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Coming out of Emerging MarketsEMBA Global Strategy Session 6

Professor Mari Sako

Dr Eric Thun

26 February 2014

Plan for this session

Advantages and disadvantages of emerging market firms

China: International module

BREAK

India: Impact of institutional reforms on corporate strategy

Case: Bharti Airtel in Africa

2

Comparing China and India (I)

Comparing China and India (II)

Comparing China and India (III)

Comparing China and India (IV)

Comparing China and India (V)

Source: Bloomberg/IMF

8

Comparing China and India (VI)

Source: Economist, 30 September 2010

9

China as a Home Base

• Political Structure?

• Economic Structure?

• How does political economy shape competitive advantage? 10

Share of World GDP

Goldman Sachs Forecast

Source: Goldman Sachs

Setting the StageThe Middle Kingdom and the World

• Imperial China • Century of Humiliation • The Mao Era • The Reform Era

The Qianlong Emperor in Ceremonial Armour on Horseback by Giuseppe Castiglione (1739 or 1758)

Portrait of the Kangxi Emperor in Court Dress, by anonymous court artists (late Kangxi period).

Treaty of Nanjing, 1842

• Extraterritoriality • Moderate tariffs and no monopolies • Hong Kong ceded to Britain in perpetuity • Treaty ports

The Paris of the Orient

The French Concession: 1849 - 1946

Century of Humiliation

• First Opium War, 1839-1842 • Treaty Ports • Second Opium War, 1858 • Anglo-French occupation of Beijing

in 1860 • Japanese invasions in 1894-1895

and again 1930s

The Mao Era: China Stands Up

• Create political institutions

• Economic recovery and growth

• Transform society

Causes of the CulturalRevolution

• Mao worried about succession • Mao hated bureaucracy • Mao wanted a return

to ideology • Mao wanted the young

to make revolution

The Reform Era

• Growth in Private Sector – Agricultural reform and decentralization

• Growth in Foreign-Invested Sector – Opening to trade and investment

• Growth in State Sector – Ownership reform and restructuring

The Starting Point

32Source: Steinfeld, p. 49.

Employment Share of Agriculture (%),1978-2003

80

70

60

50

40

30

20

10

01978 1985 1990 1995 2003

33

National Sources of FDI in China,1985-1990

Hong Kong/Macao 61.5%Japan 12.8%

USA 11.2%Taiwan 7.6%United Kingdom 1.1%France .9%Italy .7%

Singapore .6%Others 3.6%

Source: Khan, 1991, p. 44.

Foreign Direct Investment in China(as a percentage of GDP)

36Source: World Bank

Number of Firms by Ownership(in millions of firms)

Source: China Economic Quarterly, June 2008

State Industrial Enterprise Profit

Source: Naughton, The Chinese Economy, p. 305.

From Plan to Market in China• Starting Point: Hierarchical bureaucracy , managers

focus on fulfilling plan, planned prices, soft budget constraints

• Pre-1993: Slowly allow markets to grow on the margin, increase in managerial incentives through contracts, but soft budget constraints remain

• Mid-1990s to Present: Corporatization, managersfocus on profits (with qualifications), prices set by market (with government intervention at times), hard budget constraints (with qualifications)

• Defining characteristic of reform in China has been gradualism, experimentation and lack of political reform.

Whither China?

Income per person relative to the United States,

log of %

MADE IN CHINA!but...

Value Capture in a $600 iPhone 4

Processing vs. Normal Exports(for advanced technology products exported to U.S.)

50,000

Dol

lar 40,000

30,000

U.S.

20,000ofill

ions

10,000

M

0

-10,0001996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Data Source: China Custom Statistics, U.S. Census ATP definition

Processing Normal Others

Ownership of Exporting Firm in China(for advanced technology products exported to U.S.)

35,000

30,000

r

25, 000

Dol

la

20,000

U.S

.

15,000

of 10,000

Mill

ions 5,000

0

-5,000

-10,0001996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Data Source: China Custom Statistics, U.S. Census ATP definition

SOE Joint Veture Wholly Foreign Collective Private

Crude Birth and Death Rates in China

Source: Scott Rozelle, Stanford University

Falling Supply + Rising Demand =Increasing Wages

Source: Scott Rozelle, Stanford University

Growth of the Domestic Market20

18

16

14

12

Trillion 10

RMB8

6

4

2

01995 2004

Source: 1995 and 2004 Industrial Census and UN Comtrade data for the same years.

Domestic Market Growth: Autos(unit sales in millions)

20

18

16

14

12

10

8

6

4

2

0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Industrial Yearbooks

Domestic Market Growth: CNC Machine Tools(unit sales)

120,000

100 ,000

80,000

60,000

40,000

20,000

01997 2000 2003 2006

Source: Industrial Yearbooks

Domestic Market Growth: Wheel-Loaders(unit sales)

140000

120000

100000

80000

60000

40000

20000

01997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: Industrial Yearbooks

Domestic Market Growth: Excavators(unit sales)

80000

70000

60000

50000

40000

30000

20000

10000

01997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: Industrial Yearbooks

Domestic Market Growth: Mobile Handsets(unit sales in millions)

200

150

100

50

0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Brandt and Thun 2011

Different forms of ownership with different challenges….

• Foreign firms struggle to lower their cost structure and navigate unfamiliar terrain.

• Chinese private sector firms struggle to upgrade

• Chinese state-owned firms struggle to restructure

• How is competitive advantage created in China?

Underlying Questions

• What are the strengths and weaknesses of the Chinese economic model? How sustainable is this model?

• What is China’s role in the global economy and how is it evolving? What should it be?

• How does the Chinese “model” and China’s place in the global economy shape the strategies of Chinese firms and the opportunities for foreign firms?

Core question: How is competitive advantage created in China?

• Topic 1 - The State and Business in China • Topic 2 - Foreign Firms in China • Topic 3 – The Private Sector • Topic 4 – Challenges • Topic 5 – China’s Future

• Mix of readings: broad overviews, case studies, “how to” pieces, additional readings available electronically

• Reading through reading guide and key questions before you begin; I will tell you what is relevant for each session

• Background readings on China listed in the front

TheLOCALE

55

TheSCHEDULE

Assessment• Strategy report for either a non-Chinese firm that is either entering (or

struggling to compete in) China’s domestic market, or a Chinese firm that is struggling to globalize.

• Report should include: – Analysis of competitive landscape (including domestic and foreign firms) in the relevant

industry – Current trends and characteristics in the industry

Hurdles and obstacles facing firm – Strategy recommendations

• The intent of this report is to use the case of China to integrate concepts and knowledge that you have acquired in the EMBA program. What will be the advantages/disadvantages of domestic firms in this sector? What will be the advantages/disadvantages of foreign firms in this sector?

• You are free to use information from any source, but be careful to provide full citations.

• Word limit is 5,000 words. Deadline is Monday 23rd June at 12 noon. See Information Sheet for further submission requirements.

Advice for Coursework• Choose an industry and firm for which information is accessible—review

the cases/industries covered in the course as a starting point

• Think carefully about the purpose of the report and make sure that you cover every element.

• Draw implications from evidence—don’t just repeat facts, interpret and analyze them.

• Utilize frameworks and concepts both from this course and other relevant courses.

• Only provide the evidence that is necessary to make your case.

• Key marking criteria: power and coherence of the argument, evidence to support the argument, use of relevant concepts/ techniques