“Business Globalization:
How To Survive The Impact of China and
The New Global Economy”
Presented by:
John A. CaslionePresident & CEO
GCS Business Capital
Chicago Shanghai Frankfurt Milan
October 4, 2006 – Flexible Packaging Association – Chicago, IL
! Globalization and Critical Issues for US Businesses
! The “Peaceful Rise” of China
! Leveraging Globalization to Your Advantage: What to Do
! Ratcheting Up the Value Curve Has Never Been So Important! Alliances and Partnerships Must Be Part of Your Strategy! Most Business Models Have to Change, Especially for SMEs
! Case Studies: China to US; US to China
! Darwinism in the New “Flattened World”
Agenda
China Today
! FT, 21 Sept 2006; “McCann Erickson [Leading global advertising firm] shifts focus to Chinese brands” (Chinese need brands as 50% of world’s autos produced in China this next decade; China now 3rd largest luxury market after US and Japan)
! IHT, 25 Sept 25 2006: “It’s Not the Group of 7, It’s the Group of 2” (IMF Group of 7 meeting all about US and China, and then more about China)
! China Daily, 25 Sept 2006: “Service sector is the next big thing to power the Chinese economy as investment in manufacturing tails off”
! WSJ, 25 Sept 2006: “US airlines vies for China; 4 carriers wage campaigns to win lucrative daily flight”
! IHT, 18 Sept 18 2006: China Targets World’s Top CEO’s to head its National Champions” (Dell Computer’s China head goes to Lenovo)
! FT, 20 July 2006: “Up to the job? How India & China Risk Being Stifled By a Skills Squeeze” (China’s labor shortage now at 75 million and rising)
! FT, 22 Sept 2006: “China Travels Mapless on Road to Being a Great Power
China’s Globalization in the Headlines…Daily
05,000
10,00015,00020,00025,00030,00035,00040,00045,00050,000
CHINA US INDIA JAPAN BRAZIL RUSSIA UK GERMANY FR OTHER
LARGEST ECONOMIES - 2035(GDP $BN)
WorldWorld’’s Largest Economies in 2035s Largest Economies in 2035
Source: IMF 2005
! Many multinationals lead global strategies: SMEs can learn from the best
! Some Multinationals and SMEs have adjusted and successfully compete globally against other multinationals and Asians; regrettably many are needlessly falling behind
! While some government support and intervention may be helpful in the short term, they do not address the core issues
Today’s Globalization
Today’s Globalization is merely the latest chapter in our Global Manifest Destiny – the inevitable economic
integration of all humankind
But, today’s globalization is very different!
Present-day drivers of today’s –and tomorrow’s – globalization:
" Increasing Global Interdependence" Accelerating Rate of Change" New Information Technology
Special Pressures Pulling at US Businesses
! Downward pricing pressure continues as low cost producers (China) continue to out price many businesses in their respective markets
! Companies are forced to run leaner, to support increased costs, including health care and energy, to name a few
! Competitive pressures from ‘like companies’ in other areas of the world will continue, and this alone advances our price-driven, fiercely competitive environment
! Companies from unlikely places, developing nations such as China, India, Brazil and Russia are shaking up entire industries and changing the “rules of the game”; they’re mastering global competition – fast!
Source: Boston Consulting Group, May 2006
“Chinese Companies are on the Move…”
! BYD Company (China) the world’s largest manufacturer of nickel-cadmium batteries; has a 23 percent share of the market for mobile-hand set batteries
! China International Marine Containers Group Co. (China) has 50 percent share of marine container market, supplying top ten global shipping firms
! Galanz Group Company (China) commands a 45 percent share of the microwave market in Europe and a 25 percent share in the US
! Hisense (China) is #1 seller of flat-panel TVs in France; #2 in Europe overall
! Johnson Electric (China) world’s #1 manufacturer of small electric motors
! Pearl River Piano Group (China) global volume leader in piano manufacturing
! Techtronic Industries Company (China) the #1 supplier of power tools to Home Depot in the US
"The influence of China will growwith its economic power and its soft power.
In the past decade Chinese products have gone abroad,Chinese labor has gone abroad,
and Chinese tourists have gone abroad.
We now have accumulated some wealth, and now we think it's time for our corporations to go abroad.”
Davos, Switzerland at 2005 WTO, statement made by Mr. Wu Jianmin, the former Chinese ambassador to France and current president ofChina's Foreign Affairs University in Beijing, IHT 27 January 2005
The “Peaceful Rise” of China
In March 2006, Chinese Premier Wen Jiabao reaffirmed the government’s commitment to support globalization by offering various types of support, including new policies and services to coordinate overseas investments and managing risks:
“We will support qualified enterprises in going global, making overseas investment…, establishing processing centers, marketing and service networks and R&D centers in other countries”
– Wen Jiabao, Chinese Premier, 05 March 2006
Source: “Chinese companies backed to go global”, XinhuaChina Economic Information Service, 05 March 2006
Chinese Government’s “Go Out” Policy Expands
Global “Champions” at Every Level, in Every Industry
One specific priority for the Chinese government under the “Going Global”strategy is the creation of a number of ‘Global Champions’ – large multinational firms with globally recognized brands able to compete in the international marketplace.
Beijing estimates there will be 150 within next decade.2
1 Source: Deutsche Bank Research, AUG2006
2 Source: PricewaterhouseCoopers, JAN2005
1
China’s Economic Growth Predicted to Continue
China’s integration into the world economy is being driven by key forces:
! China’s continuing rapid economic growth in China (Ave. 9.0%+ each year for foreseeable future)
! Booming global trade (Global GDP Ave. 5.0%)
! Foreign direct investment (into China) continues at high rates / rapid pace (US$ 60 billion in 2005)
! Chinese investments abroad (ODI) increasing at increasing faster pace; manufacturing (30%), natural resources (29%), and IT (28%)*
*Source MOFCOM YE 2005
The Chinese Business Mantra
"Observe;Imitate;
Overtake"
Realities of the Chinese Market (1)
" China is the inevitable superpower, and the only foreseeable one –the West is going to have to deal with China at many levels, and do so constructively
" There’s a lot of money in China – in fact, there are more millionaires numerically (in US$ terms) in China than in the US or all of Europe – even as the “wealthiest” 18 million Chinese average US$ 68,000 annually income and top 400 million Chinese average US$ 1,800 annually
" There are more than 100 million Chinese with money enough to afford and live the lifestyles of the average person in this room
" Chinese companies will likely retain a low cost of manufacturingfor the foreseeable future – 20+ years (China’s manufacturing exports have increased nine-fold to over US$ 440 billion between 1990 – 2005; totals 6% of all global exports)
Realities of the Chinese Market (2)
" Chinese companies lack marketing / brand building expertise, but not tomorrow – Chinese businesses learn fast
" Chinese companies dominate non-specialized manufacturing, but still lack expertise in specialty and custom manufacturing, but not tomorrow –Chinese businesses learn fast
" China is in a severe price war – deep & fast discounting now the norm (began late 2001 and there is no end in sight, even with inflation on the rise)
" China lost between 8% - 13% of its manufacturing to even lower cost markets (’02 – ’05)
" “Serious” Chinese companies must look outside China today to succeed in the middle and long term (succeed both inside and outside China)
" “Serious” Chinese companies will begin to look / are looking for like-minded Western “partners” to go global – and do it together
Impact on the US from Increased Trade with China –It’s ALL About Balance
Increased Trade with China Chinese GDP(higher)
Global Commodity Prices(Higher)
Supply Side Effects on US(long run effects)
Net trade effects(deterioration?)
Prices(lower)
Productivity(higher)
Real Income(higher)
Supply Capacity(higher)
GDP (higher)
GDP (lower)
Employment(lower)
Prices (lower)
Wages(lower)
Interest Rates(lower)
Source: Oxford Economics and The Signal Group – The China Effect: Assessing the Impact on the US Economy of Trade and Investment with China, The China Business Forum 2006
Demand Side Effects on US(short run effects)
Chinese Companies Motivations for Global Expansion
1 2 3 4 5
Seek new markets for growth
Acquire brands, advanced technology, management skills
Diversity risks
Intense competition in domestic market
Obtain production resources
Improve productivity
Respond to macro environment
Obtain overseas funding
Source: IBM Institute for Business Value, 2006
1.5
2.3
2.3
2.8
3.1
3.4
3.8
4.5
The motives for overseas expansion by Chinese companiesare reflected in a recent poll conducted by the IBM Institute forBusiness Value among 60 leading Chinese state-owned (47) and private (13) companies with annual revenues of over USD 1 billion.
1 = Not important 5 = Very important
Chinese Companies – and ALL Companies –Are Pressured to “Go Global”
Chinese companies – like ALL companies in every country around the world – continue to face the
intense pressures of globalization
Sometimes it’s really only a matter of which side of the issue each company is on at any point in time
AND how each company responds
It’s a simple matter of their SURVIVAL, too
Low-Cost,Quality
Manufacturing
AdditionalGrowthCapital
Access toChineseMarket
Access toOther Asian
Markets
Creation ofCompetitive
GlobalCompany
GLOBAL COMPANY SUSTAINABILITY
Chinese enterprises offer US & European firms low-cost manufacturing with increasing high quality, and access to
China and all of Asia enabling – even SMEs – to successfully compete even with multinational competitors
Global Business Integration Strategies: For US / European Enterprises with Chinese Enterprises
! Ratcheting up the value curve has never been so important
BUT, developing new, innovative products and technologies, whileALWAYS necessary, isn’t enough to stay competitive anymore
! Alliances and partnerships must be part of your strategy
BUT, you will have to reassess your need for control of your business, and even redefine your definition of control
! Most business models have to change, especially for SMEs
BUT, you’ll have to get comfortable with strategies based upon leaving your home market in order to protect your home market
Leveraging Globalization to Your Advantage: What to do
Global Business Strategies For US (European) Firms, Including SMEs
Stay “As Is”Export Goods
Partnership /Joint Venture
Be Acquired By ChineseCompany
Acquire ChineseCompany
Business Strategies to Successfully Compete In a Global Economy
Access To:
Low Cost Manufacturing,
China market
Access To:
Low Cost Manufacturing,
China market
Access To:
Low Cost Manufacturing,
China market
HIGH RISK: Creates Competitor
Globalization of your firm increases with lower risk
Dalian Machine Tool Group (China), in 2005 acquires Ingersoll Production Systems (USA)
Benefits of acquisition:
• Dalian gains well-known Ingersoll brand name within the North American, South American, European and Asian machine tool industry
• Dalian gets immediate access to Ingersoll’s comprehensive and well-established global sales and distribution network; US & European management
• Ingersoll’s US employee level rises more than 40% to pre-2001 employment levels, but now with higher value jobs
• Dalian invests big in marketing and new product to expand US market share
• Dalian gets access to build Ingersoll’s sales in China so Dalian can compete more successfully against German, Japanese and Korean machine tool makers
Case Study: Dalian Machine Tool Group
Case Study: Shenyang Machine Tool Group
Shenyang Group (China), Acquires Schiess, a 140-year-old maker of heavy-duty lathes and boring machines (Germany), 2005
Benefits of acquisition:
! Schiess transfers production of smaller machinery to China to take advantage of China’s low-cost labor; increase Shiess margins by 50%+; Shiess market share in increases through improved price competitiveness
! Shiess markets Shenyang’s smaller machines to European markets; Shenyang’s smaller machines quickly gains market share in Europe; Shenyang now expanding acquisition search to US
! Shenyang draws on Schiess’s expertise to produce large equipment for Asian markets; Shenyang quickly gains market share in China
Lacquer Craft (China) Acquires Craftmaster Furniture Group (USA), 2006
Benefits of acquisition:
! well-known, highly-respected US brand name Craftsmaster is widely known for quality and service within the furniture industry; Lacquer Craft gets top brand in the US and Canada
! Lacquer gains Craftsmaster’s expertise in sourcing upholstery raw material and semi-finished products from markets around the world; key competitiveweaknesses of Lacquer Craft prior to Craftmaster acquisition
! Craftmaster’s distinct advantage is ability to add “cut and sew fabrics” and its leather upholstery design and production expertise to Lacquer Craft’s low-cost China production
Case Study: Lacquer Craft
ArvinMeritor forms joint venture with China company (2005) ArvinMeritor Inc. has formed a joint venture with First Auto Works (FAW) Sihuan Axle Brake Group of Changchun, China
Benefits of Joint Venture:
! First Auto Works was founded as China First Automobile Group Corp. in 1953 in a heavy-industry sector in northeast China
! ArvinMeritor's Global Brake Systems business also maintains brake component manufacturing and supply locations in Canada, the U.S., Mexico, Turkey, and Brazil
! JV will produce commercial vehicle foundation air brakes, specifically air disc brakes and automatic slack adjusters (higher technology/value components)
! JV’s new manufacturing facility is planned in China; new facility to produce 90,000 brakes annually for domestic China market, and SE Asia export
Case Study: ArvinMeritor Inc.
Kanawha Scales & Systems (KSS) – Poca, WV (USA)
Benefits of globalizing:
! Chinese orders for KSS’ sophisticated coal-loading machines have grown to one-third of the company’s $50+ million in annual revenue
! In 1986, KSS’s president visited China, six years later the company finally landed its first deal, a $3 million contract to install a coal loading system
! KSS promoted its advanced technology, higher quality and reliability; KSS’ products 2x-3x more expensive than Chinese systems
! KSS now plans to expand its Chinese business including plans to acquire local Chinese competitors
Case Study: Kanawha Scales & Systems
Sharpe Mixers – Seattle, WA (USA)
Benefits of globalizing:
! Since its first order in 2004, Sharpe’s China business has led to a doubling of the company’s sales from $10 million (’04) to $20 million (’06)
! Sharpe Mixers manufactures specialized “absorber mixers” that strip sulfur dioxide from power plant emissions; increasingly tough environmental regulations the plants need equipment like Sharpe’s
! The 30-employee Sharpe company has added additional 10 workers and more production capacity to handle increasing China business
! Sharpe planning Chinese expansion by either acquisition of Chinese competitor or greenfield operations in China to serve local China market
Case Study: Sharpe Mixers
! Globalization forcing ALL businesses to evolve – and do so rapidly
! From “sea to shining sea” – US businesses are protected no more
! “Experience gives you perspective; everything else is just information” –for some businesses, it’s finally time to get a perspective
! The race to the bottom (price) is as important as race to the top (value)
! Alliances and Partnerships Must Be Part of Your Strategy
Business Models Must Change, and then Change Again, and Again …
Darwinism in the New “Flattened World”
! Globalization forcing ALL businesses to evolve – and do so rapidly
! From “sea to shining sea” – US businesses are protected no more
! The biggest private equity firms are investing billions of dollars in China and other emerging markets – growth in these markets is unparalleled in business history – and accessing these markets has never been easier
! The race to the bottom (price) is as important as race to the top (value)
! Alliances and partnerships must be part of your business strategy
Business Models Must Change, and then Change Again, and Again …
Darwinism in the New “Flattened World”
“Business Globalization:
How to Survive the Impact of China and the New Global Economy”
John A. CaslionePresident & CEO
GCS Business Capital
Chicago Shanghai Milan Frankfurt
www.gcsbusinesscapital.com