Managing MNCs in China Class 2 Professor Paul Gillis PhD CPA Guanghua School of Management Peking University 1
Case Study – Electronics Industry • China accounts for 40% of • Local challengers global electronics exports – Lenovo (up from 5% in 2000) – Huawei • Most China activity is final – Xiaomi assembly • H+X 80% quality at 60% price – Largely controlled by • All private, but L & H state foreign companies supported (Foxconn) • Bottom of the smile – High value components in hands of global giants like Apple, Samsung, Intel
Smiling Curve - Stan Shih - Acer Chinese companies have only learned how to organize workers, but have not learned how to organize engineers, they can only make a living in the most inhospitable terrain area of manufacturing. Wang Chuanfu - BYD
4 How to do a case study September 26, 2018
Surviving Cold Calls – Give a good answer – Bullshit – Ask a counter-question – Answer a different question – Make a joke – Admit you don’t know From the Fishbowl MBA 6
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Analyzing cases • Getting oriented – Read opening section – Flip through pages – Read and reread the assignment questions – Define the problem in one or two sentences 8
Levendary Cafe • What is your evaluation of the way Levendary Café has entered the China market? • What changes (if any) should Mia Foster make? Specifically, what should she do about Louis Chen? And what changes (if any) would you propose at headquarters? • Prepare a specific action program for Foster to help her deal with the need for continued growth in China. What should be on the agenda for her meeting with Chen? 9
Analyzing Cases • Identifying problems – Read the entire case carefully – Highlight the key material – What concepts are highlighted? – Revise your problem statement 10
Analyzing Cases • Performing analysis – What is fact and what is opinion? – What facts contribute to the problem? – How is quantitative data relevant? – Identify useful information, read between the lines – There are usually no correct answers – Have you defined the problem correctly? 11
Action planning • List possible recommendations • What lessons are learned? 12
Case summaries • Submit for each case we discuss – Done in groups of up to four students. • Maximum of four single spaced pages – Format flexible, needs to adapt to assignment questions • Problem statement for each question (but not always) • Summarize key facts – perhaps consolidated for all questions • Recommendations/lessons learned – The ideal case summary resembles a report to senior management/board on the issues presented 13
Mao Era • 1949 Revolution • Private property eliminated by 1957 • Hundred Flowers Campaign/Anti-rightist Campaign • Great Leap Forward - 1958 – Mass starvation • Cultural Revolution 1966-1976 • Mao dies 1976 14
Deng Era • 1980 – 90% of China’s population is rural – One Child policy – Household responsibility system doubles ag output – TVEs employ 135 million by 1996 – Gradual price decontrol – Tax reform – Currency Reform – State owned enterprise reform – Special economic zones – WTO 15
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China’s Macroeconomic Performance • Private consumption 2015 is 39.9% v. 68% of GDP in USA • Fixed Asset Investment (FAI) is over 40% of GDP – real driver of growth. • Fundamental issues – Economic growth powered by two things • Fix asset investment (By MNCs, SOEs and PIEs) • Exports • FAI unsustainable, Exports leading to trade tensions, rebalancing towards consumption essential 17
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US China trade in services 23
June 15 - B June 15-A China responds by issuing a revised list of US $50 Bn in US products starting July 6 th targeting US Trump announces 25% tariffs on US $50 Bn of China goods – US $34 Bn agriculture. starting July 6 th , and proposed new list worth US $16 Bn for further review. May 19 January 22 Recent “We’re putting the trade war on Trump imposes tariffs on solar panels hold” – US Treasury Secretary. and washing machines. China agrees to buy more US products. US delays tariffs. Developme March 8 nts 2018 April 5 Trump raises import taxes on steel and aluminum by 25% and 10%, Trump spikes up tensions: respectively. “Considering additional tariffs on US $100 Bn of CN imports”. Q1-Q2 April 2 April 4 Beijing strikes back against US trade China announces list of 106 US goods measures - proposes 25% tariffs on 128 US to respond with 25% tariffs worth US products including wine, pork, and pipes. April 3 $50 Bn. Trump releases list of 1,300 CN exports worth US $50 Bn to hit with 25% tariffs – targets Made in China 2025. 24
Lastest • On Monday, the US imposed 10% duties on $200 billion of Chinese imports, and said duty would go up to 25% in January. • China responded with tariffs on $60 billion of imports from USA. • Trump threatened to impose tariffs on an additional $267 billion if China retaliated, which it has. That would bring total to $517 billion (everything). 25
Impact on MNCs • On average, every US farmer exports $10,000 of produce to China • GM China sales accounts for 40% of global output. • Qualcomm earns 57% of revenue in China. • Intel earns 24% of revenue from China 26
China’s perspective 500 400 300 200 100 0 -100 -200 -300 -400 -500 2009 2010 2011 2012 2013 2014 2015 ������ ������ �������� 27
Were tariffs the right tool? 28
Technology • Trump appears focused on balance of trade, while others focus on technology – Does China steal technology? • Forced technology transfers to JVs • Cyber theft of intellectual property • Acquisitions of US companies – CFIUS – Made in China 2025 • Reduced reliance on foreign technology – ZTE case – Thucydides Trap 29
What does a negotiated settlement look like? • Increased Chinese imports – Does this just shift BOT deficit to other countries? – Beware of accounting gimmicks • Relaxation of export controls • Reduction in Chinese tariffs – Autos – China already agreed to drop from 25% to 15% • Market opening – Most industries open since WTO – Opening financial services does not create US jobs 30
What does future look like? • Jack Ma says trade war might go on for 20 years. – The new cold war • Will tensions survive Trump? 31
How should MNCs respond? • Can production be returned to America? – How quickly? – At what cost? – Are supply chains too difficult to relocate? • Will companies shift to other countries, and does this help the US? 32
Email: gillis@gsm.pku.edu.cn Twitter: @profgillis Blog: China Accounting Blog 33
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