Effective Integration Makes 1+1>2

On the sixth Chinese Enterprises Outbound Investment Conference， Mr. Long Guoqiang， Minister of the Department of Foreign Economic Research under the Development Research Center of the State Council， gave his opinions on the issues as outbound investment and economic structure transformation and upgrading. He said economic globalization had been rapidly proceeded and constantly deepened over the past two decades， thus forming a global production value chain called “smiling curve”; therefore， industrial upgrading can move towards not only the original one direction.

Long said many economies had gone through rapid industrial structure upgrading after the war. For instance， post-war Japan moved its leading industries from traditional labor-intensive industries like textile industry， clothing industry， and toy industry to steel industry， petrochemical industry， auto industry and electronics industry， etc. Such industrial upgrading is the result of the growth of per capita income levels and economic development.

However， Long said that the rapid advancement and continuous deepening of economic globalization over the past two decades bring a new change， that is the global production value chain， which is called“smiling curve” domestically. The President of Acer in Taiwan is the first man who noticed this curve when he observed the development of PC industry. He found there was global division of labor in PC industry. The left of this division are technology and capital-intensive industrial activities; in the middle， there are labor-intensive industrial activities dominated by assembly and processing; downstream activities include service marketing， professional services， and brand building， which belong to information and management intensive industrial activities.

Long told the reporter that this “smiling curve” exists not only in PC industry but many other industries， and more and more industries have such phenomenon， that is the formation of global production value chain we are talking about today. After the formation of global production value chain， we can find that traditional industrial upgrading can’t indicate problems. For instance， China is now the largest exporter of IT products in the world， and in China’s export structure， more than 30% exported products are so-called hitech products. From this perspective， hi-tech industry seems to constitute a large portion in China’s industrial structure; however， only the labor-intensive assembly work of a good portion of those exported hi-tech products is done in China. Therefore， China needs to treat the issue of industrial upgrading from a different perspective under the new background. In the background of globalization， industrial upgrading moves towards not only the original one direction after the formation of global production value chain. The upgrading from traditional industries to intelligence-intensive and technology-intensive industries mainly reflects value upgrading. Therefore， China needs to obtain the new direction of industrial upgrading correctly in the background of globalization.

For China， a rising economy， outbound investment helps to advance our industrial upgrading to technology-intensive industries. Long gave an example， some Chinese enterprises in auto industry obtain advanced technology through outbound investment. Geely Auto， a new entrant in auto industry， bought the wellknown Volve， obtaining not only Volve’s production capacity but also its technology and brand. China’s machine tool industry， for instance， lacks competitiveness in the field of numerically controlled machine tools for a long time; however， through foreign acquisition and international and domestic resources integration， the international competitiveness of China’s machine tool industry in the field of numerically controlled machine tools has been rapidly strengthened. There are also some enterprises that positively established overseas research and development centers to enhance their own research and development ability. Actually， according to their own strategic layout， they are making use of the specific research and development resources of different countries. Huawei， for example， a typical independent innovative company， is at the forefront in the field of mobile communication equipment worldwide. Huawei， as an innovative company， hires a large number of research staff， and RD inputs accounts for a high share of sales. Besides in many cities of mainland China， such as Shenzhen， Beijing， Shanghai， and Nanjing， Huawei has its RD centers; it also has overseas RD centers， such as in Sweden and Stockholm(the headquarter of Ericsson). Actually， Ericsson as the leading company in the field of mobile communication equipment has its spillover effect， therefore Huawei establish its RD center in Stockholm. Also， Huawei has RD centers in Moscow and American Silicon Valley， etc. According to specific RD resources in different countries， Huawei positively establishes centers. In this way， it can make full use of the RD resources of different countries and integrate global resources according to its own strategy， to accelerate the improvement of its RD capacity.

Another important point is that overseas research and development can reduce cost in some cases. Long Guoqiang said many multinational companies come to China in recent years for two reasons: first， they are interested in the Chinese market; second， they are attracted by the low cost of Chinese RD human resources. Although many people show their worry that the international competitiveness of China’s labor-intensive industry won’t last for a long time， since the salary of ordinary workers has been raised， meanwhile， the upgrading of China’s human resources， especially that of RD human resources， has attracted many multinational companies to carry out research and development in China， trying to reduce cost. Absolutely， outbound investment facilitates market expansion， and it has a very important function， that is to obtain scale economy， reduce or split， dilute RD cost. In this way， more companies can obtain impressive returns through research and develop-ment， and make their future RD sustainable.

In his view， when services， brands， and channels expand， overseas investment is no doubt an important means. Brands will attract certain consumer groups with monopoly， which is so-called brands’ profitability. Over the last several years， many domestic companies， especially the export companies， offered OEM (Original Equipment Manufacturer) services. They have no self-brands， and even many well-know domestic enterprises lack international brands; therefore， Chinese enterprises were pushed to build their own global brands many years ago. However， to establish a global brand is a time consuming and labor intensive process， for which we need to do a lot of work and it will take a long time. So far， there are few Chinese brands with global influence. I think there are two approaches to build global brands. One approach is to constantly expand the international influence of our own independent brands as we mentioned just now; the other approach is to obtain existing brands through outbound investment and acquisition. The latter one is a shortcut， which can save time and reduce cost， and we have many such successful cases. For example， after the outbreak of financial crisis， CCTV had reported that the exports of a private companies producing electric drills dropped by 80%， but its profits increased by 100%. Why? This company offered two enterprises OEM services， an American enterprise and a British one. These two companies were bankrupted during the financial crises， and this foundry company bought them and obtained their brands and customers， thus gaining brands profitability not only the little processing fees through OEM services. Therefore， although its exports dropped dramatically， its profits increased sharply.

The global financial crisis is a big opportunity for Chinese enterprises to go out， improving China’s competitiveness and putting forward China’s industrial upgrading through outbound investment. He said， taking the case of Geely Auto and Volve for example， if not in the background of financial crisis， it is hard to believe Volve could be sold to a new Chinese entrant in the auto industry. Although Geely Auto has its advantages， its international reputation has to be improved; therefore， Geely Auto has seized the opportunity brought by the crisis. Besides， the acquisition price was quite high before the crisis， but now it dropped dramatically. Ten years ago， Ford spent 6.4 billion dollars to buy Volve， while it just cost Geely Auto one fourth of that money — just more than one billion dollars. Thus， the global financial crisis is an important strategic opportunity for Chinese enterprises to make outbound investment. However， this window of opportunity will not be open for China forever; it will be closed slowly with the constant changes of external environment.

Therefore， Long says Chinese enterprises must lose no time to seize the opportunity; meanwhile， they should strive to avoid the risks brought by outbound investment. Outbound investment and domestic investment has their own risks; thus， if we can’t effectively avoid risks， it is possible for us to run after their traps and fall into the traps at the last. Therefore， we can’t buy overseas assets just for their low prices. Lastly， he emphasizes it is most important for enterprises to consider from the perspective of their own strategic development that whether their acquisition could be effectively integrated to make 1+1>2.