Book Review of “Is China Buying the World”
As China grows to become the world’s largest economy, catching up with even the United States in the coming decade, it is important to understand the strategic growth objectives of the Chinese economy. Several authors have written books and research papers on the Asian Tiger, and the country is setting the pace of its economic growth. From becoming the manufacturing hub of the world at the end of the last millennium, China is now looking to expand its presence beyond its shores (Mitter, 2008). In the last decade, Chinese companies have begun acquiring companies and assets such as power generation, technology, food and natural resources abroad, across both the developing and developed world (Navarro and Autry, 2011). The pace of acquisition has picked up since the recession, which saw many companies being targeted aggressively by Chinese firms, some private and some state-owned. The source of the funds for these acquisitions comes from the Chinese Government which currently holds over $2 trillion in US treasury bonds which it is leveraging for these buyouts (Moyo, 2011). Will this shopping spree result in China taking over the world’s enterprises? That is the question that Peter Nolan’s “Is China Buying The World” seeks to address. This short book by Nolan, an acknowledged China expert and economist is published by Polity Press and the first edition came out in 2012.
The book takes an in-depth look at China versus the global economy and contrasts the actual figures against the image raised in global media. Nolan through his in-depth study of global economics and the business theatre shows us that there has been an unprecedented level of expansion as well as consolidation in global enterprises across the 80s and 90s. Companies that have espoused new technology have grown to a point where they have absorbed others and adapted these to their own business objectives. These consolidators and “system integrators” as Nolan calls them, have become behemoths that control turnover and economic power that is larger than many of the independent countries. With globalization, many companies today pursue a multi-faceted sourcing, manufacturing and delivery strategy (Fishman and García Pérez, 2006). Companies in the 80s and 90s invested in manufacturing setups in China to cater to the growing demand for goods in developing economies across Asia. As globalization helped companies expand into China, the supply chain structure of these companies became tightly integrated with their suppliers who also set up base in China. Even today, multinational companies account for over two-thirds of China's high technology output and over ninety percent of its high technology exports (Nolan, 2012).
The economic crisis of the second half of the first decade created a situation that was ripe to drive consolidation. As smaller companies struggled, larger entities were able to step in acquire them for the proverbial song. Examples of these include the takeover of Jaguar Land Rover (JLR) by an Indian Automotive manufacturer, Tata Motors. Similarly, Chinese manufacturer Geely bought out Volvo. While the former did not create a significant flutter, the latter set off alarm bells among the global business community of a “Chinese Takeover”. Every subsequent acquisition by Chinese companies was studied with interest and alarm by observers. Everyone thought that China was looking to take over control of the world’s major companies. However, Nolan points out clearly that this cannot be the case. Chinese enterprise today represent a measly 6 per cent of the ownership of the top companies across the world, by no means an alarming figure, and only 23 out of the FT 500 are Chinese firms, less than five percent. Peter Nolan, the Sinyi Professor of Chinese Management at the University of Cambridge claims that in fact, Chinese acquisitions abroad face significant hurdles, thanks to the global consolidation of firms in the previous decades. According to Nolan, “China has not yet bought the world and shows little sign of doing so in the near future” (p.143, 2012). In fact, many global conglomerates are already too big for China to acquire. Instead, these firms are in a position to gobble up the world, China included.
The book focuses heavily on the economic development that has taken place in China and across the world, and its core impact across all aspects of the global economy. According to Nolan, (2012), the GDP growth of China remained 6% - 8% during the last decade, making it one of the economies of the world that worked exceptionally during the current economic crisis. This coupled with the rising demand for China as a low cost manufacturing center contributed to its significant performance (Rein, 2012). However, in spite of its economic growth, Chine still remains a developing country with low per capita income as compared to the developed nations. Nolan outlines that contrary to widespread perceptions in the Western press, China is open to foreign investors and many of the areas in which China has been said to be ahead are actually being spearheaded by Western firms which have a significant technological advantage over the Chinese counterparts. Even Chinese national champions, the so-called state enterprises lag their Western counterparts in competitive scales, and have a negligible presence outside China (Shambaugh, 2000). Their size and strength comes from the domestic market alone and their presence in the U.S. and the EU is “negligible”. Then, what is the key factor that is driving China’s Going Global strategy?
According to the words of Peter Nolan “In the current economic scenario, China is the Godfather of the economies, and they have the guts, funds and power to buy things but the argument in buying of everything is not at all right”.(pg. 143, 2012) The Chinese focus in acquisition of companies is very strategy driven. For example, China is investing heavily in the development of natural resources in Latin America and Africa. This helps the Chinese secure raw materials like copper, iron and coal while giving them access to these markets for their products. However, the size of these markets is very small compared to the developed countries, and Chinese firms remain small compared to companies from developed countries. Another example given by Nolan includes oil and gas. While China has been making investments in acquiring and developing oil and gas resources internationally, it is widely known that 90 per cent of these are controlled by the respective national oil companies (NOCs), and the rest by the private giants. The NOCs seek the assistance of the private players in areas of technical support due to their knowledge and expertise, thereby denying China an opportunity to break into this market at a global level. This creates an oligopoly with a few “giant” firms controlling more than fifty percent of the market for oil and gas. The same scenario is seen in sectors such as automobiles, aircraft, telecommunications and electronics.
The key driver for China’s international acquisitions has been primarily its acquisition of natural resources, technology and food. Therefore, to achieve a strategic presence in these sectors, China has been looking at acquisitions. The aim behind the acquisitions is to create multinational companies which can contribute in areas important for China’s economic development (Yueh, 2013). Since outward capital flows from China are controlled by the Government, only acquisitions that meet these criteria are approved and supported by the Chinese government through funding. Having a globally known brand opens the doors for Chinese manufacturers to bring the rest of their products to the global market. The best example of this is seen in Lenovo’s acquisition of IBM’s PC products business. While taking over the PC business, Lenovo also acquired the rights to use the IBM’s brand names on products for five years, and used the time to build its product presence in markets where it could not penetrate earlier. This logic can similarly be applied to Geely’s acquisition of Volvo. The growth of Chinese financial institutions is similarly restricted by their involvement in the domestic state enterprises. Since the Chinese banks do not fund the larger “system integrators” the scope of their operations is also restricted. In fact, many of the IT systems on which these banks operate are set up by multinational firms like HP and IBM, and Chinese firms have very little presence in this area as well. The author describes this as surprising, given the fact that China is the world’s largest exporter. Essentially, most of the products that China manufactures are not Chinese, but Western, and their domestic firms are yet to achieve the kind of presence in western countries that these Western companies have achieved in China.
My personal verdict about the book is positive and a big thumbs-up for Peter Nolan, for the factual and clear approach that he has taken in putting the right facts and figures across. The book is short and to the point, and does not waver from the central theme too often, unlike most theoretical discussions which can sometimes be meandering in their approach to the subject. One of the best things associated with the book is that it probes and investigates the global economic system in which the entire world is living in. While the book does provide insight into China, it is not a one-sided view, but takes an all-round perspective across the G-7 countries as well as China. Nolan clearly outlines the fallacies in the arguments put forth by other Western economists on how the Chinese are taking over the world. Instead, he says that while that may happen sometime in the future, it is not likely to be now, and Chinese enterprises lack many of the basic organizational, economic and administrative capabilities to manage a multi-country, multi-cultural environment.
One area that the author should have looked to cover is the influence of China on other developing economies. Like the G-7 countries, China too is looking to spread its influence across the developing nations and is taking a strong position in investing in infrastructure, nature resource utilization and development of industries across the developing economies of Africa and South America. Here, it is slowly beginning to compete with the larger enterprises of the G-7 countries and can pose a challenge to them. This aspect is one which has been very briefly covered by Nolan. However, this may be the subject of a future book, hence possibly avoided by the author. Another key question is given the growing impact of China’s industrial expansion on its society and environment, and how long China will be able to sustain its pursuit of growth. Already questions of permitting greater freedom of expression, a transition to democracy and an urgent need to clean up its polluting factories have been raised, and these are likely to have an impact on China’s ability to present itself on a global stage as a suitable partner or suitor. Therefore, Chinese acquisitions are likely to face increasing resistance, defeating the hypothesis of global takeover. This aspect has also not been adequately covered by the author.
All in all, the book is a good read and a compulsory one for Western politicians and policy-makers, who tend to get carried away by the rhetoric of the media. Nolan points out for example, that no other Chinese firm besides Huawei in telecom has made any significant global impact in their respective industry outside the Asian geography, and it will take time before they do so. The book bases all of its arguments on facts and figures, all of which can be verified, and therefore present irrefutable logic on the issue. A short but definitely an interesting and worthwhile read is the conclusion.
References
Fishman, T. and García Pérez, R. (2006). China, S.A.. Madrid: Debate.
Moyo, D. (2011). How the West was lost. New York: Farrar, Straus and Giroux.
Navarro, P. and Autry, G. (2011). Death by China. Upper Saddle River, N.J.: Prentice Hall.
Nolan, P. (2012). Is China buying the world?. Cambridge, UK: Polity Press.
Rein, S. (2012). The end of cheap China. Hoboken, New Jersey: John Wiley & Sons, Inc.
Shambaugh, D. (2000). The evolving and eclectic modern Chinese state. [S.l.]: [s.n.].
Yueh, L (2013, 30 May) China buying up the world? BBC Business News, retrieved from http://www.bbc.com/news/business-22717939 last viewed 5 November 2014.
