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Shanghai Business Review (SBR), December 1, 2006 Interview with Frank-Jürgen Richter (F-JR)

SBR: What were the key discussion points at this September's China Europe Business Meeting (CEBM)?

F-JR: This year's CEBM focused on Chinese firms' endeavours to go global. Globalisation has become the key word for many Chinese companies with many aspiring to propel themselves from national champions to global winners. Be it Lenovo's acquisition of IBM's computer business, Nanjing Automotive buying Rover or TCL taking over assets of Thomson and Alcatel, Chinese firms are showing their global ambition. And they are right to do so; with the opening of world markets and the continued globalisa­tion of services, they might risk failure if they do not have real global scale. Keen to expand faster and further than even the local market allows, they are setting their sights on Europe , which offers strong infrastructure, relatively stable politics and opportunities to buy cutting-edge technology, well-known brands and ready distribution channels for Chinese goods. Ren Hongbin, President of China National Machinery Industry Corp. and one of the meet­ing's co-chairs, said “Chinese companies have a long way to go when it comes to investing in Europe,” Another co-chair, Ronnie C. Chan, Chairman, Hang Lung Group Limited, Hong Kong, commented: “China and Europe should work well together, politically and economically. The only missing element is perhaps better understanding of each other. The China Europe Business Meeting helped in this regard.”

SBR: How do Chinese companies perceive globalisation?

F-JR: CEOs of Chinese com­panies are very fond of globalisation. I meet Chinese CEOs a lot in my work helping Chinese companies better understand international business and to structure finance for deals over­seas. They are not usually concerned to recruit the people or in the manufacturing aspects, but in purchasing the foreign brand and technology. It's a good opportunity to get hold of good brands. Not all deals are well executed, though. I think the Rover deal by Nanjing Autos will be difficult to make work. Usually, the Chinese want to buy cheap assets and sometimes don't understand how to integrate companies. I think sometimes they need to pursue greater due diligence. But they are catching up – and starting to hire the best consultants and investment banks.

SBR: Now two years' old, how do you see the CEBM evolving in future?

F-JR: It is the first independent, international meeting of Chinese and European CEOs to conceptualise Chinese companies' rise to global eminence. This year, 125 CEOs and board-level executives from Europe exchanged views and ideas with a similar number of executives from China . The first China Europe Business Meeting, held in 2005, was initiated by the China Federation of Industrial Economics and Horasis. This year's meeting developed into the foremost annual gathering of Chinese business and political leaders and their European counterparts. It is a vehicle for Chinese firms to scout business opportunities in Europe and develop into multinational corporations, and helps define the perspectives for Sino-European trade and the impact on business. Chen Feng, Chairman, HNA Group and one of the co-chairs, said: “The meeting serves as a catalyst for Chinese firms to go global.” Overall, the meeting's success will be determined by the months to come, as firms pursue the tasks they have laid out. As Alan G. Hassenfeld, Chairman of Hasbro, remarked, “Chinese firms hold the seeds of economic dynamism in their hands already.” The challenge is now to convert this optimism into long-term sustainable growth.

SBR: As Chinese companies become more globally integrated, will the world need new institutions – and how will China participate?

F-JR: This is a good question. The G8 will soon admit China , although China didn't really want to become a member of the G8, or G9, as it is still a developing country and it felt that by join­ing the G8 it would lose this status. China looks at what institutions it feels that it will need. Look, for example, at the Shanghai Cooperation Organisation; some people say that it is a coun­ter organisation to NATO, since it includes all the central Asian countries and other regional players, and they will want to put forward their own standards and commitments. It has been interesting to see the development of the Boao Forum in Hainan Island , which is basically a localised version of the Davos World Economic Forum. The idea is simple – to invite Asia 's leading politicians and businessmen to come once a year to Chinese soil. Many people thought it should be in Beijing , but that would be too obvious, so they are doing it further afield, in Hainan .

SBR: The first phase of the WTO acces­sion era is nearing an end, do you think China will now start to adopt its own standards?

F-JR: China is establishing new standards in all areas of the economy. Take technical areas, such as semiconductors and software. China doesn't want to be dependent on companies like Microsoft and is very much supporting Linux and open-source software. It is also developing its own standards in telecoms. China will certainly push its standards. It is trying to evolve the economy to focus not just on manufacturing, but on developing a technology and innovation strategy for the future. Part of this involves inviting western companies to share technology and do joint research. Companies like Huawei take research very seriously. When you go to their head­quarters in Shenzhen, it's all brand new, but the outstanding thing for me is the number of expatriates working there who were hired from foreign competitors. Huawei reinvests around 25 per cent of turnover into research, which is a mind-blowing figure. It wants to lose China 's image of copycatting and develop proprietary technology, IP and standards.

SBR: How can China overcome the copycat legacy?

F-JR : I think it will happen in the main in­dustries, such as consumer electronics and telecoms. The big Chinese brands know the importance of both IP and reputation. It won't happen for small companies exporting through different channels and aiming for quick profit. The government is fighting against counterfeit­ing, but you can't really control it, especially in places far away from Beijing and Shanghai . In the 1990s, I worked in Beijing for a manu­facturing company producing power tools. We discovered copycat companies producing fake products, but as soon as the factories were closed down, they reopened in a neighbouring village.

SBR: Branding in China is still finding its feet. How do you see Chinese brands developing?

F-JR : Well, for internationally competitive Chinese brands, I think you would look firstly at energy, such as CNOOC and Sinopec. In consumer goods, Haier, TCL, Hisense and many others. The chairman of Haier has questioned whether it should build and create or buy a new brand, as there is a concern that Haier is perceived as too Chinese. One strategy for Chinese companies at this stage of development is to buy a foreign brand. Another strategy is build a Chinese brand and have a more inter­national name, like Lenovo, which sounds Latin or Spanish. Chinese companies are investing into brands to get rid of this image of being cheap, and to present themselves as being at the forefront of new technologies. Alibaba is a good example. It is a very well-managed company and the business model is compelling: an online trad­ing platform for Chinese companies, opening a great door to the west. China Mobile is the world's largest mobile phone company and is actively looking for acquisitions. It wants to become a global, not just a Chinese, brand. Hainan Airlines recently rebranded as Grand China Airlines and tried to buy Malev, the Hungarian airline. It pulled out because that company is in bad shape, but its strategy is clear – to buy a European airline. It is hungry for foreign investors, because it knows that forces a raising of standards and services.

SBR: China-India relations is a topical is­sue. How do you see this developing?

F-JR: They have two different economic models. China is very much state-driven, India is more driven by private companies with less state planning. Two Harvard professors recently said that the Indian model is better, as it is slower and more careful and entrepreneurial. But nei­ther model is static. China has many dynamic private companies and excellent entrepreneurs, and the future of its economy lies with private industry. India , however, is moving towards the Chinese model with more and better planning and better cooperation between government and business. So Indian and Chinese models are coming closer together. You can already see investment between the two countries, particularly in IT. China is build­ing its own IT outsourcing industry – though it's not happening as fast as it did in India – and plans to build Dalian into a Chinese Bangalore. Indian companies are participating in this drive. InfoSys is investing substantively in China . I don't see yet many Chinese companies invest­ing in India , but I am sure they are interested in energy-related companies. At the end of last year, Kazakhstan 's energy company was bought by China National Petroleum in cooperation with an Indian oil company. This was the first time that a big Indian and a big Chinese com­pany shared a common strategy in acquiring a foreign asset. I think we might see this type of cooperation again in future.

SBR: And China and U.S. relations?

F-JR: This is a big question for the future of the world economy. China wasn't a theme at the last U.S. election, but it will be in future. In the United States , left and right are coming together to discuss containment of China . The China Economic and Security Review Commission is researching how to constrain China 's rise. I've been there; it has people from the entire political spectrum. On the business side, I can see big European and U.S. companies moving their HQs to China , once the whole legal framework becomes more mature. ABB, for example, has moved a global division to Shanghai and its president is resi­dent here. This is a first step. I spoke with a major professional services company run out of the United States and said they should move their HQ to Asia , as that's where all their clients will be in future. Given Shanghai 's development as a future financial centre, a lot of analysts will soon sit there to write about world issues.

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