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Market Entry Strategies of Chinese Companies in Europe

Sergey Filippov and Ying Zhang

International Workshop “Chinese Direct Investment in Europe – Data, Patterns and Strategies (28-29 June 2009, Hamburg)

Presentation Outline
• Background • Literature
– FDI from emerging economies – Strategic Alliances

• • • • •

Analytical Framework Overview Chery Case Conclusions Policy Implications

“North-South” flows. i. FDI spillovers) . a whole stream of research emerged within the framework of “development studies” (e. Buckley and Casson (1976). “North-North” flows . • Later. Hennart (1982).Penrose (1959).g. Caves (1971).e.Firm internationalisation and FDI flows • Internationalisation of US companies and their penetration to Japanese and European markets. as the multinationals from advanced economies started internationalisation to developing countries. Hymer (1976). Vernon (1966).

Goldstein. . 2007. Gammeltoft.FDI flows from the South • The end of the 1990s – early 2000s: the internationalisation of companies from developing / transition / emerging economies. • Bartlett and Ghoshal (2000): companies from developing countries internationalise in order to seize the opportunities abroad even if they do not necessarily have unique ownership advantages based on superior technology or competitive products. their presence not only showed in developing countries (“South-South” flows). 2007. • In order to address their lack of specific competitive advantages the firms from emerging economies invest abroad to take advantage of the new context (Sauvant. Buckley et al. 2008). but in advanced economies too (“South-North” flows). As these companies go global. 2005.

Sources and Destinations of FDI Destination: North Destination: South Source: North North-to-North FDI North-to-South (“down market FDI”) Source: South South-to-North FDI (“up market FDI”) South-to-South FDI (mostly “down market FDI”) Source: Ramamurti and Singh. 2009 .

. • Strategic alliances can be defined as agreements between two or more partners as a cooperative form towards a common goal by sharing necessary resources as well as coordinating activities. – (3) Partners continuously contribute to one or more strategic areas of the alliance. – (2) Partners have control over the alliances and share in the generated advantages.Strategic Alliances • Yoshino and Rangan (1995) define three necessary & sufficient conditions of strategic alliances: – (1) Two or more firms or organisations try to realise a set of common goals they agreed on.

Both sides retain managerial control over their respective companies . efficiency. etc) Strategic Alliances Securing presence on a particular market or realising a specific project through collaboration with a partner Flexibility Very flexible. the alliance agreement ends Managerial control A company is qualified as part of MNC if the HQ has more than 10% of stake in it. market-. Strategic alliances are formed for achieving a specific goal and once this goal is achieved. As a rule. Subsidiaries evolve over time (scope of functions. MNC HQ seeks to retain full control over subsidiary operations. asset-seeking) Subsidiaries established through FDI are part of the long-term strategy of the MNC parent company. Strategic Alliances FDI / Subsidiaries Goals and motives Establishing corporate presence in a particular country with a specific motive (resource-.FDI vs. competence.

that the attention has been drawn to the Chinese companies in Europe. Milelli et al. • A number of studies (Di Minin and Zhang. Filippov and Saebi (2008) coin a term “Europeanisation”. it is only recently. know-how and competence”. meaning “sustained efforts to enter competitive European markets. 2008. 2008. 2009) have identified a new trend whereby Chinese companies increasingly seek to enter the European Union and establish their presence in the Single Market. Nicolas and Thomsen.Chinese companies enter Europe • While the trend of internationalisation of companies from emerging economies and their entry in advanced markets is not entirely new. . to strengthen the presence in Europe with the goal of getting access to superior technologies. • In order to describe this emerging phenomenon.

Strategies of Chinese companies in Europe Western Europe Greenfield investment Establishment of small-scale subsidiaries with basic functions. with the purpose of manufacturing at lower cost than in Western Europe Strategic alliances Chinese companies tend to enter in technology alliances with Western European companies Chinese companies form logistics and marketing alliances that can help them understand the market conditions in Europe and adapt to the European standards and technological requirements . sales representation. such as support to trade. as well subsidiaries engaged in assembly and low-cost manufacturing Acquisition Acquisition of manufacturing units. etc Acquisition of engineering companies possessing strong competence and know-how. Use of this competence not only in the newly established subsidiary but also in other units of the corporate network Eastern Europe Establishment of subsidiaries with basic functions.

Total number of Chinese outward strategic alliances formed worldwide Source: Thompson SDC database. calculated by authors .

Destination of the Chinese outward alliances Source: Thompson SDC database. calculated by authors .

Destinations of Chinese outward alliances in developed world 1989-2008 Source: Thompson SDC database. calculated by authors .

The trend of outward M&A formed in Europe Source: Thompson SDC database. calculated by authors .

calculated by authors .Sectoral distribution of acquisitions in Western Europe 1992-2008 Source: Thompson SDC database.

.Case Study: Chery Automobile Co. • A good example of young generation of Chinese firms that develop rapidly technologically. . fast growing-up and sharp entering into international market. • A young and dynamic private company • The largest independent Chinese auto manufacturer and one of the fastest growing automakers in the world • Internationalisation strategy through international strategic alliances. Ltd. • Advanced without the government encouragement and government financial support. characterised by late starting-up.

Chery had exported to 80 countries and regions. Russia. Indonesia. and Uruguay. • Chery has seven assembly plants in Egypt. car parts and autos in China . • Now it has become China’s top car exporter and the biggest Chinese local automaker.Chery’s Profile • Founded in 1997 with an initial capitalisation of RMB 3. Iran. By 2008.2 billion. Ukraine. • Chery is the only one automaker which embraces its own technology in producing motor engine.

Chery’s global car sales .

actively enlarging alliance network.Chery’s strategy — catching up via collaboration “Transitions due to frustrations” • Early stage: struggled in no market for motor engine – – – – – – – – – Aim to manufacture car under own brand. Collaborate with European and Taiwanese companies Consequences: Chery’s engineers absorbed basic skills to design car and motor-engines. Consequences: East Europe Market. Aim to absorb more advanced expertise in car manufacturing Collaborate with professional technological consultant companies from developed countries Consequences: successfully transfer to a car designer and immediately dominate domestic market Aim to improve technological capability and access to North America and West Europe markets Going abroad. advanced R&D level • Mid stage: struggled in poor expertise • Last stage: weak technological capability .

Chery’s conservative strategy in Europeanisation • Aim to enter advanced market and achieve higher product quality as well as reduce entering risk • Chery attempts to penetrate market and incubate brand awareness through international alliances • Indirectly nurturing Western European market through directly accessing the neighbouring markets • Collaborate with local companies in terms of marketing. logistics. and new product development so as to understand market and improve capacity in product development • Keeping products under own brands in process of Europeanization .

Chery’s catch-up model Technology Technology Alliances Alliances Value Innovation Value Innovation OBM & & OBM Globalisation Globalisation Market Penetration Market Penetration Brand Awareness Brand Awareness .

• Internationalisation of Chinese firms is a gradual process. They offer a win-win situation for both partners as well for the governments. or tacit and codified knowledge. . We underline the role played by this form of business activity in the strategies of Chinese companies. – The advantage of this integrated strategy is to leave sufficient time for companies from emerging economies to learn and absorb skills and technology.Conclusions and findings • FDI inflows from emerging economies have greatly overshadowed the popularity of strategic alliances among Chinese firms. whereby they integrate technology and marketing/logistics alliances in an optimal way. – Strategic alliances play a vital role in this integrated strategy.

Limitation and future research • Limitations due to the scarcity of data: – Thompson Reuters SDC – We strongly call for establishment of a comprehensive database that focuses specifically on Sino-Foreign alliances • Complementary or substitution effects of strategic alliances and FDI? • Mechanisms and magnitudes of knowledge and competence flows from acquired European companies to the HQ in China (also. comparison to BRICS)? .

political leverage by home governments. Germany Trade & Invest) • “Invest in Europe” initiative • Strategic alliance may be better received. alleged dubious managerial practices) – An old problem of “good” and “bad” FDI • Nevertheless. investment promotion agencies of many European countries particularly target these investments (e.g.Policy implications and reflections • Acquisition of assets in Europe by companies from emerging economies has stirred up controversies for a variety of reasons (e. if managed properly.g. as they offer an alternative means of internationalisation for emerging multinationals. and. may lead to a win-win situation .

etc as a destination for investment.P. China) first think in terms of the continent. then in terms of the region. city. FR (3-5 June 2009). 7th World Investment Conference in La Baule.S. “Invest in Europe” initiative – – – – Foreign investors (from emerging economies. There is a clear need to promote Europe as a whole “Invest in France” and “Germany Trade & Invest” are launching a joint project “Invest in Europe” Received moral support from the European Commission President . Intense cooperation between Pays de la Loire and the Province of Shandong 2. Two points relevant for our workshop: 1.