Friday, July 05, 2024
By Zhao Xiande and Wang Liang
Recent years have witnessed a renewed surge in overseas expansion efforts by Chinese companies, despite an uncertain global landscape and the unforeseen challenges and potential risks posed by entering diverse overseas markets. What is fueling this surge in Chinese companies venturing overseas? What obstacles do Chinese companies encounter in this process? Finally, how should they respond to these challenges?
Motivations behind Resurgent Overseas Expansion
The current surge in Chinese companies’ overseas expansion is driven by multiple factors.
The first factor is the changing global landscape. In recent years, the COVID-19 pandemic has disrupted the global economy, leading to a reevaluation of the risks associated with highly centralized supply chains. European and American clients have recognized the vulnerabilities arising from overreliance on a single country; highly centralized production and manufacturing pose a significant risk of supply chain disruptions in the event of uncertainties like pandemics and geopolitical conflicts. Consequently, they have come to require a more diversified supply chain strategy to balance cost and risk, instead of a cost-driven approach that prioritises centralized suppliers.
The second factor is the need to rebalance global trade and payments. Historically, China followed an export-driven growth model, leveraging product exports to drive economic growth and employment. However, this approach has become unsustainable due to persistent trade surpluses. To address this challenge, there is a growing imperative to broaden the value chain across various links through global expansion, ensuring equilibrium between value creation and resource allocation.
The third factor is China’s diminishing cost advantage. China’s previous reputation as the “world’s factory” has begun to shift in many traditional industries and low-end sectors due to rising labor costs and higher living standards. Meanwhile, some countries have imposed unilateral taxation policies on China’s exports. For example, the United States imposes an additional 15% to 20% tariff on Chinese goods, while exempting Vietnam-made products. As a result, China has been forced to undergo an industrial transformation and upgrade. In fact, this transition is ultimately necessary for the country to maintain its competitive global edge. To stay ahead in the global market, China must shift its focus from relying on cost advantages to enhancing competitiveness across more links in the value chain, especially those with higher added value.
Over time, China is expected to transition from its previous role as the “world’s factory” to a more balanced and diversified participant in a “distributed production/supply chain system”, allowing it to allocate resources and manage partnerships across a broader geographical area and throughout various links in the value chain.
Currently, Chinese companies prioritise three key areas for overseas expansion:
- Southeast Asia, known for its low costs, proximity to Chinese industrial resources, and mature industrial ecosystem.
- Nearshore regions in Europe and North America, such as Eastern Europe and Mexico, preferred for their short distance to major European and American markets, quick response times, high service standards, and affordable costs.
- Emerging markets such as the Middle East, which provide vast market opportunities for overseas companies due to their accelerated economic growth, considerable market potential, and limited local production capabilities.
Patterns of Overseas Expansion in Supply Chain Management
The overseas expansion of supply chains involves integrating overseas expansion efforts with a company’s supply chain strategy, which sets it apart from general overseas expansion. Chinese companies seek to establish a more competitive end-to-end supply chain through overseas expansion, which involves optimizing branding, R&D, design, production, delivery, channels, and service on a global scale.
Companies adopt different supply chain strategies in their business practices. Some opt for an end-to-end integration strategy, managing the entire supply chain including R&D, design, production, logistics, distribution, sales channels, and after-sales service by themselves. This approach is typically adopted by large companies, as it requires significant resource investment to maximise the overall value of the supply chain. Other companies choose to focus on only one or a few links in the supply chain, and outsource the rest to partners. These different strategies result in three common patterns for the overseas expansion in supply chain management.
The first pattern is exporting brands and channels through cross-border e-commerce. This pattern involves companies leveraging their production strengths while outsourcing overseas sales and brand building to partners, primarily cross-border e-commerce platforms and operational service providers. These partners, commonly seen in the fast-moving consumer goods (FMCG) and daily necessities industries, not only facilitate sales but also offer market feedback for product improvements. While many Chinese companies have gained substantial experience with widespread practice, challenges persist in identifying suitable downstream partners for long-term collaboration. In fact, an increasing number of companies have started to extend their supply chain by managing overseas channels and brands themselves, typically through building independent websites and other methods.
The second pattern is exporting production capacity through factory relocation. Companies move their factories abroad, typically to locations near major markets, to quickly respond to client demands. This approach is common in household appliances, new energy, and many B2B industries. However, companies should consider several factors before relocation: labour costs, which are typically higher in locations close to European and American markets; suppliers, which need to be sourced locally after relocation; transportation costs, which require extra management efforts in overseas operations; and local laws, regulations, and business environments, which the company must understand and adapt to in their new locations.
The third pattern involves agile integration throughout the supply chain. Instead of focusing on physical operations, these companies leverage digital systems to gain insights into global consumer demands and coordinate partners across the entire supply chain accordingly. By adopting an on-demand approach, they can effectively adjust their supply chain operations to meet the ever-changing needs of overseas consumers. This advanced model requires strong digital capabilities and supply chain management skills, meaning it is typically adopted by new, digitally native brands or B2B supply chain service companies.
Challenges in Overseas Expansion
Despite varying overseas expansion patterns, Chinese companies face common challenges in terms of supply chain management.
First, Chinese companies face considerable obstacles in introducing a new brand in foreign markets. Established brands typically have a stronghold on the market, which can push new brands from deferring entry. For example, in Southeast Asia, most motorcycles are fueled by gasoline, and Japanese brands like Honda have a dominant position in the market. In the early days of their expansion, Japanese companies formed associations and worked with local governments to introduce laws that create barriers for new entrants. Additionally, local consumers hold negative perceptions of Chinese brands due to the inferior quality of the country’s early motorcycle exports. Factors like these collectively make it hard for Chinese companies to establish a foothold in overseas markets.
Secondly, Chinese companies often struggle with product positioning without adequate understanding of local market preferences. Some of them attempt to replicate their success in the domestic market by applying previous product strategies to overseas markets, only to face significant setbacks. Low prices, for example, often seen as a significant advantage in China, may be perceived as a sign of inferior quality in Germany and other quality-focused countries. This can lead to even more absurd practices, such as bulk-selling thermos cups in Europe and America, or socks in tropical countries.
Thirdly, Chinese companies often lack the necessary insight into the political and business environment in the target country. Many of them hold a misconception that their overseas projects will proceed smoothly with approval and support from the local government, provided they bring capital investment and job opportunities to the country. The reality turns out to be much more complicated. In fact, Chinese companies often find themselves at a disadvantage in overseas expansion when they mishandle complex interests among divided groups within the target country. For example, a company may have difficulties in mining projects when transporting minerals through land owned by local villagers who do not comply with government directives. Despite having obtained mining rights from the government, the company may still fail if it is unable to navigate these relationships skillfully. Likewise, in certain countries, the same piece of land may have different property certificates issued across various government periods, resulting in ambiguity over land ownership. In such cases, companies may lack legitimate ownership rights despite purchasing the land. Hence, it is imperative to conduct a thorough investigation before making investment decisions.
Fourthly, Chinese companies face additional challenges in managing production and workforce in multiple locations across the globe. When exporting production capacities, companies typically establish facilities and equipment in various factory locations for different products. However, this approach may lead to discrepancies between order distribution and production capacities if companies lack the supply chain management expertise to synchronize data across different sites and coordinate suppliers and service providers accordingly. Consequently, some factories may experience underutilized capacity due to a lack of orders, while others may struggle to meet demand, resulting in delivery delays. Ideally, companies should establish standardized processes within their distributed production network, integrating inventory, production capacity, and supporting resources across different factories to adapt production schedules and logistics planning to real-time demand across locations. However, most companies currently lack the capacity to achieve such effective management.
To effectively manage overseas workforce, companies need to understand and adapt to local laws, regulations, and cultural norms. They should establish management strategies that align with the local culture to improve employee satisfaction and loyalty. Specific considerations include deciding whether to send staff to oversee operations locally, determining the duration of their stay in the target country, and developing plans to maintain effective operations after their departure.
Suggestions from the Perspective of Supply Chain Management
Based on the points made above, we have several suggestions for Chinese companies seeking to expand overseas.
First, Chinese companies should strategically integrate overseas expansion efforts with supply chain strategies, rather than taking it as an excuse to pull back from the domestic market. Instead of pursuing global expansion for immediate fixes or maximum short-term profits, they should aim to refine and optimise their global supply chain layout for sustainable competitive advantages through efficient resource allocation and risk management. When deciding on overseas expansion, they should take into account not only traditional international business considerations but also factors such as rapid supply chain response, brand image and value, and risk management.
Secondly, Chinese companies should strive to gain a competitive advantage through innovation. At this stage, the overseas expansion decision is in part driven by the demand to develop new quality productive forces. As such, companies should prioritise differentiation as their competitive edge, to prevent overseas expansion turning into another price war. Achieving this goal fundamentally requires innovation within the supply chain to produce superior or unique products and improve the overall customer experience. In practice, this involves leveraging digital technology and supply chain relationship management to integrate the entire supply chain, foster collaboration between upstream and downstream partners, and innovate business models. It is necessary to establish collaborative mechanisms to leverage overseas intellectual capital, thereby optimising R&D and other high-end links in the supply chain.
Thirdly, supply chain leaders should strategically leverage both local and domestic partners for overseas expansion. Chinese companies can reduce costs by sourcing non-core components locally, particularly structural parts, and establishing channels and service networks through local agents and distributors. While collaboration with local partners offers clear advantages, it also carries potential risks associated with overreliance. Thus, it is imperative for companies to establish mechanisms to engage domestic suppliers, especially key players, in overseas expansions, as part of their efforts to reduce uncertainties and mitigate risks in new locations. Chinese companies can draw valuable lessons from the successful experience of Japanese and South Korean counterparts in collaborative overseas expansion. This is particularly relevant considering how Japanese companies overcame challenges through collaborative strategies during their “lost decades,” a three-decade period of economic stagnation since the 1990s.
Finally, relevant government departments should provide more support for Chinese companies venturing into overseas markets. Successful global expansion often requires policy support from the government, and collaborative efforts between companies and government bodies can significantly improve the chances of success. Access to adequate funding remains a major challenge due to restrictions on cross-border capital flows. Historically, governments in Japan and South Korea have supported companies’ international expansion by offering low-interest loans and easing policy constraints. Japan has even developed an industry-business-finance integration model for this purpose. On the other hand, countries like Germany focus on leveraging financial tools to assist their numerous small and medium-sized “hidden champions” in penetrating foreign markets. These strategies offer valuable insights for China as it navigates its overseas expansion efforts.
Zhao Xiande is JD.COM Chair Professor of Operations and Supply Chain Management, Associate Dean (Shenzhen Campus), President of CEIBS Institute of Supply Chain Innovations, Director of CEIBS-ZKH Centre for Innovation in Supply Chains and Services, and Co-Director of the CEIBS Digital Intelligence Transformation of Enterprises Course.
