China Goes Out
In the late 1990s, the Chinese government initiated the Go Out policy, an effort to encourage corporate China to make investments abroad and secure resources and technology in overseas markets. This initiative gave birth to a new class of companies, the Chinese Globalizers. The World Economic Forum (WEF), in collaboration with Strategy& (a global team of practical strategists formed when the firm formerly known as Booz & Company combined with PwC), identified the best corporate outperformers in Emerging Best Practices of Chinese Globalizers: Develop the Innovation Model.
Despite the global economic and financial crises of recent years, corporate China continues its push for globalization. Empirical data indicates that the country’s outward foreign direct investment (FDI) has increased significantly over the past decade, reaching $108 billion in 2013 (the latest data available for the survey).
The six-year compound annual growth rate (CAGR) in outward FDI reached 14% between 2008 and 2013, the highest among the world’s major economies. The strongest growth rate over that period appears in North America and Europe, reflecting corporate China’s recent interest in expanding into developed regions. This is evidence of a clear incremental trend that – beyond the traditional interest in the energy and manufacturing sectors – an increasing number of Chinese companies have been seeking investment opportunities in high value-added industries, pursuing new technologies and talent, and taking on mergers and acquisitions with overseas companies to enhance their innovation capabilities and promote sustainable development.
In 2013, China’s trading capacity in high value-added industries had reached $27.6 billion, more than quadruple that of 2005. Naturally, US high-tech companies have become coveted targets, as evidenced by the acquisition of Motorola’s smartphone business by Lenovo and the investment in Tango Me, a start-up focused on social-network site services, by Alibaba. Significant innovation expansion has also been seen in developing regions, such as Latin America.
Innovation is therefore becoming increasingly important in the globalization development of corporate China, and, even more importantly, is emerging as a strategic success factor for its globalizers. Comprehensive research shows that the Chinese globalization champions are better innovators than other ‘going out’ companies. The area in which they truly outpace their peers – where they are really able to make a difference – is in their ability to systematically tackle various operational challenges in the globalization development process.
Follow the Leaders
That said, what lessons can be drawn from the top Chinese globalizers? The research shows four major steps the champions have taken:
1. Make innovation a strategic element of globalization efforts
Nearly half of the surveyed champions make innovation their first strategic priority, ranking it much higher than do other globalizers. In many of these companies, especially in those whose founders have a technical background, innovation not only serves as a crucial part of their overseas strategy, but is also a part of their core DNA, attracting the attention of corporate leadership and being promoted throughout the company. These companies are not only innovative in terms of their products, but also in services, technologies, and business models (including management processes and governance), both domestically and overseas.
For example, Haier Group has made business-model innovation a key theme over the past few years, as has Neusoft Corporation, which also focuses on innovation in technology and products. A new medical platform that Neusoft has recently begun to promote represents not only simple IT technology innovation, but also a new model of cooperative medical service. Neusoft is building this online platform across China to connect thousands of grassroots medical institutions, hundreds of large hospitals, and citizens to develop a medical service ecosystem.
2. Tailor innovation strategy to meet global challenges
In today’s evolving and generally unpredictable overseas business environment, tailoring an overseas innovation strategy is necessary for globalization success. Chinese globalizers often face somewhat different innovation challenges in their domestic market than overseas. To meet these challenges and satisfy regional customer needs, diverging innovation strategies must be adopted.
3. Balance polarities between overseas and domestic innovation operations
Developing an appropriate innovation strategy alone does not ensure the success of a Chinese globalizer. The comprehensive research shows that companies in the same industry may pursue a similar innovation strategy but obtain quite different results. Senior executives interviewed at champion companies repeatedly stated that without a feasible implementation plan for innovation strategies, innovation is nothing more than an empty slogan that cannot be carried out effectively within the company.
Innovative Chinese globalization champions tend to take the following steps:
Develop formal and structured innovation processes and systems
Formal processes, with their underlying procedures and business rules, allow the institutionalization of clear operating principles and guidelines across an organization. Innovative globalizers must nonetheless decide whether to standardize the innovation processes in their overseas operations or make them flexible and, if standardized, where to fully standardize and where to allow some flexibility.
Senior executives from a number of multinational corporations (MNCs) mention that Chinese companies’ traditional ‘trial and error’ attitude toward innovation often helps them adapt quickly to market changes, but at the same time creates considerable risk in overseas innovation. The standardization of innovation procedures is therefore one of the most important issues Chinese companies face. In fact, the results of the survey indicate that the champions have a significantly higher degree of standardization in innovation procedures than do other Chinese globalizers.
China’s leading globalizer is Huawei, an ICT solutions provider that has created an original product development process that has become a crucial tool in managing the company’s global R&D system. A unified standard for all Huawei software developers and a common language for the company’s entire R&D staff were also promoted. By standardizing its development process and management tools, Huawei has been able to conduct R&D simultaneously in the Indian, US, Swedish, and Russian offices; in addition, using a scientific management approach has made it possible for the company to manage and coordinate R&D institutions effectively around the world.
Establish local innovation teams
For a global company, people are one of the most important factors for managing the tensions between home country and host country. All of the senior executives interviewed from global MNCs and Chinese companies stressed that talent plays an important role in any company’s globalization development. Yet nearly half of the Chinese globalizers surveyed still have local employee ratios of less than 5%. In contrast, the champions have much higher localization rates in overseas employment (50% or more) than their peers.
A striking example of employment localization comes from Perfect World, where many of the overseas teams are made up entirely of local talent, with the exception being only one or two senior executives sent from the company’s headquarters in China.
Empower and entrust overseas innovation teams
Governance is essentially the art of balancing control and empowerment. A successful globalizer must consider how to maintain sufficient control, while still empowering the overseas innovation team for maximum efficiency and responsiveness to the ever-changing local environment.
Compared to other globalizers, the champions are much better at empowering overseas innovation teams. In addition, the champions surveyed agreed that local knowledge is essential for overseas innovation success.
For example, Perfect World gives its overseas innovation teams full operational control. Its headquarters only manages the outliers or exceptional emergency cases. Overseas branches are considered independent local firms rather than affiliates and are given sufficient control to run their businesses.
Neusoft aims to develop its overseas R&D departments into the company’s new innovation drivers rather than make them into mere copies of those at the Chinese headquarters. With easy access to advanced technologies, overseas R&D centers are given flexible budgets and enough space to maneuver.
Develop an innovative corporate culture
As the survey shows, a company’s overseas innovation centers can only be fully developed and become corporate innovation drivers if employees are given enough space. Their innovation passion is stimulated and an innovation culture is formed within the company.
The champions have made considerable efforts to develop an innovative culture. All of them place innovation as either their first priority or as one of their top-three corporate culture priorities. Many of these companies have also incorporated the concept of innovation into their core value systems.
For instance, Neusoft’s strategy of ‘open innovation,’ both internally and in collaboration with global industry leaders, works to encourage and engineer an innovative culture of learning and sharing.
4. Develop long-term innovation capabilities for the expansion of globalization
Globalization champions take a long-term perspective on building sustainable innovation capabilities and are not looking for immediate returns on their innovation investment. In fact, senior executives at champion companies frequently said that investment in overseas innovation centers brings more long-term benefits than short-term rewards. They added that blind pursuit of short-term rewards runs contrary to their original goals and may even suppress the company’s creativity or lower its competitiveness in innovation.
Innovation is becoming increasingly important in the globalization development of corporate China, and, even more importantly, is emerging as a strategic success factor for its globalizers. Comprehensive research shows that the Chinese globalization champions are better innovators than other ‘going out’ companies. The area in which they truly outpace their peers is in their ability to systematically tackle various operational challenges in the globalization development process
Xiaomi, a privately-owned Chinese electronics company that was valued at more than $40 billion in 2014, has experienced rapid development in recent years. The company is unusual in that it has allowed customer participation at every step of production, service, and sales. It even has a fan club – a large social community made up of consumers. Xiaomi’s fan club helps the company bolster its reputation through word of mouth, and also helps it understand and respond to consumer demands.
Do it Your Own Way
Every Chinese globalizer faces its own set of challenges that it must address in its own unique way. Because today’s globalization process is a balancing act, companies cannot rely on any single best practice for improving globalization performance; they must take a holistic approach. Depending on variables such as industry, globalization strategy, and stage of globalization, companies may choose different paths and tailor their innovation strategy and operating model to their own business contexts.
As an example, in its early days, Perfect World identified innovation capability development as its first step toward globalization and invested hugely in R&D to develop new products and emerging technology to expand markets. After initial success in the overseas market, Perfect World progressed into a period of advanced globalization and started to leverage its global network. It mobilized worldwide ideas and talents to promote the company’s innovation and globalization.
In today’s highly evolved and fiercely competitive global marketplace, Chinese globalizers are still struggling to find their footing. The good news is that they are not only remaining innovative, but are also continuing to ‘go out,’ never forgetting that even a journey of a thousand miles begins with a single step.
The Top 3 Chinese Globalizers
Perfect World was founded in 2004 and went public in 2007. It has since grown into the leading Chinese MMORPG (massively multiplayer online role-playing game) company, with 5,069 employees by 2014. As one of the first Chinese online gaming companies to exploit the overseas market, Perfect World has launched over 20 wholly owned subsidiaries in Europe, Japan, North America, and other regions. In 2013, its overseas business accounted for roughly 25% of its total revenue of $491.6 million.
Perfect World has adopted globalization as one of its core strategies. It advocates an innovative corporate culture, with innovation serving as the starting point and foundation for the company’s globalization efforts. Globalization, in turn, reinforces the company’s innovation efforts by allowing it to leverage global resources, attract global innovation talent, and develop a global technology network.
The company’s global innovation efforts begin with innovation around its products, technologies, and business models in overseas markets. The company first familiarizes itself with local demands and then modifies its products and technologies accordingly, laying a strong foundation for market entry.
Business models, too, are modified to fit the new market. Perfect World fully empowers its overseas branches, treating any overseas branch as an independent local firm and giving it sufficient operational decision rights. Local exigencies determine 80% of decisions; the remaining 20% are based on the company’s general modus operandi.
In addition, the workforce is entirely localized (aside from one or two senior officials sent overseas). Since local employees are unique in their cultural perceptions and educational backgrounds, the interaction between innovation and R&D workers from various regions often creates surprising chemistry.
Having achieved initial success in overseas markets, the company is now leveraging its global network and mobilizing global resources to accelerate innovation and the globalization process. For example, through Perfect World Global Investment Plan, its global investment arm, the company acquires and invests in two types of target companies: companies that have already accomplished a certain scale and small, early-stage start-ups. The latter investments resemble those of venture capitalists who invest in forward-looking projects, hoping to benefit from the projects’ future development.
After acquiring a target company, Perfect World creates a flexible working environment for its new employees and sells their products through its global network. Perfect World Global Investment Plan not only helps Perfect World build a global brand, but also gives it relatively easy access to new technology and innovation talent across the world.
Perfect World identifies innovation as its guiding principle, quality games development as its purpose, and globalization as its long-term development strategy. Globalization is in its corporate DNA and innovation is its internal driving engine for sustainable development.
Neusoft is one of China’s largest IT solutions and service providers. The company operates on a global basis with customers in over 60 countries and subsidiaries in the United States, Japan, Switzerland, Finland, Germany, Romania, Dubai, and Peru. In 2013, Neusoft’s overseas operations accounted for 35% of its $1.2 billion revenue, a number expected to rise to 60% within the next 10 years.
Underlying Neusoft’s global operating model is its highly innovative corporate culture. As an IT company with a short product life cycle, Neusoft views innovation as a core value and a prerequisite for globalization; in turn, its highly globalized operating system helps the company promote innovation by allowing it to leverage global resources.
Neusoft’s primary focus is that of enhancing its core innovation capabilities. Its ‘open innovation’ strategy promotes innovation in its technologies and products.
The company has established a corporate-level center-for-excellence mechanism across its business units to centrally manage technical expertise. Some centers are co-established with external partners to pursue even broader collaboration. The company’s knowledge is then shared on interactive platforms, including technology forums and regular topic-specific workshops, enhancing both communication and innovation.
Neusoft also seeks to innovate around its services and business model. The globalization of its medical equipment business is a powerful example. Previously, the company invested a great deal in product and technology innovation to export advanced medical products to overseas markets, competing directly with foreign companies in the international marketplace. Today, the company pays more attention to service and business-model innovation, offering comprehensive solutions and establishing global service centers for local customers in overseas markets.
This combination of product and business-model innovation has helped Neusoft establish a comprehensive global innovation platform with systematic problem-solving abilities, laying a solid foundation for the company’s globalization development. Simultaneously, Neusoft seeks to localize its management systems and corporate culture as it globalizes – understanding full well that countries vary in their laws, institutions, and cultures – and especially emphasizes the localization of R&D by fully empowering local innovation teams. For instance, the company implements its Global Talent Development Program in overseas offices, a program aimed at developing talent with global vision and management capabilities, establishing an appropriate talent evaluation system, and attracting local R&D talent to serve local markets.
Founded in 1997, Trina Solar has developed rapidly into the largest company in the global photovoltaic (PV) module manufacturing industry, as well as a leading system integrator. With regional headquarters in Europe, North America, Asia-Pacific, and Africa, the company continues to further its global expansion by selling products in more than 30 countries and forming strategic partnerships with relevant firms and institutions throughout the industry value chain.
Innovation and globalization are the foundation of Trina Solar’s development. The company has always regarded innovation as its driving force, keeping close track of domestic and international market activities, innovating around its product technology and business model, and using innovation to promote the company’s global development. In fact, the company has formed a virtuous cycle in which innovation drives globalization and globalization fosters innovation.
In terms of product technology innovation, Trina Solar has filed over 1,000 patents – far more than its global competitors. To further enhance the role of technological innovation, the company established its State Key Laboratory Testing Centre on PV science and technology. The laboratory has hired more than 150 researchers to work on product transformation through innovative technology, offering highly effective PV modules and innovative solutions for lowering system costs. As for its business model innovation, to further reduce costs and provide more comprehensive solutions, Trina Solar has expanded its business along the entire industry value chain.
Trina Solar now boasts a regional PV industrial cluster – headed by the Trina PV Industrial Park, which was established in 2008 – that combines upstream and downstream industry, equipment, and accessories. The company cooperates extensively with many other companies in the industrial park, through collaborative R&D and joint testing of new materials, in order to further enhance its innovation capabilities and its competitiveness in both domestic and overseas markets.
As a result of the company’s continuous globalization, Trina Solar is able to marshal global resources and platforms, attracting a steady flow of talent in management and engineering. In 2014, Trina Solar’s management team came from more than 20 countries, and 60% of them came from abroad or had overseas work experience. The company also cooperates closely with Australian National University and other leading PV research institutions to enhance its ongoing innovation efforts. Trina aims to grow the State Key Lab into a world-class innovation platform, promoting global competitiveness and sustainable development.