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Last Updated: Wednesday, 23 May 2007, 19:03 GMT 20:03 UK
China's drive to expand overseas
By Steve Schifferes
Globalisation reporter, BBC News, Shanghai, China

China has been seen as a place where Western companies outsource jobs and production. But now Chinese companies are moving into overseas markets themselves.

Quality assurance manager Steve Gul at Lenovo's Shanghai plant
Steven Gul: Quality assurance on the production line

The Lenovo production line in the Pudong district of Shanghai moves swiftly.

Workers have 18 seconds to add components before the assembly line moves on - producing more than 400 laptops per hour.

The four assembly lines work 24 hours per day, shipping thousands of computers to customers in China.

Lenovo is the best-selling computer in China, with a 37% market share, and is hoping its association with the 2008 Beijing Olympics will boost its sales further.

Next month Lenovo will move its production to a new factory, which will also produce IBM notebook computers for export.

Potential customer trying out Lenovo laptop
Lenovo has a strong brand profile in China

But this is not outsourcing. Lenovo owns the IBM personal computer brand, which it purchased from IBM for $1.75bn (890m) in 2005.

It is the first time that the two brands will be produced together, and its factory manager is proud that Shanghai has been chosen to do so.

Up to now, IBM-branded computers had been produced at the former IBM plant in Shenzhen, near Hong Kong.

Merging brands

And merging the two companies has been fraught with difficulty.

William Amelio, Lenovo chief executive
CEO William Amelio: more job cuts are needed

Globally, Lenovo's market share has fallen to 6.3%, behind Taiwan's Acer brand as well as market leaders Dell and Hewlett Packard.

Lenovo still operates two corporate headquarters, one in Beijing for the Chinese market and one in North Carolina for the rest of the world.

Company boss William Amelio, a former Dell executive, is based in Singapore and shuttles around the world.

Hewlett Packard: 17.6%
Dell: 13.6%
Acer: 6.8%
Lenovo/IBM: 6.3%
Toshiba: 4.1%
Source: Gartner Dataquest, Q1, 2007

Factory quality control manager Steve Gul says that one problem is that Lenovo is slower to despatch custom-ordered computers than its rivals, despite the fact that most of its component suppliers are located within the Shanghai region.

The company has been forced to cut jobs in the US, both in 2006 and 2007, in order to help boost profitability.

Two cultures

Chinese corporate mergers and joint ventures with Western companies have particular difficulties.

The way Ron Logan, an HSBC executive who is managing a joint credit card venture with a Chinese bank, sees it, Chinese business culture emphasises respect for senior management and does not encourage subordinates to think independently and question the boss.

To Mr Logan, the hardest task is to get his subordinates to make their own suggestions and think creatively.

He says that asking subordinates what they think about the broader picture often produces defensiveness and confusion, as people feel the quality of their work is being questioned.

Drive overseas

Nevertheless, Chinese firms are aggressively moving to cultivate markets overseas, both through exports and acquisitions.

Everywhere we are going we see Chinese investors
Nicholas Moore, head of investment banking, Macquarie

China's biggest white goods manufacturer, Haier, which makes refrigerators, air conditioners and washing machines, is rapidly expanding overseas, and tried but failed to buy US brand Maytag.

Shanghai Automotive, China's biggest domestic carmaker, now owns Korean firm Ssangyong, while Nanjing Motors has bought the UK's MG Rover and intends to turn it into a global brand, according to general manager Zhang Xin.

MG7 at the shanghai motor show
Nanjing Motors aims to market the MG brand globally

Another Chinese car firm, Chery, plans to export 100,000 small cars per year, mainly to the Middle East and Eastern Europe, and is planning a joint venture with Chrysler to build and market small cars in the US.

Many Chinese-designed cars may not yet be marketable in developed markets, but the government believes that moving into international markets will force companies to become more competitive.

Seeking raw materials

China's biggest overseas investments have been designed to secure the raw materials it needs to continue its economic boom.

BHP Billiton diggers
BHP Billiton sends much of its ore to China

China's largest steelmaker, Baosteel, based in Shanghai, plans to spend $4bn to build a new steel plant in Brazil, in a joint venture with Cia Vale do Rio Doce, the world's largest iron ore exporter, in the state of Maranhao.

China now produces one third of the world's steel, and its iron ore imports are expected to double by 2012.

Chinese companies are buying up stakes in iron mines in Australia, copper mines in Chile, and nickel mines in Papua New Guinea.

"Everywhere we are going we see Chinese investors," says Nicholas Moore, head of investment banking at Macquarie. "Gas, iron ore, copper, everything. They want to have a hand in the supply chain."

Political barriers

China's drive into overseas markets hit a political barrier when it sought to buy US oil company Unocal in 2005.

Oil pipeline in Nigeria
Africa's oil reserves are a potent lure for energy-hungry China

Political opposition in the US Congress caused China's state-owned CNOOC to withdraw an $18.5bn bid for the company, which was eventually acquired by Chevron.

But China is likely to be importing 60% of its oil needs by 2010, and has been investing heavily in Africa to secure oil supplies - often dealing with countries that the West has shunned, like Sudan.

China has invested $11bn in oil projects in Africa, and recently hosted the annual meeting of the African Development Bank in Shanghai, where Chinese premier Wen Jiabao called for closer collaboration in development.

Investing the trade surplus

And it's not just Chinese companies that are investing overseas.

It's a paradigm shift in global capital flows
Stephen A. Schwarzman, chairman, Blackstone.
The Chinese government has accumulated a huge trade surplus of $1.2 trillion dollars, and now plans to set up an investment fund, which could be as much as $250bn to invest in overseas companies and markets.

Its first move was to buy a 10% stake in private equity firm Blackstone for $3bn, a sign that the government is looking for higher returns on its money.

"It's a historic change. It's a paradigm shift in global capital flows," said Stephen Schwarzman, chairman and chief executive of Blackstone.

China's move could hit the already-weakening dollar and may ultimately raise interest rates worldwide.

But it is also a sign of how far China's economic influence now extends across world markets.

That influence, and the role of Chinese companies in the world economy, is likely to grow substantially in the next decade.

This is one of a series of articles on how globalisation is transforming China's largest city. Future articles will look at how Shanghai is coping with problems of pollution, environmental degradation, and migrant labour.

The challenges facing Chinese computer maker Lenovo

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