The building of world-class Chinese firm: Key elements

By | April 11, 2014

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1.1 Role of the state

Even though as mentioned above, the government has been trying hard to change its function to be a service oriented government provides more service than plans, but in the issue of creation of Chinese world class firm, the government should provide protection to those companies that are ambitious to be world class firms. And to the Chinese government, the creation of world class firm is an important step in China’s rising strategy. Moreover a world class firm means more GDP growth which is desperately desired by the local government. Take the 2002-2009 most valuable Chinese brand (Huang 2009), Haier as an example.

Haier, with 29 manufacturing plants, 9 comprehensive R&D centers and 19 trading companies in the oversea market with over 60,000 employees working all around the world (Unknown 2008), but started by a collectively owned small joint-stock company which kept losing money before the current CEO Zhang Ruimin came into power. The major difference between a state owned enterprise and a collectively owned enterprise is that the government will not intervene the operation of the collectively owned company, and the government also will not provide financial help to the collectively owned company. That’s why when at the very beginning Zhang Ruimin decided to invest on the fridge manufacturing, the RMB 17 million investments totally came from the bank loan.

By focusing on the quality of the product, Haier began to demonstrate its profitability in the electronic household appliances industry in the late 1980s, then the government came in with powerful support that help speed up Haier’s expansion as an global competitor in the industry. The first kind of support from the local government is the offer of free land usage. For example, the Qingdao government had provided the land usage in the Huangdao Industrial Development Zone for free and even asks the original factory that located in this industrial development zone to move to another place for Haier’s move in (Yang 2002). Such kind of offer shows the government’s preference to help the leading companies. The second kind of support from the government is the free appropriation of state owned enterprises. At the time when the government started to reform the state owned enterprises, many were privatized and some of them were directly appropriated to the leading private enterprises and Haier was the one of the benefactors. By acquiring these state owned enterprises Haier obtained large sum of assets especially the land property, and when later the land price raised greatly the asset that Haier had also increased dramatically. Another Qingdao house hold electronic appliance manufacturer “Hisense” had also benefited from such kind of free appropriation. For example when Hisense first get the appropriation of a state owned enterprise that was originally under the Qingdao Mechanical & Electronic Bureau, after Hisense settled the employees it immediately obtained large amount of land in very low price which assist Hisense to later be the No.1 real estate developer in Qingdao city. The third kind of governmental support is about the bank loans. Usually a private enterprise has to get the loan on mortgage but for the leading company like Haier, it can obtain the bank loan without a mortgage because of the government support. The fourth kind of help is the simplification of governmental procedures. As we know doing business in China also means getting approval and permits from all kinds of governmental department from now and then, but such kind of complicated procedures could mostly be simplified when come to Haier. For example, companies need to make clearance to the custom before exporting their goods to over sea markets but Haier can export first and then make the clearance. Such priority in most case is enjoyed only by the state owned enterprises. This is why even many of the Qingdao people today still think that Haier is a state owned company.

In some perspectives, a Chinese private company could become competitive in its industry on its own but it has to obtain the support from the government in order to grow in such a fast speed like Haier. Without such powerful supports, to reach such a big scale in a short term would be quite difficult.

1.2 Financial system

As the domestic companies want to upgrade to world class firms, huge investment from the financial system is of great critical significance. But compared to their international competitors from the advanced markets, the rising and ambitious companies from the emerging markets are a lot difficult to get enough of resource such as risk capital under the similar circumstances. Under such conditions, the ability to mobilize as much resource as possible will be very important to the growth of the companies including the domestic private and state financial resource and international capital as well. Let’s look at the recent attractive case of the Hangzhou based Geely’s acquisition of one of European’s most famous auto mobile brands Volvo which is based on Sweden.

Set up in 1986 Geely is now one of the top ten auto manufacturers by its fastest growth rate in the Chinese auto industry since first launching into the auto manufacturing in1997. Headquartered in Hangzhou, Zhejiang province, Geely have 6 car assembly lines and power train manufacturing plants in 3 different provinces of China with an estimated 300,000 annual capacity (Unknown 2010). The one to be acquired, Volvo Corporation is one of the strongest brands, founded in 1927 in Gothenburg of Sweden with an output of 334,808 in 2009 (Jian 2009). In this acquisition, Geely paid USD 1.8 billion to Ford to buy 100 percent of the share Volvo. Including the 900 million to keep Volvo running, the total amount needed would reach USD 2.7 billion to make this deal possible. But the total asset that Geely has is about 2 USD billion (RMB 13.3 billion) so Geely had to borrow a lot of money to pay this deal.

The source of this USD 2.7 billion is very complicated. Half of the money is from abroad and the other half is from the domestic. Half of the domestic money that is 25% of the 2.7 billion is from inside the company, this amount of money not only come from the Geely’s profit but also comes from an early investment by Goldman Sachs Group in 2009. Another half of the domestic money is the loans from Bank of China, China Construction Bank, Export Import Bank of China and some local governments. Take note that Bank of China and China Construction Bank are listed firms but the government control the major share of them, and Export Import Bank of China is a state owned enterprise set up to provide loans to companies according to the government’s policies. More over in China many cities have provided loan or investment offer to Geely in the condition that Geely set up the new Volvo plan in these cities. On the other hand about the fund from abroad, the source is also from many parties. The government of Gothenburg where Volvo is headquartered and Belgium government together provided warrant to Geely to get the loan from the second biggest bank in Sweden; anther investment came from the European Investment bank, and it is said that some unknown European and American banks also offer loans to Geely (Unknown 2010).

It’s still too early to make a judgment about whether the acquisition will be successful or not, but speaking from angle of the financial system, no matter Geely will fulfill its promise to turn Volvo from deficit to making profits or not the capital transaction within this acquisition is successful. And this has set up a good example for the Chinese companies that it is possible that they could also become a world class by utilizing the capital from various resources. Moreover this case again proves that the Chinese government should provide more help especially in finance to help the relatively weak business to transform to world class firms because the credit offered to the company will increase its evaluation by the private finance such as the venture capital.

1.3 Labor system

Let’s look at the human resources management strategies of the leading Chinese firms through the case analysis of Lenovo (formerly known as Legend). Lenovo Group was created in 1984 by the Chinese Academy of Sciences with an investment of RMB 200, 000 and 11 technicians and one of them is Liu Chuanzhi who was the founder of the company with the dream to transform their research fruit into products. In 2003 by the launch of the completely innovative connecting application technology, Lenovo established its position in the period of 3C. With the breakthrough and innovation in the leading technologies of the personal computer, in 2006 Lenovo had topped the market share of the domestic personal computer market for 10 consecutive years. Lenovo makes remarkable contribution to the advancement of the personal computer technology; it built up the research and development centers in Beijing of China, Tokyo of Japan and Raleigh of the United States and registered more than 2000 copyrights. In 2004 Lenovo became the first Chinese company to be a global partner of the International Olympic Committee. In this year by buying the PC department of IBM, Lenovo established itself as one of the world’s three largest PC manufactures with high growth rate in recent years (Unknown 2009).

Lenovo has its own special human resource management measures. The first measure is the task oriented assessments. The assessments include two levels: one is the assessments by departments to see whether the departments have finished the goals that had been set previously and the performance of the departments will directly influence of the performance of the departmental managers, the other level is the assessments to the individual employees. The assessment criteria to individuals include a, a-, b+, b-, c, and d and this assessment is based largely on the quantitative data of the employees like the (Key Performance Index) KPI. If the personal assessments for a employees are ranked the last compared to the peers for two consecutive years, there will be an offer of a chance of job change, if the performance is still not within expectation the worst employee will be fired.

In order to motivate the employees Lenovo built up attractive salary and reward system to remain competitive in the labor market to its major competitors. One human resource management strategy that is used in China is the higher standard of salary and welfare. Lenovo does not use the salary standard and welfare standard that are used by the Chinese competitors, it tries to raise its standards according to the foreign companies and become more attractive to the domestic talents. In order to do so, the stock option is provided to those who had entered the company for more than 1 year and abroad holiday for those had worked for 4 years. (Chen 2005) Other than monetary motivations, Lenovo also offers training opportunities to the employees and some of the training programs are even enforceable. Because of the lack of experience in international human resource management, Lenovo even employed the world famous consulting firm Mckinsey to make a three years’ human resource management plan for the company.

1.4 Social and cultural conventions

With the fast changing social and cultural conventions in China, the leading Chinese firms have also made changes in their corporate cultural building to adapt to the business practices. Continue with the case study of Lenovo to see the corporate changes in the Chinese leading companies.

In the early 1990s when the company was still struggle to survive in the competitive market the corporate culture was called as “survival culture”, employees were told to focus on performance rather than hard work and turn the 5% possibility into 100%, during this term of period little human factor is involved in the corporate culture content as the company is striving for its room of living and breaking the record of sale seems to be the most important task. The survival culture kept reminding the employees of the risks and failure that the company may have if employees would not reach the goals.

When the company later established in the market, the “survival culture” was changed to a so called “strict culture”, the tasks of strict culture were to emphasize on responsibility, better control, and efficiency in a more rule based internal business system. When the company grew even bigger the company began to pay attention to the humanized culture building and brought forward the “family culture” into the corporate culture. And some key words are: appreciation, family, trust and equality. In Liu Chuanzhi’s words, Lenovo needs to create “humid” air. The family culture aims at reducing the frictions when the company was making transition from the old management team to the new one. And also the cultural change was needed with its strategy changed from product orientation to service focus. In the service industry smiling is as important as the efficiency.

Another motivation that drives the company to change to the “family culture” was the culture integration because of the acquisition of IBM’s personal computer business. There had been suspicions that the corporate culture differences that between these companies may obsolete this acquisition and make it a failure. In order to smooth such integration difficulties, Lenovo had adjusted its culture to be more elastic and adaptable by adding the humanized factor into its corporate culture. The attitude of “honesty, respect, compromise” is hold by Lenovo towards the new company culture after the acquisition. Lenovo even moved the headquarter to New York and make Lenovo more close to the foreign workers psychologically.

2. Conclusion

Some of the best Chinese companies, Lenovo, Haier, Geely are analyzed in different perspectives of their achievement and difficulties they have under the national business system frame work. They are writing the history of the Chinese firms’ advancement to the world class firm. But some business practices that the government or the enterprise use to create world class firm is not without problems.

Firstly, the government is involved too much in the market economy. It is true that the government could play an important role in help the companies with promising future to achieve their dreams to become world class firms. But in my opinion, in a normal market economy, what the government could do best is to keep the market functioning and create an equal and rule based system in which companies as the main players could get the resource through the normal ways rather than by building up good relationship with the government. Just like the Haier’s case, when it first started the fridge business the government would say nothing about it but when it did make remarkable achievement the government came in with a lot of good offers which are more needed by those that still struggling in the industry rather than the already successful Haier.

Secondly talking about the Lenovo case, it is understanding that Lenovo want to have a better cultural and practical integration with the IBM personal computer sector which is located in the United States, so it move its headquarter to New York city. But the problem is Lenovo still a Chinese company or it will become a US company. Some will argue that for multinational companies border would no longer be an issue and should be forgotten. But if it is not an issue why do we need to talk about Chinese world class firm, and why don’t we just talk about world capitalization process in the Chinese market. So it does matters. A compromising strategy could be use when in conflict with different culture, but for a Chinese class firms, it should not compromise its corporate culture because compromises would just make the Chinese employees feel that they are discriminated in a Chinese firm which is ridiculous. The Chinese people have done too many silly things like this. We hold a marvelous Olympic Games with many of our fellow still live a poor life, our state owned companies hand out large amount of divides to the US shareholders that buy the stocks but do not give a coin to the domestic shareholders, the government bought a lot of the US bonds with our domestic companies still get the loan from the under market.

1.1 Role of the state

Even though as mentioned above, the government has been trying hard to change its function to be a service oriented government provides more service than plans, but in the issue of creation of Chinese world class firm, the government should provide protection to those companies that are ambitious to be world class firms. And to the Chinese government, the creation of world class firm is an important step in China’s rising strategy. Moreover a world class firm means more GDP growth which is desperately desired by the local government. Take the 2002-2009 most valuable Chinese brand (Huang 2009), Haier as an example.

Haier, with 29 manufacturing plants, 9 comprehensive R&D centers and 19 trading companies in the oversea market with over 60,000 employees working all around the world (Unknown 2008), but started by a collectively owned small joint-stock company which kept losing money before the current CEO Zhang Ruimin came into power. The major difference between a state owned enterprise and a collectively owned enterprise is that the government will not intervene the operation of the collectively owned company, and the government also will not provide financial help to the collectively owned company. That’s why when at the very beginning Zhang Ruimin decided to invest on the fridge manufacturing, the RMB 17 million investments totally came from the bank loan.

By focusing on the quality of the product, Haier began to demonstrate its profitability in the electronic household appliances industry in the late 1980s, then the government came in with powerful support that help speed up Haier’s expansion as an global competitor in the industry. The first kind of support from the local government is the offer of free land usage. For example, the Qingdao government had provided the land usage in the Huangdao Industrial Development Zone for free and even asks the original factory that located in this industrial development zone to move to another place for Haier’s move in (Yang 2002). Such kind of offer shows the government’s preference to help the leading companies. The second kind of support from the government is the free appropriation of state owned enterprises. At the time when the government started to reform the state owned enterprises, many were privatized and some of them were directly appropriated to the leading private enterprises and Haier was the one of the benefactors. By acquiring these state owned enterprises Haier obtained large sum of assets especially the land property, and when later the land price raised greatly the asset that Haier had also increased dramatically. Another Qingdao house hold electronic appliance manufacturer “Hisense” had also benefited from such kind of free appropriation. For example when Hisense first get the appropriation of a state owned enterprise that was originally under the Qingdao Mechanical & Electronic Bureau, after Hisense settled the employees it immediately obtained large amount of land in very low price which assist Hisense to later be the No.1 real estate developer in Qingdao city. The third kind of governmental support is about the bank loans. Usually a private enterprise has to get the loan on mortgage but for the leading company like Haier, it can obtain the bank loan without a mortgage because of the government support. The fourth kind of help is the simplification of governmental procedures. As we know doing business in China also means getting approval and permits from all kinds of governmental department from now and then, but such kind of complicated procedures could mostly be simplified when come to Haier. For example, companies need to make clearance to the custom before exporting their goods to over sea markets but Haier can export first and then make the clearance. Such priority in most case is enjoyed only by the state owned enterprises. This is why even many of the Qingdao people today still think that Haier is a state owned company.

In some perspectives, a Chinese private company could become competitive in its industry on its own but it has to obtain the support from the government in order to grow in such a fast speed like Haier. Without such powerful supports, to reach such a big scale in a short term would be quite difficult.

1.2 Financial system

As the domestic companies want to upgrade to world class firms, huge investment from the financial system is of great critical significance. But compared to their international competitors from the advanced markets, the rising and ambitious companies from the emerging markets are a lot difficult to get enough of resource such as risk capital under the similar circumstances. Under such conditions, the ability to mobilize as much resource as possible will be very important to the growth of the companies including the domestic private and state financial resource and international capital as well. Let’s look at the recent attractive case of the Hangzhou based Geely’s acquisition of one of European’s most famous auto mobile brands Volvo which is based on Sweden.

Set up in 1986 Geely is now one of the top ten auto manufacturers by its fastest growth rate in the Chinese auto industry since first launching into the auto manufacturing in1997. Headquartered in Hangzhou, Zhejiang province, Geely have 6 car assembly lines and power train manufacturing plants in 3 different provinces of China with an estimated 300,000 annual capacity (Unknown 2010). The one to be acquired, Volvo Corporation is one of the strongest brands, founded in 1927 in Gothenburg of Sweden with an output of 334,808 in 2009 (Jian 2009). In this acquisition, Geely paid USD 1.8 billion to Ford to buy 100 percent of the share Volvo. Including the 900 million to keep Volvo running, the total amount needed would reach USD 2.7 billion to make this deal possible. But the total asset that Geely has is about 2 USD billion (RMB 13.3 billion) so Geely had to borrow a lot of money to pay this deal.

The source of this USD 2.7 billion is very complicated. Half of the money is from abroad and the other half is from the domestic. Half of the domestic money that is 25% of the 2.7 billion is from inside the company, this amount of money not only come from the Geely’s profit but also comes from an early investment by Goldman Sachs Group in 2009. Another half of the domestic money is the loans from Bank of China, China Construction Bank, Export Import Bank of China and some local governments. Take note that Bank of China and China Construction Bank are listed firms but the government control the major share of them, and Export Import Bank of China is a state owned enterprise set up to provide loans to companies according to the government’s policies. More over in China many cities have provided loan or investment offer to Geely in the condition that Geely set up the new Volvo plan in these cities. On the other hand about the fund from abroad, the source is also from many parties. The government of Gothenburg where Volvo is headquartered and Belgium government together provided warrant to Geely to get the loan from the second biggest bank in Sweden; anther investment came from the European Investment bank, and it is said that some unknown European and American banks also offer loans to Geely (Unknown 2010).

It’s still too early to make a judgment about whether the acquisition will be successful or not, but speaking from angle of the financial system, no matter Geely will fulfill its promise to turn Volvo from deficit to making profits or not the capital transaction within this acquisition is successful. And this has set up a good example for the Chinese companies that it is possible that they could also become a world class by utilizing the capital from various resources. Moreover this case again proves that the Chinese government should provide more help especially in finance to help the relatively weak business to transform to world class firms because the credit offered to the company will increase its evaluation by the private finance such as the venture capital.

1.3 Labor system

Let’s look at the human resources management strategies of the leading Chinese firms through the case analysis of Lenovo (formerly known as Legend). Lenovo Group was created in 1984 by the Chinese Academy of Sciences with an investment of RMB 200, 000 and 11 technicians and one of them is Liu Chuanzhi who was the founder of the company with the dream to transform their research fruit into products. In 2003 by the launch of the completely innovative connecting application technology, Lenovo established its position in the period of 3C. With the breakthrough and innovation in the leading technologies of the personal computer, in 2006 Lenovo had topped the market share of the domestic personal computer market for 10 consecutive years. Lenovo makes remarkable contribution to the advancement of the personal computer technology; it built up the research and development centers in Beijing of China, Tokyo of Japan and Raleigh of the United States and registered more than 2000 copyrights. In 2004 Lenovo became the first Chinese company to be a global partner of the International Olympic Committee. In this year by buying the PC department of IBM, Lenovo established itself as one of the world’s three largest PC manufactures with high growth rate in recent years (Unknown 2009).

Lenovo has its own special human resource management measures. The first measure is the task oriented assessments. The assessments include two levels: one is the assessments by departments to see whether the departments have finished the goals that had been set previously and the performance of the departments will directly influence of the performance of the departmental managers, the other level is the assessments to the individual employees. The assessment criteria to individuals include a, a-, b+, b-, c, and d and this assessment is based largely on the quantitative data of the employees like the (Key Performance Index) KPI. If the personal assessments for a employees are ranked the last compared to the peers for two consecutive years, there will be an offer of a chance of job change, if the performance is still not within expectation the worst employee will be fired.

In order to motivate the employees Lenovo built up attractive salary and reward system to remain competitive in the labor market to its major competitors. One human resource management strategy that is used in China is the higher standard of salary and welfare. Lenovo does not use the salary standard and welfare standard that are used by the Chinese competitors, it tries to raise its standards according to the foreign companies and become more attractive to the domestic talents. In order to do so, the stock option is provided to those who had entered the company for more than 1 year and abroad holiday for those had worked for 4 years. (Chen 2005) Other than monetary motivations, Lenovo also offers training opportunities to the employees and some of the training programs are even enforceable. Because of the lack of experience in international human resource management, Lenovo even employed the world famous consulting firm Mckinsey to make a three years’ human resource management plan for the company.

1.4 Social and cultural conventions

With the fast changing social and cultural conventions in China, the leading Chinese firms have also made changes in their corporate cultural building to adapt to the business practices. Continue with the case study of Lenovo to see the corporate changes in the Chinese leading companies.

In the early 1990s when the company was still struggle to survive in the competitive market the corporate culture was called as “survival culture”, employees were told to focus on performance rather than hard work and turn the 5% possibility into 100%, during this term of period little human factor is involved in the corporate culture content as the company is striving for its room of living and breaking the record of sale seems to be the most important task. The survival culture kept reminding the employees of the risks and failure that the company may have if employees would not reach the goals.

When the company later established in the market, the “survival culture” was changed to a so called “strict culture”, the tasks of strict culture were to emphasize on responsibility, better control, and efficiency in a more rule based internal business system. When the company grew even bigger the company began to pay attention to the humanized culture building and brought forward the “family culture” into the corporate culture. And some key words are: appreciation, family, trust and equality. In Liu Chuanzhi’s words, Lenovo needs to create “humid” air. The family culture aims at reducing the frictions when the company was making transition from the old management team to the new one. And also the cultural change was needed with its strategy changed from product orientation to service focus. In the service industry smiling is as important as the efficiency.

Another motivation that drives the company to change to the “family culture” was the culture integration because of the acquisition of IBM’s personal computer business. There had been suspicions that the corporate culture differences that between these companies may obsolete this acquisition and make it a failure. In order to smooth such integration difficulties, Lenovo had adjusted its culture to be more elastic and adaptable by adding the humanized factor into its corporate culture. The attitude of “honesty, respect, compromise” is hold by Lenovo towards the new company culture after the acquisition. Lenovo even moved the headquarter to New York and make Lenovo more close to the foreign workers psychologically.

2. Conclusion

Some of the best Chinese companies, Lenovo, Haier, Geely are analyzed in different perspectives of their achievement and difficulties they have under the national business system frame work. They are writing the history of the Chinese firms’ advancement to the world class firm. But some business practices that the government or the enterprise use to create world class firm is not without problems.

Firstly, the government is involved too much in the market economy. It is true that the government could play an important role in help the companies with promising future to achieve their dreams to become world class firms. But in my opinion, in a normal market economy, what the government could do best is to keep the market functioning and create an equal and rule based system in which companies as the main players could get the resource through the normal ways rather than by building up good relationship with the government. Just like the Haier’s case, when it first started the fridge business the government would say nothing about it but when it did make remarkable achievement the government came in with a lot of good offers which are more needed by those that still struggling in the industry rather than the already successful Haier.

Secondly talking about the Lenovo case, it is understanding that Lenovo want to have a better cultural and practical integration with the IBM personal computer sector which is located in the United States, so it move its headquarter to New York city. But the problem is Lenovo still a Chinese company or it will become a US company. Some will argue that for multinational companies border would no longer be an issue and should be forgotten. But if it is not an issue why do we need to talk about Chinese world class firm, and why don’t we just talk about world capitalization process in the Chinese market. So it does matters. A compromising strategy could be use when in conflict with different culture, but for a Chinese class firms, it should not compromise its corporate culture because compromises would just make the Chinese employees feel that they are discriminated in a Chinese firm which is ridiculous. The Chinese people have done too many silly things like this. We hold a marvelous Olympic Games with many of our fellow still live a poor life, our state owned companies hand out large amount of divides to the US shareholders that buy the stocks but do not give a coin to the domestic shareholders, the government bought a lot of the US bonds with our domestic companies still get the loan from the under market.