Companies need to think globally earlier, says academic
Chinese businesses should start planning the path to globalization as they develop their business model to make use of market diversification and global perspective, said a professor and entrepreneur in residence at the Judge Business School at the University of Cambridge.
The international expansion of a wave of such mediumsize Chinese firms may be the next trend connecting Chinese investment with global markets, as well as helping Chinese firms to move up the value chain, Alan Barrell said.
The largest Chinese firms are already becoming leaders in their fields internationally, but China itself needs more such firms, said Barrell, who is heavily involved in leadership, management and entrepreneurial education in China and at Cambridge with Chinese visiting groups.
Companies that Barrell considers to be industry leaders include the Chinese telecommunications firm Huawei and the electronics product firm Lenovo, both of which have a global sales presence.
Barrell said these companies represent the old model of Chinese firms’ international expansion, which follows the strategy of looking for international markets only after they are big enough to saturate the domestic market.
This model is not as effective now that globalization means that foreign firms can enter China and pose strong alternatives to these medium-sized firms if they are not competitive enough, he said, adding that one important element of staying competitive is internationalization.
“Many midsize firms, especially in the healthcare, communication and technology sectors, can expand by going international. Even though there is excess capacity in China, there are still needs in different countries, and they can create different products for different countries.”
Another key reason for Chinese firms to internationalize is the availability of innovation and creativity in many mature markets such as the United Kingdom, which Chinese firms can access if they are in those markets. In the process, they can facilitate China’s structural transformation into a highervalue and more service-based economy.
Barrell said Chinese business leaders often ask him where China should go next. “I say innovation. Innovation is what will take China forward in the next 20 years. China needs more of its own brands, and I see China emerging into a new age of inventiveness and creativity.”
In Barrell’s view, this innovation is being demonstrated not only by world-leading Chinese firms like Huawei, but also by new startup firms in China that bring much needed vitality to the economy.
Huawei, started in Shenzhen in 1987, mainly as an original equipment manufacturer for Western companies, worked hard to develop its own brand. The company now sells products and services in more than 140 countries, and in 2012 it overtook Ericsson to become the largest telecom equipment manufacturer in the world.
Core to its strategy is dedication to research and development, with a commitment to reinvest 10 percent of annual revenue in R&D and to localize R&D work globally so that it can access the best talent and expertise of each country and region it is in.
“Huawei has studied the future needs of the telecommunications industry,” Barrell said. Today Huawei serves 45 of the world’s 50 largest telecom operators.
Another highly innovative Chinese firm is Alibaba, an e-commerce company founded in Hangzhou in 1999. Initially a business-to-business portal to connect Chinese manufacturers with overseas buyers, Alibaba has since grown into the main e-commerce company in China. It made a name for itself last year when it listed on the New York Stock Exchange as the largest global IPO ever, at $25 billion.
Barrell said what distinguishes Alibaba from other e-commerce firms is the company’s ability to venture into other fields, such as lending to small and medium-sized firms.
Alibaba’s financial arm, known as Ant Financial, makes small loans, under 1 million yuan ($154,000) to credit-starved companies left out by China’s banking system, which often favors bigger companies and State-owned enterprises.
Many of the small businesses receiving credit from Ant Financial are already Alibaba customers, so Alibaba can judge their credit history by using customer data, including their shopping history, utility bills, work and home addresses and contact information.
Such a business model is considered highly innovative, as it allows a certain segment of the Chinese population without a credit history to financing. More recently, Ant Financial opened a cloudbased lending bank, Mybank, which offers loans of up to 5 million yuan. That business model, Barrell said, helps smaller companies grow.
When big companies downsize during a recession, the creation of small firms plays a big role in the recovery, he said. But in China, banks generally do not lend to young firms, making alternative lending sources such as Ant Financial very important.
Another key source of innovation emerging in China is small businesses run by young graduates, Barrell said. One example of a business that impressed him is a firm called Ufenqi, which gives loans to students to buy electronic goods, he said.
It has a pool of investors who provide peer-to-peer loans, with Ufenqi receiving a commission. The company, founded last year, has received tens of millions of yuan in investment, including funds from Xu Xiaoping, one of China’s foremost angel investors and founder of ZhenFund.
Ufenqi’s staff does rigorous checks on the students to ascertain their ability to pay back the loans, and those approved can make payments in installments, which reduces the financial burden. The firm has customers in more than 40 cities in China, including more than 800 college campuses.
Barrell said such a model takes care of a market need in an innovative way. Ufenqi is representative of small firms established by China’s new generation of entrepreneurs, who take a global perspective from the very beginning.
“In China there is a spirit of adventure in new technology and new ways of doing things. There are many young Chinese people educated overseas, and they bring the creativity back to China.”
In addition, Barrell said he feels Chinese people have a strong entrepreneurial spirit because they aspire to be their own bosses, and they are highly dedicated and have a strong work ethic. These qualities are a strong force in pushing forward China’s innovation.
Barrell, who has dealt with many Chinese students in Cambridge over the years, said his interest in the Chinese economy developed through such contact which has given him a window into China.
The Chinese government should invest more in providing help to medium-size companies, he said. These firms may not have the financial ability to expand internationally, but their growth could benefit both the companies and the country as a whole.
“The world market is the market. If companies like Huawei had not invested properly when they were smaller, they could not be a world leader, and China needs to build more world leaders and create more brands.”