In the past few years, going global was only attempted by a few companies, but today, whether proactively or reactively, it has become a consensus among mature Chinese enterprises. The international expansion of Chinese companies has become an independent topic, with more and more enterprises venturing abroad and looking to the world. On August 22, 2024, at the 'Going Global Salon Seminar' of the 6th China FMCG Conference, Cao Hu, Global Partner of Kotler Consulting Group (KMG) and CEO of Greater China and Singapore, attended as a guest and delivered a keynote speech titled 'Overflow - Growth Strategy for Chinese Brands Going Global'. New Distribution has compiled Mr. Cao Hu's insightful speech for our readers (with some deletions).
From 'Going Out' to 'Going Global'
Today's Chinese enterprises going global face challenges that are fundamentally different from those experienced by multinational corporations in the past, in terms of economic cycles, overall markets, trade environments, and socio-cultural trends, especially the fundamental difference in the technological foundation. The international expansion of Chinese enterprises is an independent and significant topic, both magnificent and full of cases for in-depth discussion. Although the term 'going global' is relatively new, this phenomenon has been ongoing. Going global was initially called 'going out', when mainly central state-owned enterprises, with capital exports, made global energy and production capacity layouts. Whether it was SANY, Huawei, or CSCEC, they were all 'going out', bearing certain economic and geopolitical considerations. Today's 'going global' has a major characteristic: the forms and scales of participating enterprises are unprecedentedly diverse, and many enterprises no longer need to rely on traditional overseas distribution networks or global production capabilities. Now, many enterprises in different industrial belts, such as those in Yiwu, Foshan, Hangzhou, and Ningbo, can achieve a certain degree of going global through cross-border e-commerce, platform e-commerce, social e-commerce, and content e-commerce channels. Today's information infrastructure, such as Feishu, WeChat, and TikTok, gives small and medium-sized enterprises the global collaborative information sharing and efficient office mechanisms that only multinational corporations had 15 or 20 years ago.
Drivers for Chinese Enterprises Going Global
In everyday language, we often confuse 'going global' with 'exporting', but strictly speaking, there is a fundamental difference between the two. Exporting is something China has done for many years and is the fundamental driver for China's participation in the global division of labor and wealth creation. Because after the global division of labor, China's supply chain efficiency and production efficiency are the highest, so global manufacturing is concentrated in China, and then most manufactured goods are sold globally. This was the result of the WTO era, the global integrated market and international division of labor. During this period, we earned foreign exchange through exports, giving rise to a large number of export-oriented enterprises. Today, three major factors accelerate the momentum for Chinese enterprises to go global and export.
1. Exchange Rate Trends
Export profit = Overseas price - (Domestic production cost * Exchange rate + Tariffs). In this model, when the local currency weakens, it actually benefits exports. Going global profit = Overseas price - (Overseas production cost / Exchange rate). A major feature of going global is that all or part of the value-added, assembly, service, and delivery activities occur overseas, and settlement is based on overseas costs. In this case, a weakening local currency is actually unfavorable for going global.
2. Cost Drivers
In addition to profit models and exchange rate impacts, differences in domestic and overseas production costs, especially labor costs, also significantly affect going global. At the same time, it requires the ability to integrate into local production, assembly, value-added, service, and delivery. In contrast, exporting is more about the circulation of finished goods, which places different demands on the enterprise's participation in the value chain and capabilities.
3. Policy
Domestic industrial policies adopt 'replacing old industries with new ones' and squeeze out certain industries, but some countries welcome certain industries, such as electroplating, tires, and textiles, leading to global nomadism. Today, Chinese enterprises going global is not only about coping with overcapacity and finding global markets to absorb excess capacity. More importantly, China possesses advanced productive forces, high-quality enterprises, and innovative young entrepreneurs whose excellent management capabilities and ambition to globalize are spilling over. This is not just about overcapacity; in fact, many Chinese enterprises are exceptionally well-managed, and their global expansion is a natural development process. Looking globally, if we observe the top 500 companies in a country and the top 20 companies in each industry, we find that in Japan and the United States, overseas revenue accounts for over 70%, and even India reaches 24%. But China is less than half of India's level. From this perspective, as the most populous manufacturing country, China's internationalization ratio is quite low. Furthermore, the overseas revenue proportion of China's leading enterprises and industry champions is also relatively low. Some well-performing domestic enterprises have overseas revenue ratios of around 30%, but Japanese enterprises' overseas revenue ratio reaches 50%. The level of going global and internationalization of Chinese enterprises is still relatively low, and the future value-added space is enormous. Even if we pull to the global average, China still has huge potential.
Therefore, going global is not about dumping excess capacity abroad, but a natural need for geographical expansion when Chinese enterprises reach a certain level of management and China's global influence reaches a certain level.
Trend of Multi-Chain Development in Global Supply Chains
A notable feature of current going global is that global geopolitics and production economics are being driven. Geopolitics has a significant impact on us, directly reflected in the restructuring of global trade arrangements. In the past, China benefited the most from the globally integrated market (WTO), which allowed China's efficient products to be sold globally with minimal trade friction. Currently, geopolitics has led to the formation of multiple multilateral trade agreements globally. China has RCEP, North America has USMCA, and there is also TPP. In the past, there was a single global market; today, it has become a 'mosaic' market. This means that different trade agreements have strict requirements on rules of origin, tariffs, and market access. In the past, to pursue the lowest production costs and efficient supply chain management, global production tended to concentrate in countries like China. Now the situation has changed, and the previous single supply chain model is no longer applicable.
Currently, we must not only consider supply chain efficiency but also balance security, agility, and co-creation. Moreover, numerous supply chain members, including Tier 1 suppliers (TL1) and Tier 2 suppliers (TL2), can gather in a collaborative space to promote innovation and collaboration, leading to the trend of multi-chain supply chains. For going global, national strategy is crucial. First, determine which countries to enter, specifically which are primary markets, core markets, and strategic markets. Sometimes entering a market is not necessarily for immediate high sales, but to enhance brand momentum and meet the market's product specifications and access requirements. Second, identify which are opportunistic markets, i.e., those that may not be large now but have young demographics, rapid urbanization, and high internet penetration. For example, Indonesia and the Middle East, including the Gulf states, have high growth rates. Taking three regions as examples: Singapore is a must-fight market for going global, as it has the most trade agreements globally and is also called the revolving door of Globalization 2.0. Indonesia, as the center of ASEAN, is also important because it has the largest population, largest economy, and fastest growth; the Middle East is an offline market for major Western brands, making offline entry difficult, but online has opportunities, though logistics costs are relatively high. The Middle East market has high per capita disposable income, but product supply is insufficient, so Chinese enterprises have great opportunities. Every enterprise needs its own country map and should classify country strategies based on its needs. There is no unified going global strategy; only a local country strategy.
Channel Capabilities for Going Global
When systematically thinking about going global, enterprises must build a framework to help guide, think, and consolidate fragmented information and practices. Therefore, we have summarized the 4R+1P framework. At the national strategy level, the going global model includes agency, local operations, M&A, and country selection. At the terminal level, all enterprises face four issues: 1. How to identify potential customers in regional markets; 2. How to build products to achieve customer-product fit; 3. How to build relationships with local distributors, terminals, and partners; 4. How to sustain repeat purchases. For enterprises, entering overseas channels basically involves six channel formats.
Channel 1.0: Exporters and traders. Factories' large foreign trade orders usually come from traders, who purchase and place orders while setting specifications. In this process, we do not know who the final consumers are. This is the most basic model, mainly addressing capacity issues, and is wholesale in nature.
Channel 2.0: The emergence of first-generation platform e-commerce like Alibaba International and Amazon.
Channel 3.0: Vertical e-commerce, such as Wayfair, Etsy, Chewy, and Petco, covering home, pets, women's clothing, and art. Many Chinese enterprises have deepened audience penetration and product diversification in this area.
Channel 4.0: Independent websites. Independent sites are crucial for building brands and obtaining customer data. Through them, enterprises can tell brand stories, showcase brand portfolios and product displays, and present brand culture, philosophy, and lifestyle. There are also new content e-commerce like TikTok and social e-commerce like Temu, which are new channels that allow brand building and long-tail products to reach the new generation of Alpha and Gen Z domestically.
Channel 5.0: Entering offline markets. When enterprises reach a certain level online, they begin to expand offline. For the US market, over 75% of GMV comes from offline, so the US is essentially an offline-dominated market, with logistics and warehousing systems built around offline sales. Examples include offline NKA, Walmart, Chewy, Best Buy, and regional chains like Publix, Stop & Shop, Loblaws, and HEB.
Channel 6.0: Omnichannel integration of online and offline. This is how real enterprises gradually evolve from cross-border e-commerce to true international brands. Companies like Creality and Anker have fully experienced this path and truly become international brands. In the past, Chinese enterprises were good at selling products and competing on product specifications, which is the 'hit product' logic. But to become an international brand and build multi-brand, multi-category portfolios, enterprises must learn to articulate what the brand stands for, how it adds value, and tell brand stories.
Final Thoughts
When Chinese enterprises go global, on one hand, they must learn to leverage national advantages in the global division of labor, transforming extreme supply chain efficiency into individual enterprise advantages. At the same time, they should not only become profit machines pursuing ultra-high economic growth but also integrate locally. Enterprises should not only strive to become high-profile unicorns achieving tenfold growth, but also commit to becoming enterprises that integrate into and benefit local communities, growing at a sustainable minimum necessary growth rate, becoming 'small and beautiful' zebra enterprises. In fact, becoming a unicorn is the goal of only a few enterprises, while zebra enterprises are more aligned with the goals and capabilities of the vast majority. Philip Kotler once said: 'When it comes to the future, there are three types of people: those who create the future, those who adapt to the future, and those who are unaware of what is happening.' Going global for Chinese enterprises is no longer an optional extra; it has become a must, both important and urgent. In the process of global geopolitical, economic division of labor, and supply chain restructuring, the opportunity window for enterprises is typically three to five years. This does not mean that going global will be prohibited after three to five years, but that after this adjustment period, the cost of entering markets will rise significantly. Therefore, I hope everyone will not only consider going global but also accelerate action, build their own going global strategies, and enhance corresponding organizational capabilities.