LU Feng

Master of Engineering, Tongji SEM

Ph. D. of Economics, Ruhr-Universität Bochum

Researcher, Warton Economic Institute

Past Employment

Project Manager, GFK

Editor in Chief, China Office, Bertelsmann AG

President of China Operations, Kaiser+Kraft AG

President of China Operations, Sindopower

President of European Operations, Fuyao Group

What is internationalization?

Why should companies go international?

What requirements are put to the companies if they want to achieve internationalization?

What kind of problems or challenges would a person encounter if he was managing the Chinese branch of a German Company or vice versa?

When facing the different management style, legal framework, and divergent staff ideologies between China and Europe, should the Chinese companies “conform to local customs”, or stick to their high efficiency ways of working?

The article is transcribed from the keynote speech

“Adhere to the original aspiration or blend into the crowd? China’s foreign investment experience in the Belt & Road initiative”

Delivered by alumni Lu Feng at the Alumni Forum

On 16th November 2019

The topic I would like to discuss with you today is the internationalization of Chinese corporates. We will examine the problems from the corporates’ point of view, and it will not be examined from a macroeconomic angle nor a national strategic angle. I have dedicated my working life to corporates, and I would like to share my experience and feelings concerning a working life tied with corporates. Before we start, I want to point out that Corporate Internationalization is an important lesson in Germany, which belongs to the discipline of Corporate Economics. Other countries have conducted research in this field for a long period, and I suggest that China expands its research in this field from a Corporate Economics angle. Analyzing corporates against an internationalization background is an intriguing task. China has raised much discussion on the Belt & Road Initiative, but much was done from a macroeconomics angle, little attention was given to the corporate side.

Let’s get acquainted first. I was among the first group of students admitted to Tongji University after the re-launch of the Higher Education Entrance Exam. I was proud of myself by then, but now it sounds like I was almost as old as the dinosaurs. China relaunched the Higher Education Entrance Exam in 1977. It took me five years to acquire a bachelor’s degree from Tongji SEM and followed by a master’s degree. Upon achieving the master’s degree, I undertook to teach in Tongji for a little more than a year, delivering courses on Operations Research, Probability Theory, and Mathematical Statistics. Then I went to Germany and it took me three and a half years to acquire a Ph. D. in Economics from the Ruhr-Universität Bochum.

After school, I went into the manufacturing industry. My first employer was GfK, it took samples from consumers and business bodies, and deduce the overall data from these samples to provide market information to help corporates make manufacturing decisions. It is a well-known company and I have worked there for more than three years. A turning point revealed itself in 1994, at that time, a lot of German corporates marched onto the path of internationalization, especially branching out into China. I switched to another company, some of you might have heard of it, Bertelsmann AG, it’s a book dealer and a media company, the journals, books, TV shows, music operated by this company were among the finest in the world. The company delegated me to develop the Chinese market in 1995, starting its internationalization process. Bertelsmann sells books via membership, which was an eye-opener to much of the world. I have been working in China from 1995 to 2000. This company withdrew from China due to the inability to conform to the local conditions. The main problem is that the publishing business is regulated in China and the company has no right to publish anything in China, which makes it a failed book dealer. I then switched to another company that produces industrial products such as shelves and trolleys through online ordering. I served this employer for another five years. All the previous companies were based in Shanghai. After that, I joined a company in Zhuhai. It makes power electronic building blocks for electricity converters. The company made great success in China and I worked there for another five years from 2011 to 2016.

Then I met a great turning point. I got a phone call, asking me if I wish to make a career change? I said no because I was truly content with my current job. People on the other end of the phone asked me if I wish to become the President of the German operations of a Chinese company? My previous working life has been helping German companies to develop the Chinese market, and now it made a 180-degree turn. I still showed no interest, because it’s exhausting. Then the caller said it was a job with Fuyao Group, the owner of the group was a cyber celebrity, and I started to become interested. Remuneration aside, labor and soil aside, I firmly believe this would be a rather interesting endeavor, and I said yes. The interview went on for about 50 minutes and the boss told the headhunter to draft my contract, and I was delegated to manage the European operations of Fuyao Group. Many of you may be aware of the movie called the American Factory, and I knew most of the filming crew. We had dinner together at the boss’ home in 2017. There were 3 Americans and 1 Chinese. The Chinese guy graduated from the Tongji Film Academy. Due to the Tongji bond, we exchange WeChat contact info. A few months ago, we had a chat over WeChat, saying that the American Factory has become a blockbuster and raise a great wave of discussion. Fuyao Germany is a parallel subsidiary as Fuyao America, there were many stories and the German version is quite similar to the American version. We have encountered many obstacles and I have personally suffered a great deal.

That’s a brief sum-up of my past.

Chinese Factories Overseas

Let’s start with theories and rumors. What kind of problems will companies encounter once they step outside China? Why did they choose to go? Many theories are floating around. Some people say it’s due to a lack of confidence in China’s future, some people say it’s because other countries offer a better investment environment, and some say the entrepreneurs simply want to get out of China, or they treat the overseas investment as a political act. I think these are parts of the whole picture and the truth goes far beyond what we saw.

After the American Factory hit the market, it caused quite a stir. I read some of the critiques, some people say: ”Upholding your dignity is only worthwhile when you have achieved production efficiency, otherwise it only meant certain death.” This could be considered a positive comment on Fuyao America’s performance. We all know, Chinese capital has exploited the American laborers, and it may sound strange to you. But the key to this idea is that production efficiency trumps everything else, and the American factory does not stick to the principles set up by the labor unions, and their operations are more aligned with Fuyao’s interests. Capitalists may have to take care of many different factors when they operate in foreign countries, but not Chinese capitalists. They are more capitalist in nature, and almost like the old capitalists in Europe and America back in the old days. Some people argue that “China and the US should learn from each other. China should learn how to protect laborers’ interests like the Americans, and the Americans should learn how to increase production speed and efficiency like the Chinese.” “Laborers in Europe and America struggled for hundreds of years to establish the modern labor system to protect their basic rights. The capitalists can do whatever they want if there is no genuine Labor Union to represent the workers.”

I will save my comment for later, but let’s imagine, if Chinese companies operating in the US all act by the Union’s demands, can Fuyao sustain its business in the US? Fuyao’s competitors all left, General Motors and Ford all went bankrupt, should we protect the workers by the requirement of the modern-day working system? At first glance, we should. But what problems could that cause if we indeed went ahead?

Models and Pathways for Companies’ Internationalization

Models of Internationalization. The first model is domestic production with international sales distribution. This is a rather simple model for companies to go international. The company can outsource international work to specialized import and export companies, or they can use agents to take up international sales tasks. And a more straightforward approach is that the company will establish direct sales channels in overseas countries by itself.

The second model is making productions in multiple countries and sells those products where they were made. For example, made-in-China is sold in China, and made-in-USA is sold in the US, and this is out of consideration for different market demands.

The third mode is making productions in multiple countries and sells those products through a global network. This mode is usually practiced by large enterprises and this mode will require a complete ecosystem. For example, a company that makes and sells diodes, silicon controls, IGBT, and other large components can manufacture these products in different countries, and then sell these products through a unified global network because the enterprise is large enough to set up sales outposts in various locations around the world.

The last model is bringing a new business model overseas. For example, Bertelsmann AG has no proprietary products in China, the company did not bring products to China and did not make products in China. It brought a sales business model in a closed circle to China. It had made a splash and was tremendously successful for a while.

There are also four pathways for companies to internationalize. The first is to expand internationally through authorization, franchising, transfer, patenting, and forming composition. The second way is to do commissioned manufacturing (commission foreign companies to make components or whole products), for example, Apple and Samsung made their products in various locations around the world. The third way is to outsource via contractors. For example, a factory or a company that wishes to expand internationally can outsource parts of the internationalization process, such as building factory floors, worker recruitment, and establishing a logistic system, to another company, and this is considered another way of internationalization. Lastly, a company can invest directly in a foreign country. This is the most common way of internationalization, which includes sole proprietorship and joint ventures.

Why do Companies Internationalize?

First, companies are meant to make profits. They need a place to expand their market share, distribution volume, or manufacturing.

Second, the capitalist is always in pursuit of profit. The capitalists will go wherever they can lower costs or wherever they can make better productions and sales. The factors to be considered include labor costs, taxation, transportation fees, and foreign exchanges, etc.

Those are two of the commonly seen reasons for internationalization.

Third, international competition is intensifying. It should not come as a surprise. Starting from ten years ago, small-sized automobile manufacturers start to fail, their survival was dependent on industry merge and achieving economy of scale. The situation is worse in the capital market, small-sized companies face swift take-over at any minute. After establishing a foothold in the international market, the company must be able to make technological conformity. For example, it is vitally important for Fuyao Europe to be able to understand the highest demand and master the highest technological standard in the local market before it can render help to the mother company.

Fourth, the unification of industrial standards. Take power electrical module, for example, 20 or 30 years ago, every manufacturer has its own standard, but it is now unified. The voltage level goes from 600 volts to 1200 volts, then to 1700 volts. The electric level and packaging are either 17mm or 23 mm. Forming a unified standard gives leeway to companies’ internationalization.

Fifth, the convergence of consumer preference. Two or three decades ago, Chinese people rarely saw hatchbacks on the street. But the consumer preference is somewhat assimilated to that of the Europeans or Americans, and SUVs and MPVs are also included. Any consumer product that attracts public attention overseas will soon get the eyes of the Chinese people, and there is hardly any time delay. This also helps promote companies’ internationalization.

Sixth, companies must grow, must lower R&D costs, and must become an international supplier. We all know, for companies operating in multiple countries, all they need is one unified R&D platform, one unified ERP system. It reduces many costs in terms of leadership input or service provided.

We have talked about some of the main reasons driving the company’s internationalization. Those are some of the most discussed reasons.

For the next part, I’m going to talk about passive internationalization, which means the company was forced to go abroad. When Fuyao first decided to expand into the US and Germany, the big boss said it was because they charge less for gas and electricity. However, foreign countries are in general more costly than China. The remuneration paid to blue-collar workers is six or seven times that of Chinese counterparts, and for white-collar workers, the rate is two or three times. Under normal circumstances, the lands cost much more than China, and taxation is much higher than in China. Then why would Fuyao still expand into the US and Germany? It was forced to do so.

The first factor is client demand. I will make an example by using the problem surrounding the supply chain. You can tell your client that your product is made in China and you can ship these products to the US or Germany. However, the German client would not accept this for fear of problems that may arise in the supply chain. You can ensure them that if the ships fail you can switch to trains, and even if trains fail, you can use air transport. The client still will not say yes, because if air transport is delayed or cost too much, it still posts great uncertainty to their own business, therefore the German clients won’t accept our products. They demand we set up a complete production system in their city or at least in a nearby location to make them feel safe. They demand our companies go through valuations (ISO and IATF16949), and the valuations will take place regularly, or every time we replace an old machine. If we continued to make our products in China, we will not be able to fulfill the valuation criteria. Apart from the standardized valuations, there are many other factors such as legal obligations, child labor, environmental protection, production safety, noise level, contamination controls are all included in their appraisal. Moreover, technical support, after-sales services, parallel design capacity, continuous production ability, management capability, safety management, procurement, human resources, logistics, and quality controls are all under their purview. They will not buy your word even if you told them face to face that you have good machines and workers. If you tell them there are 10 workers assigned to a certain production line, they will question what would happen if anyone of those 10 becomes sick? You tell them that’s fine, and Chinese workers come to work even if they don’t feel well. They will not accept this. If you tell them that you have 2 backup workers, they will evaluate if these 2 backups can deliver their work from a human resources professional judging criteria. In terms of equipment, they will check if the machines are fully functional, and ask if workers can manually make up the difference if any of the machines broke down. In terms of sales, they will check every factor including the whole supply chain, the distributors, and your relationships with upstream suppliers. They demand our company to be in close physical distance to them, and we must establish a physical presence in Europe or the US before they hand you any order. Many of our internationalization was a result of such coerced circumstances.

The second factor is the industrial processing technics. Some of the industrial technics made it impossible for made-in-China products to be shipped overseas. For example, certain types of adhesive materials will dry up in four weeks after production, and it must be applied to cars before it dries up. Shipment will take up four weeks by cargo ships and more than two weeks by train, and therefore cannot guarantee the delivery of usable adhesive materials. That is one of the reasons for pushing for passive internationalization.

The last factor is Industry 4.0. Some of the information-based companies have already achieved a certain degree of Industry 4.0 by streamlining inter-departmental communications. Every company has its own ERP system and uses CRM in client management, and the companies can identify the client’s purchasing behavior, supply conditions, and payment progress. On the manufacturing end, the companies use the MES system to decide which device should be used in a certain project. There are digital connections among the enterprises as well, some are Internet-based, and some are direct digital links.

What does Industry 4.0 have to do with internationalization? Let me give you an example. Industry 4.0 is meant to fix the gap between mass production and individual demand. If you have ever bought a car, for example, you are going to buy a VW Golf, you could choose among three different engines 1.4, 1.8, and 2.0, there are three different body colors grey, silver, and white, and yet there are different versions such as luxury and economy, and you end up with more than 20 options. If that’s the case in China, then you could face up to more than hundreds of choices if you were buying a car in Germany. Do you want a sunroof? Which kind? A regular one or a panoramic one? Do you want green glass, grey glass, or laminated glass? Do you want a leather cushion? What type specifically? What kind of sewing do you want with those cushions? Do you want the seats to be heated? Every consumer has his/her own preference, some of them deem this function unnecessary, some of them deem the other function unnecessary, the individual demand for customization is unlimited and thus creating more troubles for manufactures. If the companies make those car batch by batch, it will take forever to get a delivery, and no one wants to wait 9 months for a new car.

The carmakers came up with a solution to this problem. Let’s use Audi as an example. When Audi sends orders to us, they do not accept one cradle green glass, one cradle laminated glass, or one cradle grey glass delivery. They only accept package which has already been sorted per customer demand, such as one cradle containing one piece of green, two pieces of laminated, and one piece of grey. But when we make those glasses, we made them in bulk, and the same batch of glasses is packaged with their own kind. If we make these glasses in China, it would be impossible to deliver them to Audi because they demand a three week advance time in delivery. We cannot deliver this from China, because Audi only informs you of their demand two weeks in advance, but the shipment alone will take three weeks. So the only solution is for us to go to the client, staying close to them, and deliver as they order. For them, the duty becomes much easier, and the most difficult part has been left to us. The demand for glass could be viewed as an easier task. Some of the companies which make cushions are tasked with more difficulties, they must sort among three different kinds of leather, four different types of textiles, and sometimes the raw materials can be bad, and sometimes the sewing may go wrong. Some clients want yellow leather, some may want blue leather, and it falls to the cushion companies to make them one by one. The Audi assembles the cars, their workers don’t have to choose between different kinds of glasses or cushions, because all components are ready to use.

That is the impact of Industry 4.0 on internationalization.

Companies’ Competitiveness during the Internationalization Process

The first point is to take advantage of a strong and large domestic market. This point should be easy to understand, for example, the rise of high-speed trains can only happen in a market as large as China, and the accompanying opportunities to forge one’s competitiveness can only be achieved in such a market. That’s how Fuyao came to be, and two-thirds of its market share were in China. At first, Fuyao only caters to domestic car manufacturers, and we covered all the highest quality carmakers including Mercedes Benz, Audi, Ford, and BMW. It helped Fuyao build up solid foundations and allowed it to train its team, and in the end, to make world-class glasses. This is to say that a large-scale market is critical to internationalization.

The second competitiveness is a good company image and the international stance of our home country. At the end of the 1980s, Japanese cars have very low recognition in Germany, they are prone to faulty performance and are less durable. However, the sales volume of Japanese cars is equal to that of domestically made cars in Germany, because the brand images of Japanese cars have improved significantly. Nowadays, when you think of perfumes you naturally think of France, and when you mention chocolate you naturally think of Switzerland, and these are examples of good brand image.

The international stance of a country is a somewhat abstract idea. The international stance of a country is usually a factor when judging companies’ abilities. Let’s say 20 years ago if you want to find a company to help your business in Germany, and if you were asked to choose among Chinese, Japanese, or Indian companies, you would not choose a Chinese one. But the situation has changed. I have interviewed a sales manager once, and I asked him his opinion of Fuyao’s expansion into the German market? I asked how does he feel about the Chinese company taking up German market share? He responded briefly, and in general, he believes that Chinese companies are a force to be reckoned with, they march into the German market like animals on a stampede. But this should be viewed as a positive comment because it revealed that Chinese companies have high production efficiency, for example, Huawei is doing very well in Europe. When China achieved a certain level of national empowerment, the world starts to view Chinese products differently. 20 years ago, no one would imagine that one day people will say “Chinese products are of good quality.” “China has extraordinary efficiency.” or “Chinese people have an outstanding capability in providing solutions.” Back in the 1980s and 90s, when I was still in school, Chinese products are the cheapest in the market, and can only find sales channels in the lowest end of retailers, and they are simple fabrics, clothing, or toys. Nowadays, our country has become much more powerful, and when Chinese companies expand overseas, people would have a particularly good first impression.

The third field of competitiveness includes efficiency, technology, innovation, capital, and management. Chinese capital is highly competitive, if they wish to step overseas, banks and the state government all lend their support. Management talents are particularly important, but we are still behind in this area.

The fourth factor is matching industrial resources in the target country. If a company steps into a foreign country, it needs matching industrial resources both upstream and downstream, otherwise, it cannot succeed. Let’s say you are in glass manufacturing, and you decide to go with full automation, you need to have robotic arms and manual integration systems, and these have to be procured locally. A couple of days ago I read about Tesla building its factories in Berlin, although everything is expensive in Berlin, it has great matching powers, and that is how Fuyao felt when we got there. Upstream and downstream matching resources is a judging criterion to gauge the companies’ competitiveness. When your company wishes to expand overseas, you need to evaluate the matching capabilities of the whole industrial chain. This is one of the areas where China still lags.

Fifth, foreign resources at your disposal. Including human resources and raw materials.

Sixth, foreign exchange rate.

Factors to be Considered when Making Direct Foreign Investment

Foreign markets are more complex than China. Legal requirements, labor union requirements, accounting requirements, environmental concerns are a few of the things you need to consider. I still remember when we wish to open a new factory overseas, they asked if we will operate three shifts a day? I said it will not be a problem. But they continued to ask if we could truly operate three shifts? Would the third shift cause noise problem due to its affinity to residential areas? You need to figure out these problems before you lead your company overseas. Foreign markets are varied and overly complicated, which can make you feel totally unprepared. The same goes for financial problems. Production costs, capital providence, industrial match are all factors we need to consider.

Problems that are Particular to Chinese Companies’ Internationalization

The first problem is a shortage of international talents, a divergence in management members’ background, and a deviation between each other’s awareness of legal matters. Over 20 years ago, I led a German company to invest in China and they had sufficient talent reserves. These people excel at almost everything, and they have little language or communication issues, nor any management issues. Chinese people think highly of these people. I don’t think any Chinese company has adequate human talent reserves, especially the ones that want to step outside of China. I raised the question in the company’s internal meetings, and I said we are not ready to expand into the German market. But we must do it anyway, and we tackle the problems as they pop up.

The second problem is the forming of different interest groups in a foreign subsidiary. Most of our management members made to their current positions by hard soil and labor. Repatriated people such as myself are likely to stick to a European thinking pattern, and this could cause multiple problems when we return to a Chinese company.

The third problem is the gap between the understanding of corporate social responsibilities. For example, if a company wants to recruit interns, a Chinese company only treats interns as laborers, but foreign enterprises are making arrangements for interns from a national and social perspective, they truly want the students to be able to start working upon graduation. The same goes for hiring disabled persons. Foreign companies are not concerned about expenditures on these matters. This is where Chinese companies are so different from their foreign counterparts.

The fourth problem is the conflict created by “full devotion to work”. Chinese people value devotion to work highly, and when they need to work overtime, they can leave their family behind, but this is not acceptable in foreign countries. Once we run into a problem with one of our projects, which become a hot iron on hand, we assigned one of our technical managers to form an action team to tackle the problem, he was in charge of the team and was given authority to allocate resources across different departments, and he can report directly to me. Two weeks later, the problem passed retesting, everyone was happy, and the task force was dissolved. Three or four weeks later, we run into the same problem again, and we want to convene the same taskforce, and want the original technology manager to lead the team. He was in tears and turned me down. If he were Chinese, he would considered this a show of devotion to work with the opportunity to make more money and even promotion. He said he has had any personal time with his daughter for two weeks, his daughter was already asleep when he returned, and the next morning when his daughter wakes up to go to school he has already left for work, and as a result, he wants the company to give such opportunity to other people, he’s not going to do it. Chinese bosses would not understand his point of view, they would think that this employee has squandered the boss’ trust and opportunity for more salary and promotion.

The fifth problem is low unemployment in the US and Germany makes it difficult for us to recruit qualified workers. The hollowing-out effect of the US manufacturing industries is severe. Capable workers are few and we cannot hire enough qualified staff. The situation is more or less the same in Germany where the unemployment rate is below 5%, and the country achieved full employment and suffers from a shortage of skilled labor. The labor shortage is common in East Germany, Poland, and the Czech Republic where their laborers are all high-quality workers. We end up hiring people from even further away places, but workers from Romania and Bulgaria tend to respond slowly to work demand. This is a huge problem if you wish to open factories in the US or Europe.

The sixth problem is environmental protection and concern for production safety.

Problems Happened to Chinese Staff in Europe and the US

The problems are varied: Chinese staff are less legally aware (China has a different legal framework than the US or Europe); Chinese staff have different recognition of the company or the work on hand, where Chinese workers are more obedient and German workers are more ego-centric; there are differences in national welfare and insurance systems as well which resulted in different levels of spontaneity in competition. German welfare is better than the Chinese version, and German employer usually stays longer, the German workers will not be solicited to a competing company if they only receive a small amount of monetary incentive; German employees are more concerned with the working atmosphere and their superiors; it is very difficult for Chinese employees to blend in.

Overseas Factories

Allow me to go over Fuyao German factories. When I joined the company, Fuyao did not have any factories in Germany, only a logistics storage house. My task was to build Fuyao’s German factories because Audi wants us to make products in their vicinity to supply components for their A6 cars. We have 300 employees and have built our factory floors and many automated production lines.

Stepping into the German market at this point poses a great challenge to Fuyao. I have been at the task for more than a year, the German factory is doing good in terms of OEM supply. But we have also come across many problems:

The first problem is communication. I require all German departments including technology, procurement, sales, HR, and finance to communicate with their Chinese counterparts, which proved to be impossible. They do not speak good English, the Chinese counterparts do not speak good English, compounded by technical problems, which makes communication mission impossible. We have run into the same problem in Europe, the US, and Russia. Language proves to be a barrier.

The second problem is the perception of work. Chinese staff is willing to do overtime, but the foreign staff is not. Our vice president at that time was German. We had a serious discussion about this problem, he said that Chinese staff doing overtime seems good because they are working hard and contributing to the factory. However, 95% of the employees are German and this puts huge pressure on the other 95%. What can they do? They cannot do overtime even if they are willing to do so, because it is against the law. Chinese staff doing overtime and they are not meaning that both sides are getting unequal information, which is problematic. We encountered the same problems in Germany, the US, and Russia.

Other than the above-mentioned problems, there are many more, such as the Chinese headquarters’ understanding of foreign policies, the irregular changes in decision making, the shortage of qualified workers, and the lack of execution ability in management. Some large scale Chinese companies have accumulated enough experience in conducting excellent management, but the German employees are generally more capable than their Chinese counterparts.

All these are actual problems I have come across when opening our foreign factories.

To sum up, many Chinese companies are highly competitive in the international arena. They have high efficiency, national support, and sufficient funds. From a corporate development point of view, they should go on the internationalization path as soon as possible.

 

Tongji SEM Alumni Association 28th December 2019