In the past, Western companies traded technology for market share in emerging Asia. Today, true cooperation is preferred.
Take China for example; change is far more rapid than in mature, advanced economies. With modernization, the reliance on contacts, or guanxi, is being augmented with the global business culture based on contractual obligations.
From cost to cooperation
Typically, companies go abroad seeking resources, markets, efficiencies and strategic assets. In technology industries, Chinese companies often internationalize to acquire strategic assets (brands, sales channels, technology, managerial competences), and to respond to the challenge of foreign multinationals at home.
The mobile communications industry illustrates the high drama of foreign direct investment (FDI) in China. In the 1990s, Chinese equipment manufacturers had no market share in China’s mobile marketplace; in 2001, it was less than 10 percent; in 2003, an extraordinary 55 percent! Focused on building distribution networks that took them even into small cities, local handset brands were able to beat the likes of Motorola, Nokia, Siemens and others.
It was a critical turning point, but not where the story ends. After the rise of the indigenous challengers, foreign multinationals mounted a counter-attack, imitating their challengers. By 2004, they had restored their dominance.
During the past decade or so, similar dramas have been seen in numerous industries. In the first act, the foreign multinationals pioneer the high-volume markets. Then, indigenous challengers respond with imitation and low-cost strategies. In the third act, innovation and more sustainable quality strategies emerged as the keys to success.
Cooperation between Chinese and foreign multinationals mirrors these phases. In the first act, it was boosted by cost considerations. In the second act, imitation strategies reigned. Today, the focus is on true partnerships.
True partnership
In the past, Chinese manufacturers specialized in lower-tech, labor-intensive goods. Now the focus is shifting to high-tech, capital-intensive goods. Concurrently, China’s new innovation policy has been steering low-productivity industries to less prosperous provinces in the mainland.
Low-cost strategies provide short-term benefits, but sustained leadership is inconceivable without innovation, which requires scale capabilities that global multinationals possess.
The boldest Chinese challengers are determined to narrow the “resource gap.” And why shouldn’t they? It is the same logic that drove the challenge of European multinationals in the 1950s and 1960s, Japanese multinationals in the 1970s and 1980s – and, since the 1990s, the rise of Chinese and Indian multinationals.
In China, trading technology for market share is fading into history across industries. As West meets East, cooperation, too, requires more.
Text: Dan Steinbock
Original article published in Kemira’s stakeholder magazine Waterlink 3/2009
Dr Dan Steinbock serves as a research director of international business in the India, China and America Institute.