2006-globalization of chinese brands

0Rollins College: Prof. M. Fetscherin

The Globalization of Chinese Brands

Prof. M. FetscherinProf. M. Sardy

Rollins CollegeDepartment of International Business



• Why are Chinese companies going global? • In what markets and segments are they going to

compete globally? • How do they enter target markets? • What are the strategies that Chinese firms have used to

go global? • Have those strategies been a success of failure?



• The current outbound foreign investment of China in 2005 amounts to USD 11.4 bn

• China has overtaken Japan within the last decade to become the largest manufacturer and exporter of consumer goods

• China has not yet created a single brand that is recognized worldwide

• Most literature is about foreign firms entering the Chinese market, but what about Chinese firms entering foreign markets?


Why Go Global?


Selling/Brand Motives• According to analysis by McKinsey & Co. estimated overcapacity

runs at 30-40% for washing machines, refrigerators and microwave ovens and at nearly 90% for televisions (Lundig, 2006).

• overcapacity left by companies that had previously contracted with Chinese firms (Gao, Woetzel & Wu, 2003)

Resource acquisition motives• China has an increasing need for energy, raw materials and other

inputs due to booming industrial production (Lundig, 2006).• Expanding economy has increased demand for resources beyond

existing capacity• 46% of Chinese M&A’s were for natural resources• (Deutsche Bank Research, M&A investments by sector in 2005)

Selling vs. Sourcing


Considerations for Market Entry


Building Internationally Recognized Brands


Most Recent M&A Activity


241311Total

660Emerging

18711Developed

TotalSourcingSellingTotal Deals

871Total

440Emerging

431Developed

TotalSourcingSellingAborted or Pending Deals

16710Total

330Emerging

13310Developed

TotalSourcingSellingCompleted Deals

Outbound M&A Activity


So the outcome of Chinese M&A with regard to market and motive effects is:

(3)

With the probability of a failure is shown as follows:

(4)

and the probability of success is shown as follows:(5)

0.094 - 2.482*Motive .132*MarketLNΩ = +

(0.094 - 2.482*Motive .132*Market)( ) (0.094 - 2.482*Motive .132*Market)1

ePe

+Ω = ++

11 ( ) (0.094 - 2.482*Motive .132*Market)1P

e− Ω =

++

1.0980.8970.094Constant

0.8860.0080.0840.039*-2.482Motive

8.0580.1611.1410.8950.132Market

UpperLowerExp(B)Sig.B

95.0% C.I. for EXP(B)

Logistic Regression Coefficients

Logistic Model of Chinese M&A


0.0840.084Odds Ratio

0.4440.9050.4770.916Success (0)

0.5560.0950.5230.084Delayed

/Aborted (1)Merger

(Outcome)

Selling (0)Resource (1)Selling (0)Resource (1)

Type of Industry (Motive)Type of Industry (Motive)

DevelopingDeveloped

Type of Country(Market)

Results of Logistic Model


• We can say that the odds of a successful sourcing acquisition is less than 8.4% or 11.9 times less likely to be as successful as a selling/brand acquisition.

• Given the small number of observations from the original data the effect of the market development is not significant and does not really add much to the equation. The intercept and interaction terms were not significant.

• However, for confirmation due to the relatively small sample size a Monte Carlo resampling or bootstrapping was performed with 10000 replications with replacement.

• Although there was only a small sample of firms that had been involved with foreign acquisitions, the results are significant and a classification test on results showed that 71% were correctly classified by the model.

Bootstrapped Simulation

Confirmation of Model and Interpretation

0.0740.074Odds Ratio

0.4340.9120.4750.924Success (0)

0.5660.0880.5250.076Delayed /Aborted (1)Merger

(Outcome)

Selling (0)Resource (1)

Selling (0)Resource (1)

Type of Industry (Motive)Type of Industry (Motive)

DevelopingDeveloped

Type of Country(Market)

bootstrapped Simulation (10000 Replications)


• Our model predicts that M&As in the developed world will focus on brand acquisition and that many of those will be successful.

– In fact, there is much lower chance of failure for selling/brandacquisition.

– There is also a reasonable chance of resource acquisition in developed countries, but they are more likely to meet with regulatory challenges and be aborted.

– Suitable targets in the developed world would be companies with valuable assets, brands, huge customer base, technology or overpriced products due to high production or labor intensive costs (hence potential to get products produced in China) or big brandfirms with negative earning as a result of competitive pressure.

• In emerging markets, there is little chance of Chinese firms pursuing selling/brand acquisition but a high probability of resource acquisition.

Implications of M&A Model


Thank you


• Regression Coefficient

• Bootstrapped Coefficients

Coefficient comparison