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Localization: How Multinational Corporations Survive And Develop in China

In the past two decades, multinational corporations in China have tried to solve problems involving managerial cooperation, inner company cultural conflicts, and harmonization with governments, and market entry, while also trying to adjust to Chinese consumer behavior. All have occurred through the process of internationalized management, with processes of localization thought to be the correct prescription for curing cultural and business "maladjustments".  Localization, enriched with new meanings, is becoming one of the most important corporate strategies used to prevail against fierce competition. Through more active localization, multinational corporations can make full use of local operating resources, reduce production costs, achieve more market penetration opportunities, and control the market in a more comprehensive way.

Every McDonald's is a localized enterprise managed by the international standards of operation, and this is accepted as one of their "Global Success Disciplines." The international standard includes the global standardization of quality, service and environment, while localization includes high local participation in production, purchasing, personnel, marketing, research and development.

Among the many multinational corporations in China, Motorola was one of the first to carry out and benefit from anticipated strategies of localization. Accounting for less than 10 per cent of its global investment, their production base in Tianjin provided about 20 per cent of the total profits for the whole empire. Since those early days, Motorola has been pushing its localization process by cooperating with important local suppliers and by providing technical and management training. It has also promoted local suppliers to corporate positions or participating roles in joint ventures with reputable professional foreign factories. It is expected that, by 2006, their domestic purchases will amount to US$10 billion. At present, China P&G (Procter and Gamble) purchases more than 80 per cent of its production raw materials from the local market each year. Localized purchasing can reduce production costs, which, in turn, helps the corporation achieve cost advantages in competition.

As with Motorola, many multinational corporations in China are also pursuing localization in their research and development programmes. In 1994, Canadian North Telecom was one of the first organizations to set up a research center in Beijing. But by the end of 2003 the number of research and development centers across China, affiliated with multinational corporations, had grown to about 500, including Microsoft, IBM, SUN, GE, HP, TOSHIBA and NOKIA. Some of them even cooperated with Chinese enterprises in technology, such as with Panasonic, Huawei and TCL. Initially, the R&D activities taken on by these centres in China aimed to satisfy demands of the local market. For example, they improved former products according to local market demand, and introduced new products suitable for the host country. This kind of research and development can be thought of as something like a service to the production process. Since the 1990s, these research centers in China, in addition to their previous industrial functions, have been providing an increasing amount of independent research. This is happening because the market status of China has improved to such an extent that the multinational corporations doing business here must adjust their product strategies to include local factors. This is necessary because China is regarded as a market destination for new products. As we have seen, in the automobile industry, the joint ventures of multinational corporations in China now introduce new car types into the domestic and foreign markets at the same time. Some vehicle types are designed with the Chinese market only in mind. Following objective analyses of Chinese human resources, multinational corporations have come to realize the importance of talented employees. Bill Gates once said that Microsoft set up its first Asian research institute in China because there was an abundant and excellent source of talent here.

The localization of management and marketing is also being carried out by multinational corporations in China and is mostly producing good results. At the same time, it has been noticed that most multinational family appliance corporations in China have staggered from one problem to the next. The reasons for this may include wrong or insufficient localization strategies and a reluctance to take a larger share of responsibility. This seems to prove that the localization of multinational corporate activities is necessary and indispensable. In light of this, the LG Corporation from South Korea changed its name to China LG Electron Ltd and introduced the slogan "We will succeed in China as a Chinese enterprise, not as a foreign enterprise." They have promised to complete 100 per cent localization within two years.

There are two further things that we need to pay attention to. Localization of operations by transnational companies is affected by specific industrial conditions and how active investment is in a given sector. Normally, assembly operations, such as that seen in electronics and telecommunication equipment producing industries, have an easier time with localization. These are industries that can construct an international production system, which results in active transnational investment. Industries, such as the metallurgical industry, which is usually controlled by a national enterprise or is a national capital investment, have a low level of foreign involvement, so there is less chance of foreign companies localizing the sector themselves.

The second point is that localization by transnational companies involves many strategic links like production, research and development, management and marketing.  Taking into consideration the characteristics of the products and the different sectors they fall into, localization will naturally have different characteristics. They will have different starting points and different points of emphasis in each attempt to localize their product. For example, some transnational companies increase local investment and extend their own industrial chains by emphasizing production localization. Some set up local research and development centres using Chinese skills to serve the local market. Other enterprises focus on the localization of their marketing and management. Some transnational companies have implemented their own localization plans, like Motorola, while some are still developing specialised local links, such as some high tech companies, which have set up R&D centres in China to assure their success in the local market.

As a statement of fact, with China gradually integrating with the globalization process and playing a more important and substantial role in it, many more multinational corporations in China have substantially triggered and stepped up their processes of active localization.

Case Studies

Localization of Motorola

Motorola, the worlds second largest mobile telephone producer, once said they would reduce their staff by 9,400 people by the end of 2001 and lower estimated revenues for 2002 by 5 per cent to 10 per cent, resulting in a total staff reduction of 48,400 employees.

But just before they announced their staff-reduction plan, Motorola surprised everyone by announcing at their global board of directors meeting in Beijing that they were going to invest US$6.6 billion in China. Since 1992 this investment in China has totaled US$3.4 billion, making it the biggest transnational company with the largest investment in China.

Motorola is to make its mark in China By 2006 and is expected to realize its goal of annual sales of US$30 billion, of which US$10 billion is to come from China Their total investment will reach US$10 billion. In the next five years, procurement by Motorola will reach US$10 billion.

Localization of Sony

Sony China production reached US$3.5 billion in 2003. This included domestic sales of US$1.7 billion. They have a staff of 15,000 and a total investment of about US$900 million.

Sony began their business in China in 1978 with representative offices established in Beijing in 1980, Shanghai, 1985, Guangzhou, 1994, and Chengdu, 1995. In 1993, they established the joint venture Shanghai Suoguang Electronics Ltd with Shanghai Guangdian Ltd. Sonys investment share was 70 per cent. Operations began February 1994 manufacturing video cameras (8mm, digital 8, DV), optical pickups, and 8mm video-camera parts.

In1995, Sony established a joint venture with Beijing Suohong Electronics Co Ltd, Beijing Post University Technology Development Co Ltd, Beijing Jingzhi Electronics Info Industry Co Ltd, Beijing Tianzhu Airport Development Co Ltd. Operations began in November 1997; production included the manufacturing and marketing of mobile phones, videotape recorders (VTRs) and digital video cameras (DVCAM). In 1996, the wholly owned regional managing company, Sony (China) Ltd, was established.

Continuing their commitment to joint ventures and localization, Sony has embarked on a broader localization policy including commitments to education and corporate philanthropy. Their sponsorships include the Sony Scholarship that is granted to over 200 top university students each year (1994-2000) and the Beijing University Management School Sony Marketing Forum, a week-long training session held each year since 2000. Other cultural sponsorships include the  Beijing International Music Festival sponsorship and the Tokyo  China Film Festival. (Source: Sony June 2004)

*Zhang Wei, professor, International Business and Finance

School of International Trade and Economics

University of international Business and Economics