Business Strategy and Corporate Governance in the Chinese Consumer Electronics Sector

Chandos Asian Studies Series: Contemporary Issues and Trends

Business Strategy and Corporate Governance in the Chinese Consumer Electronics Sector

Hailan Yang

Stephen L. Morgan

Table of Contents

Cover image

Title page

Copyright

List of figures

List of tables

Abbreviations and acronyms

Preface

Chapter 1: Introduction to strategy, corporate governance and corporate reform

Abstract:

Overview

Business strategy and the corporate governance of Chinese firms

Objectives of the book

Research methodology

Structure of the book

Chapter 2: Business strategy and corporate governance: theoretical and empirical perspectives

Abstract:

Introduction

Institutional theory (IT)

Business strategy (BS)

Corporate governance (CG)

Gaps in the literature

Conclusion

Chapter 3: The economic background in China

Abstract:

Introduction

Economic reform in China

The development stages of the Chinese consumer electronics sector

The classification of firms by ownership in China

The shareholding programme in China

Background to the case firms

Conclusion

Chapter 4: Business strategies in the focal companies

Abstract:

Introduction

The development of exploitation and exploration strategies in SOEs

The development of exploitation and exploration strategies in COEs

The development of exploitation and exploration strategies in DPOEs

Results of the business strategies

Conclusion

Chapter 5: Ownership structure and the characteristics of the board in the focal companies

Abstract:

Introduction

The ownership structure of the firms

Characteristics of the boards of firms

Conclusion

Chapter 6: Links between institutions, business strategies and corporate governance

Abstract:

Introduction

The model of institutional factors, business strategies and corporate governance in China’s transition context

Factors influencing the development of firms in China’s transition context

The trend of development of Chinese firms

Contributions

Limitations

Conclusion

Chapter 7: Conclusions

Abstract:

Summary

Research and managerial implications

Avenues for future research

Bibliography

Index

Copyright

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First published in 2011

ISBN:

978 1 84334 656 2

(Chandos Publishing)

ISBN:

978 0 85709 152 9

(Woodhead Publishing)

© H. Yang and S. Morgan, 2011

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List of figures

1.1. Structures of China’s corporate governance system 8

2.1. Theoretical model 43

3.1. China’s GDP growth, 1979–2005 49

3.2. Categories of firms in China 59

3.3. Employees by enterprise ownership (%), 1978–2007 63

3.4. Number of registered private firms in China, 1989–2007 65

3.5. Number of firms listed on the Shanghai and Shenzhen Stock Exchanges, 1990–2007 66

4.1. Percentages of the three kinds of patents in Hisense, 2005 94

4.2. Yankon’s overseas and domestic sales revenue, 2001–2005 106

4.3. The institution–strategy–performance framework in the Chinese CE sector 110

5.1. The pre-reform relationship between SOEs and Government 119

5.2. The listing process for SOEs 121

5.3. The ownership structure of Panda – Form 1 122

5.4. The ownership structure of Hisense and Huadong – Form 2 123

5.5. A comparison of state shares in the listed firms of Hisense, Huadong and Panda, 2000–2008 125

5.6. The relationship between listed firms and ultimate controller in COEs 127

5.7. The relationship between actual controllers and the listed firm, Yankon 134

5.8. The ownership structure of Silan 135

5.9. The relationship between actual controllers and the listed firm, Tiantong 135

5.10. The transformation of ownership structure and board characteristics of the cases at different stages 151

6.1. The interrelationship between institutional factors, business strategies and corporate governance 159

6.2. Contributions of the study 168

List of tables

1.1. Profile of interviewees from companies 17

1.2. Profile of non-company interviewees 18

3.1. Priorities of government motives for their choice of industrial projects 56

3.2. Brief introduction of the eight firms, 2006 75

4.1. Leading brands in China’s CTV market (1996, 2007) 95

4.2. R&D spending as a percentage of sales, 1998–2006: A comparison between Haier, General Electric (GE) and Sony 102

4.3. The firms’ domestic market share, 1995–2007 109

4.4. The growth rate of the main business revenue of firms, 2007 109

4.5. The stages of firms’ pursuit of business strategies 114

5.1. The relation-based positions in DPOEs, 2006 132

5.2. A comparison of shares in case firms at different stages (%) 138

5.3. Personnel composition of the supervisory board, 2008 145

5.4. A comparison of boards in case firms at different stages 146

5.5. Percentage of independent directors from different areas, 2007 147

5.6. Percentage of affiliated directors in case firms at different stages (%) 149

Abbreviations and acronyms

AMC Asset management company

BoD Board of directors

BS Business strategy

CCP Chinese Communist Party

CE Consumer electronics

CG Corporate governance

CMRS Contract management responsibility system

COE Collectively-owned enterprise

CSRC China Securities Regulatory Commission

CTV Colour TV

DPOE Domestic privately-owned enterprise

FDI Foreign direct investment

GDP Gross domestic product

IC Integrated circuit

IPO Initial Public Offering

IT Institutional theory

JV Joint venture

LP Legal person

M&A Merger and acquisition

MNC Multi-national corporation

NPL Nonperforming loan

NSB National Statistics Bureau

OEM Original Equipment Manufacturing

R&D Research and development

RBV Resource-based view

SAIC State Administration for Industry and Commerce of China

SASAC State-owned Assets Supervision and Administration Commission

SB Supervisory board

SOE State-owned enterprise

SSE Shanghai Stock Exchange

SZSE Shenzhen Stock Exchange

TCE Transaction cost economics

TVE Township and village enterprise

WTO World Trade Organization

Preface

Three decades of economic reform has allowed China to emerge on the global stage in a way that has been dramatic and astonishing for many observers. From a country largely irrelevant to global trade and investment, China became the second largest economy in 2010. As a result of the reform, economic globalization and increasingly fierce market competition, Chinese firms now face a more complex and volatile institutional environment at home. Many have also embarked on adventures abroad – outward foreign investment from China has soared during the past decade. Focusing on Chinese firms at home, in this book we ask: What are the respective roles of new rules of the market economy and what is the remaining legacy of the planned economy on Chinese firms? How do the Chinese firms improve their competitive advantage internally to meet the challenges of reform? These questions have recently fascinated researchers of organization and strategy. However, what makes the questions in China particularly complex is the very character and pace of change. Continuously changing market conditions in transition economies challenge the theoretical and methodological approaches to studying business strategies (BS) and corporate governance (CG) that have been derived from advanced and (relatively) stable market economies.

The transition economies therefore provide a new context in which to consider the relative strengths and weaknesses of the different theoretical concepts. As the largest and one of the fastest growing transition economies in the world, China provides a significant counter-example to the findings of existing literature on law, finance and growth that examine strategy and governance of firms. In many ways, it is difficult to compare the corporate reform in China with that in developed countries, or even in Eastern Europe and the Soviet Union for that matter. Unlike some other communist countries, where the government undertook massive centralized privatization of the State-owned enterprises, one striking feature of the Chinese transition is its fast growth without large-scale direct privatization. This has often been put down to Chinese pragmatism, summarized in the phrase ‘crossing the river by feeling for the rocks’ (mozhe shitou guohe).

Although the Chinese State still maintains ultimate control of the economy, there has been a deeper movement away from State planning and State-run institutions. Chinese reform has succeeded in creating more competitive markets, thereby providing a fairer market environment for all types of firms than in the pre-reform period. In the transition from a centrally planned to a market-oriented economy, China has experienced the emergence and prosperity of entrepreneurial activities over the past three decades. Chinese manufacturers have had more freedom and willingness to innovate according to market liberalization, competitive pressures and consumer demand. Increased incentives have enabled managers to be more market- and learning oriented and to enhance the competitive position of their firms. Business strategy and corporate governance are two of the major internal means to achieve the competitive advantage of firms. Chinese managers are recognizing and reacting to competitive pressures. The increasing autonomy of managerial decision-making in strategies represents a genuine transformation of the business environment.

Business strategy is a necessary but not a sufficient condition for a competitive approach. The governance of the firm also matters for competitiveness. The form of corporate governance Chinese listed firms have embraced is unique. We can see elements of both the Anglo-American and the German–Japanese models of corporate governance, yet the bulk of the listed firms in China are State-controlled and the State is the largest shareholder in the typical listed firm. With the adoption of an increasingly market-oriented system in China, market competition has driven firms to dilute the ownership control of the State in exchange for public funds to finance their growth, which has resulted in an ownership evolution, in part. However, the reform related to corporate governance is relatively harder and more sensitive in China because it is about who controls and owns the property of the firms, which for most listed firms was originally a State asset. Transformation of firms in China has more readily begun with changing their business strategy, which had little to do directly with their ownership. The reform of business strategy in China preceded the drive to reform corporate governance. Contrary to some of the literature on the topic, the reform or change in the role of corporate governance is not necessarily the most direct way to improve firm performance.

The interrelationship between the institutional environment, business strategies, competitive position and corporate governance is the root of the different processes that influence firm development in China during the transition period. We explain the differences in the process of the development of firms in terms of a virtuous circle of positive feedback in response to market stimulus or a vicious circle of defensive and negative feedback that reinforced anti-market orientations associated with their administrative heritage before the advent of economic reforms. During the process, the reform of business strategy may drive the reform of corporate governance. China has a diverse, complex and rapidly changing economy. The dynamic evolution of the business strategy and corporate governance in China will remain a fascinating research agenda well into the future.

Many people deserve to be thanked for their assistance in preparing this book. A very special word of thanks to the University of Melbourne for giving us support that has enabled us to undertake this study. We are grateful for the participating companies, the Hisense, Panda, Huadong, Haier, Chunlan, Yankon, Tiantong and Silan groups, for generously providing us with access to senior staff, information and research material. We would like to express our heartfelt gratitude to many colleagues and friends, who graciously gave their time and knowledge to provide us with ideas, comments and suggestions. Without their patient assistance, the completion of this book would not have been possible. Foremost, we are grateful to our families. Their support and love gave us the strength and inspiration to write this book.

We would like to thank the following for permission to reproduce copyright material: Figure 1.1, Chapter 1, reprinted with the permission of Edward Elgar Publishing, from The Development of Corporate Governance, by On Kit Tam. Table 3.1, Chapter 3, reprinted with the permission of Nova Science Publishers, from China’s Industries in Transition, by Xiaojuan Jiang. Figure 5.2, Chapter 5, reprinted with the permission of Blackwell Publishing, from Exit the Dragon? Privatization and State Control in China, by Guy Liu and Pei Sun.

1

Introduction to strategy, corporate governance and corporate reform

Abstract:

As the largest and fastest growing transition economy in the world, China’s economic achievement has received much attention. Economic development over the past three decades has been astonishing. From a country largely irrelevant to global trade and investment, China became the second largest economy in 2010. Among the many developments has been the transformation of enterprise organization and ownership. Our focus in this book is to first analyse how Chinese firms have developed their business strategies and corporate governance; and second, the interrelationship between the two at this point in the economic reform process.The aim of this chapter is to provide a framework for the book. It begins with an overview of Chinese economic reform and specifically the reform of Chinese firms. The Chinese consumer electronics sector is used for the study, partly on the basis of its significance in national economy, but also because its growth experience is typical of many industries in the Chinese economy as a whole. Next, the business strategy (BS) and corporate governance (CG) of Chinese firms is described and research issues identified. During the transition process, managers have progressively come to exercise their greater decision-making power and to introduce a modern corporate system in order to enhance performance of the firm. Finally we outline the research objectives and the methods used, and conclude with a summary of the structure of the book.

Key words

strategy

governance

reform

China

The fundamental problem of China research is that the concepts theories favoured in the disciplines were developed out of assumptions about systems which operate quite differently from China which is more a civilization pretending to be a nation-State.

(Lucian Pye)

Overview

The Chinese transition from a planned economy to a market-oriented economy over the past three decades has seen considerable research focused on the reform of firms.¹ Research has examined questions such as: how do the Chinese firms improve their competitive advantage using internal resources to meet the challenges of the reforms? What is the respective role of new rules of the market economy and remaining legacy of the planned economy on Chinese firms? And how have managers sought to develop organizational structures to compete more effectively in the emerging market? This book aims to analyse how Chinese firms in the consumer electronics (CE) sector have developed their business strategy and corporate governance – two aspects of their internal organization crucial for competitive advantage – during the reform process. Chinese transition to an increasingly market-oriented economy has given birth to a new diversity in firm ownership types. The book focuses on three broad ownership forms: the State-owned, collectively-owned and domestic privately-owned firms. As will become apparent, there is frequently difficulty in clearly classifying firm ownership structure in China. These three firm types best enable a comparative analysis of business strategy and corporate governance in this industry sector, which has been one of the leading sectors in the growth of Chinese-produced consumer manufactured products for domestic and export markets (OECD, 2002; CCIDConsulting, 2007).

Development of business strategy and the appropriate form of corporate governance are two of the major internal means to achieve the competitive advantage of the firms (Child and Pleister, 2003; Filatotchev and Toms, 2003). Competitive advantage comes from either lowering costs relative to competitors (doing the same better or more efficiently) or differentiation (do something different that provides more value to the user than the competitor), which enables the firm to outperform others in the sector (Porter, 1985). The transition from a central planned to a market-oriented economy in China has increased the autonomy of managerial decision-making in strategies that represents a genuine transformation of the business (Tan, 2002; Tan and Tan, 2003). Chinese firms in general have become more market responsive and in turn competitive. The strategic decision-making capability of managers should further be analysed with reference to the firm’s governance arrangements (Dalton et al., 1999; Filatotchev and Toms, 2003; Thomsen and Pedersen, 2000), which are related to the abilities of managers, their incentives to develop effective strategies and their accountability to stakeholders. Driven by the fierce market competition in the sector, firms have strived to reform their corporate governance (Liu and Woo, 2001). Improved corporate governance, and greater rewards for managers, are seen as the means to better enable the managers first to exploit strategically the internal resources of the firm, and second to position the firm to better explore external resources, thus to improve the competitive advantage of the firm (Jefferson and Su, 2006; Thomsen and Pedersen, 2000).

Past empirical studies of Chinese firms have largely neglected the link between the three elements of business strategy, corporate governance, and performance in a transition economy such as that of China. These elements are related in a series of cause–effect interactions that start with the transition of the business environment and the response of firms in allocating resources. Changes in these elements may cause a fit or misfit between the strategic choices of firms and the external environment (Grant, 1999). Analysing the interaction between various internal and external elements helps enrich our understanding of the different processes that influence firm growth in the CE sector in China during the transition period.

We examine the CE sector in particular because it is one of the country’s most important and dynamic manufacturing sectors; it was also one of the earliest market-oriented sectors. Thirty years ago the sector did not exist. China is now one of the world’s biggest producers and exporters of CE products (CCID Consulting Report, 2008). The sector is therefore useful for examining how firms develop their business strategy and corporate governance in China, which is undergoing the transition to a market-oriented economy domestically in which firms face challenges from multi-national corporations (MNCs) globally. Many Chinese firms in this sector over the past decade have also been pioneers in venturing abroad, setting up subsidiaries in both advanced market economies and developing economies.

For Chinese managers who have been so enthusiastic to embrace Western theories and practices for the past 30 years, the challenge is how to adopt and implement approaches to management in a very different institutional and political context to that in which they were developed. This book investigates the generalizability of the Western model of management in China. The transfer, adaptation and implementation of Western management practice is not only important for Chinese firms, which are eager to integrate themselves with the world, but also important for MNCs, which have tremendous incentives to succeed in the Chinese domestic market as local consumers acquire increasing levels of discretionary income.

Business strategy and the corporate governance of Chinese firms

Empirical studies on business strategies

Empirical studies of business strategies in transition economies are relatively sparse. Modern literature on strategy in the second half of the twentieth century was dominated by a focus on Western firms mostly in advanced market economies (Child and Pleister, 2003; Peng, 2005; Tsui et al., 2004). The role of emerging economies’ operations as part of a ‘global strategy’ is occasionally discussed, but the literature typically treats the subject from the perspective of multinationals pondering major corporate incursions into or retreats from foreign environments (Nelson, 1990). Strategy within the business environment of emerging countries has been largely ignored. Yet the challenges in these environments are huge. Emerging economies are in a state of dynamic flux, whereas business strategies based on Western industrialized economies assume that the business and institutional environment is sufficiently predictable to make medium and long-term plans reliable.

The heterogeneity and dynamic changes found in emerging economies magnify the challenge to the wholesale adoption of developed economy-based theoretical and methodological approaches in these countries (Wright et al., 2005). For example, it is difficult to compare the enterprise reform in China with European countries because of the different approach to the respective market-institutional environment and because of the very different historical, economic and cultural contexts (Buck et al., 2000). Thus, the theories driving the strategy research agenda are not equally