GE plays a bet in China (2 of 3)
GE Enter’s China
GE has understood these market and cultural dynamics, and has started strategically enhancing its presence in China over time. GE understands that it should not expect results immediately in China, but that it should start early to build relationships that will grow in time. In 1993, GE Capital started its first office in Beijing. In 1994, GE Plastics built a key $50 million USD plant in Nansha, which would be able to produce 20,000 tons of thermoplastics a year. In 2005, GE started to move more into the financial services market and bought a $100 million stake in the Shenzhen Development Bank of China. This investment brought GE to the maximum 25% ownership stake that it was allowed to have, imposed by the PRC government. GE also sees a bright future in China. In an interview with CFO Asia, when asked what region would drive GE’s growth in the future, GE’s Keith Sherin replied, “It’s China. China is number one, two and three for us at the moment”. And new opportunities in China present themselves on a daily basis. According to one report, GE expects to “soon yield $100 million in sales by shipping unassembled locomotives to China and hiring locals to assemble them” (www.nytimes.com). This just shows one example of how GE can try to find a market opportunity and move on it to add to the bottom line. One of GE’s largest initiatives recently has been the company’s push to go “green”. With Immelt’s leadership, the company recently started a new marketing campaign called “ecomagination” which highlights the company’s eco-friendly products. GE has already invested billions of dollars in research and development in order to build new “green” technologies that find alternative energy to oil and are environmentally friendly. It appears that China could be one of the largest buyers of these developing products. China is the largest emitter of greenhouse gases in the world, and has already been trying to remedy this by investing heavily in these renewable energy technologies. One example of this is the solar energy market in China, which is booming. The solar energy market had over 7 IPOs of Chinese-based solar companies on the NYSE in 2006. GE stands to benefit handsomely by China’s new push for green products. In 2006, China represented $5.6B USD of revenue for GE. This has increased over four times since 2001 (www.money.cnn.com). As for wind turbines, the company has sold about 100, which together generate about 7,500 megawatts of power - the equivalent of eight to 10 coal plants. GE has also devoted significant resources to China. Today, GE has over 12,000 employees there, including 1,200 alone who just work in research and development in its Shanghai office.
The Chinese government also has made significant investment in developing its infrastructure over the past several years. GE has a strong infrastructure business, and hopes to win a strong majority of the new business and China continues to invest in infrastructure to help position the country for future growth. Immelt recently has said that he expects China to spend close to “$16 billion USD within the next year alone” and GE hopes to gain a large share of that business.
Taking Small Steps: Joint Venture Strategy
As the Chinese saying goes, the “journey of 1,000 miles begins with a single step”. It appears that GE’s strategy so far in regard to entering China has been correct. It has not invested too heavily in China yet, wanting to get a small presence there and to learn more about the market, the culture, and the environment. It is quite clear that GE feels more comfortable in other Asian countries so far, such as Japan and South Korea, where the company has a very large presence. For example, GE Fanuc, an important part of GE’s business that sells electrical components, was originally a merger of a Japanese company into GE’s operations. GE has also said that it plans to invest heavily into Malaysia, and it is becoming more comfortable with the market there as well as political risk. In terms of China though, GE has been wisely cautious. It has developed small offices in key strategic regions, including Beijing, Shanghai, Hong Kong, and relatively smaller manufacturing plants, such as the $50 million plastics plant that they own in Nansha. It appears that GE’s plan is to establish itself in China slowly, building its brand awareness and reputation with the PRC government, with eventually hopes to sell other products in the market, such as a co-branded credit card in conjunction with Wal-Mart.
Like most large companies that want to stay on top, GE has had to evolve and move quickly with the times. According to a recent article in the New York Times, even as little as ten years ago, GE would not do a joint venture unless it could be in complete control. Now, for GE to take part in the upside of a growing market like China, it has had to adjust this strategy. Conceding that it did not completely understand the risks associated with the Chinese market, GE has started to do joint ventures with Chinese-based firms where it no longer requires control. The company has over 23 joint ventures with Chinese based firms, which shows a strategy that GE is willing to admit what they don’t know. But when the Chinese economy is expected to grow at 10-15% per year, GE can not afford to pass on the Chinese growth opportunity. So the joint venture strategy represents a pragmatic approach for GE. They can team with local companies, who have a greater understanding of the local market and its challenges, but still participate in the upside growth of these firms. Recently, the investments that GE has made in China have come under some scrutiny by the investing public. GE recently announced that they had a six percent dip in earnings over the last quarter, after Immelt had told investors to expect 10% growth in earnings. This dramatic difference called into question the credibility of Immelt, and GE lost $46B in market cap value in one day.
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06-20-2008, 09:55 PM
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