled all over the world to tell the story of Lenovo, using just pictures and stories. This had a significant impact on Lenovo’s global employees, and the ownership spirit has gradually become entrenched not just in China, but throughout the company’s global operations. In addition, Lenovo also invites overseas employees to take part in the company’s biannual events of New Year celebration in Beijing.
5. Based on your research in China, what advice would you give Indian companies looking to expand into China?
Indian companies must understand the strong cultural and institutional context of doing business in China. It is worth noting that China is so big that it is not one single market, but 30 different markets. And, as a result, investors should also take into consideration regional differences. There are a number of ways Indian companies can integrate into Chinese markets. These include localisation, building strong relationships with the local government and community, and portray an ethical corporate image by demonstrating corporate responsibility.
As companies from emerging economies, it is important to learn from each other’s experience and practices, so a learning attitude from both the Chinese and the Indians can be helpful. With Chinese companies eager to learn from foreign enterprises, it is therefore critical for Indian companies to come to China with an agenda for mutual learning.
This article was first published in HQ Asia (Print) Issue 04 (2012)