By Samuel J. Palmisano
The Volvo Car Corporation announced last month that it planned to open its first manufacturing plant in the United States. Volvo’s decision is emblematic of a major shift in the global economy – and specifically, in the way Chinese-owned companies are evolving into innovative enterprises that invest throughout the world.
The plant announcement comes almost five years after Zhejiang Geely Holding Group., an auto manufacturer headquartered in Hangzhou, acquired Volvo from Ford Motor Company. It is symbolic because it marks the first time a Chinese-owned carmaker has established a manufacturing presence in the U.S.
This also marks a turning point in the flow of global investment. Such investment and the sharing of knowledge that comes with it, is a win-win – making companies more competitive and countries more vibrant. In fact, I believe it represents the next phase of globalization, which will be largely based on innovation as the proliferation labor-saving digital technologies enable companies to focus more on attractive markets and less on labor arbitrage. The investment also holds the promise of strengthening relations between the United States and China and helping deliver a long-term stimulus that the global economy desperately needs.
Will business and political leaders embrace this opportunity? It is in everyone’s interest that they do so.
Until recently, companies such as Geely were quite rare in China. Following the Chinese government’s decision in 1978 to begin liberalizing its economy, China was primarily a hub for low-cost and low-skilled manufacturing. The goods produced in and exported from the country put millions of Chinese to work and helped to unleash levels of economic growth that made China the envy of many around the world. But few Chinese companies had either the breakthrough products or the management skills to operate beyond the country’s borders. As recently as 2005, there were only 16 Chinese companies in the Fortune Global 500.
Today, however, that number has risen to 100 (exceeded only by the 128 headquartered in the U.S.). And there are 24,000 Chinese companies operating outside China. The global outlook of Chinese companies is reflected in the data on foreign direct investment (FDI). Outbound FDI by Chinese companies last year totaled about $140 billion, which exceeded the amount of inbound FDI in China (about $128 billion) for the first time ever. And the change has been quite dramatic: ten years ago, there was 18 times more FDI coming into China than going out of it.
As Chinese companies have expanded beyond their borders, they have also moved up the value chain and become globally competitive in the process. Geely, founded and chaired by the entrepreneur and industrialist Li Shufu, is one such company. As China’s first privately owned car manufacturer (production began in 1998), in 2004 it became the first Chinese auto company to operate outside China. Just six years later, it acquired Volvo. And in 2013, it took full ownership of MBH, the UK company that manufactured the iconic London Taxi.
Today, Geely employs more than 18,000 people, and it leads in a number of ways. The company holds 10,000 patents, including more than 1,800 for its inventions. It has also developed a technology application platform that enables co-creation with people outside the company. And it operates two private universities that serve more than 30,000 students, in areas well beyond automotive issues (such as sociology and biotechnology).
Geely is distinctive, but hardly unique, among China-based companies. And the presence of these companies in the United States and elsewhere is almost certain to grow in the years ahead. China is at the stage in development when countries tend to develop global brands and expand their foreign investment, just as Korea and Japan did. The likely liberalization of investment rules – the U.S. and China are now negotiating a bilateral investment treaty – will also bring more Chinese investment, as will the search for new sources of economic growth.
The new Asian Infrastructure Investment Bank, recently launched by China, is also likely to expand China’s outbound investment. The Rhodium Group projects that the stock of China’s outbound FDI could grow from the current $744 billion to $1-$2 trillion by 2020. (China will need to take care not to repeat Japan’s mistake and overpay for assets.) Investment from other emerging nations looks set to grow as well. There was $484 billion of outbound FDI from these nations last year – a new record, and about 35 percent of the global total of outbound FDI.
While many chief executives may be concerned by investment from foreign companies operating in the same industry, it can be a mistake to focus only on the downside. The competition will make domestic companies stronger, and as the Rhodium report points out, a merger with a company from a country such as China often leads to an expansion of local facilities. AVIC, a Chinese company, invested nearly $200 million in Nexteer Automotive after acquiring the Michigan-based company in 2010. Similarly, Volvo was reeling from a $934 million loss in 2009 when Geely acquired the company. It is now being revitalized.
Without question, governments must ensure that foreign investment from China (or any other country) does not compromise national security. However, they should also understand the gains that come from foreign investment.
As China and other countries deepen their economic integration through FDI, they have a vested interest in policy reciprocity. If smartly used by the U.S. government, this can usher in a new level of trade pragmatism.
Policymakers should also stay focused on how FDI creates jobs. More than 80,000 Americans are directly employed by Chinese firms operating in the United States (up from less than 15,000 five years ago). More broadly, Chinese companies operating in the U.S. are big spenders on research and development – $400 million in 2012, according to the most recent government figures, and almost certainly much more since then. That spending translates to the spread of innovation and knowledge that benefits the U.S. economy. But in order for American workers to maximize the opportunities offered by Chinese companies, they will need the skills and knowledge these companies demand.
I suspect that many more Chinese companies will be following the Geely/Volvo example of choosing to build plants in the U.S. Our country has much to offer, and we can use the jobs. Clearly, a balance must be struck between appropriate protection of national security and promotion of economic growth. But we should not allow reflexive fear or xenophobia to put up unnecessary roadblocks. For the sake of near-term economics, long-term innovation and national self-interest, we should welcome this promising new era of global integration.Back to CEO Insights