Few had expected the Golden State Warriors basketball team to reach the US National Basketball Association's (NBA) 2014–2015 season title with a rookie head coach and a roster filled with young talent that had little playoff experience. It was a huge achievement for the franchise that had not won a championship for 40 years. However, the even bigger winner of the NBA Finals was a Chinese smartphone manufacturer that sponsored the team, whose brand name became increasingly well known in the US thanks to marketing campaigns like the one with the Golden State Warriors.

No, that Chinese smartphone brand was not the widely talked about young smartphone start-up Xiaomi. Nor was it Lenovo, the PC giant that once acquired the IBM PC division and more recently the Motorola mobile phone division in the US. Furthermore, it was not the aggressively expanding Huawei that did better than any other Chinese player in terms of moving into high-priced models. The Chinese company was ZTE or Zhongxing Telecommunications Equipment Corp.

Although ZTE was a major supplier of telecom gear used by carriers around the world, its name was still unknown to many people outside of China. In recent years, Xiaomi, Lenovo and Huawei were in a neck-and-neck race in the domestic smartphone market, and globally they were also competing for the world's third largest smartphone vendor position behind Samsung Electronics and Apple Inc. But in the US market, ZTE was ahead of them. In fact, ZTE was the only Chinese manufacturer with a sizable market share in the US.

By the end of 2014, it had become the fourth largest smartphone brand in the US – behind only Apple, Samsung and LG, and it was the second largest in the prepaid (no contract) market. ZTE's partnership with the NBA was part of the company's plan to increase its brand awareness in the US market and worldwide. For the latest 2015–2016 season, ZTE signed up further new deals with two more leading NBA teams – the Chicago Bulls and Cleveland Cavaliers, its basketball sponsorships reaching five major NBA teams in total.

ZTE's solid presence in the US is one example of Chinese smartphone makers expanding overseas and challenging market leaders Apple and Samsung. The broader trend is that the major internet companies in China are moving beyond the saturated domestic market to compete on a global stage to maintain their growth. Their presence has been felt abroad as they send their products and services overseas. They also actively partner with or directly invest in foreign companies to accelerate their expanding reach. However, as will be seen in the examples in this chapter, it is not an easy task to break into the US and other foreign markets. Many companies have tried and struggled to work out their strategy beyond the home market. Perhaps ZTE has made a fast breakthrough in the US smartphone market, but for all the Chinese internet companies expanding into global markets, the task is no slam dunk.

“Tomorrow Never Waits”: ZTE in the US

Although China is the largest smartphone market in the world by number of users, the US market is equally significant. The US smartphone sales figure is about half of that in China in recent years, but because the US average price per unit is much higher than in China, the US market's total dollar size is neck and neck with China. Apple and Samsung are considered to be the two dominant players in the world partly because they have leadership positions in both China and the US market.

In the Chinese market, domestic brands like Xiaomi, Lenovo and Huawei have emerged to compete directly with the two leading foreign brands. However, they need to achieve a meaningful foothold in the US before becoming true global players. Another aspect of the US market's importance is that if one can build a successful brand in the US, this brand value can be applied to worldwide markets. Therefore, the Chinese smartphone brands have a lot at stake when they compete with the two leading foreign brands (and among themselves) for market share in the US: ZTE reaching a top three Android phone maker ranking is thus highly significant.

ZTE was founded in 1985 at the tech metropolis of Shenzhen city in Southern China. Traditionally its main business was supplying telecom equipment and network services to global telecommunications carriers. Recently, the consumer device business including smartphones has been a new growth area for the company. Just a few years ago, ZTE was one of the most important domestic brands in China. In fact it once ranked first among the top four brands of “ZTE, Huawei, Coolpad and Lenovo” (known as “zhong-hua-ku-lian” in Chinese). However, Xiaomi, Huawei and Lenovo have adapted to the Chinese market's special needs and characteristics much more quickly than ZTE. As a result, ZTE's market share and leadership position in China have declined amid intensified competition in recent years.

The main reason for the decline of ZTE's smartphone market share in China is its heavy reliance on its partnership with carriers. Even in 2013 when competition for the domestic market was hot due to new entrants like Xiaomi, who marketed their phones almost exclusively on the internet, ZTE's carrier-based phone sales still accounted for about 80% of total business, with social network-based sales at only about 20%. With the carriers’ subsidies decreasing, the weakness in ZTE's marketing model became obvious, and ZTE realized that it urgently needed to transform itself. Learning from its competitors, ZTE expanded its online sales channels and responded to users’ comments and suggestions in the internet forums.

In the US market, however, ZTE's deep relationship with carriers is a huge advantage. Unlike in China, the sales channel for smartphones in the US market is dominated by the carriers. This means that for any smartphone manufacturer to enter the US market, its first priority is to establish a relationship of trust with carriers. ZTE entered the US in 1998 and established partnerships with many of them including AT&T, Verizon, Sprint, T-mobile and so on. As illustrated by the sales figures in 2014, the company's smartphone shipments to the US had a growth rate of more than 50% in 2014, far exceeding its overall growth of 20% globally.

In the past, ZTE supplied unbranded “white label” phones in response carriers’ demands, so the products were at best “handsets assembled by ZTE”. Strictly speaking, ZTE was not even an OEM (original equipment manufacturer) of smartphones, let alone a phone brand for the US market. ZTE's first break was between 2010 and 2011, a period when US customers were actively upgrading their phones. While all the manufacturers were focusing on the post-paid (contract) market, ZTE brought a high quality, larger phone screen to the prepaid (no contract) market. The ZTE Warp phone exceeded 1 million units in sales, a major milestone for ZTE.

According to ZTE's data, between 2010 and 2015, its US business increased approximately 20 times. Meanwhile, its phones moved from “having no logo” to “carrying the ZTE logo”. With the trust of the carriers, more than 95% of ZTE device testing is now performed at ZTE's own labs. By contrast, years ago ZTE had to test its devices at authorized third-party labs, which was costly both from an expense and an efficiency perspective. In 2015, ZTE stated that it had 68 types of device available for US sales (although not all carried the ZTE brand), and it boasted that its phones could be found at any carrier.

As the company aims to strengthen its own brand power, ZTE has decided to scale down production lines by offering only two series of smartphones, “Axon” and “Blade”. With the addition of the “Nubia” brand produced by a subsidiary, ZTE currently owns three smartphone series, which, interestingly, can be abbreviated as the “NBA” series, taken from the initial letters of Nubia, Blade and Axon. (See the “China's First Lady Chooses ZTE” box.) As it launches more high-end and innovative products, ZTE is distancing itself from the fierce price competition among Chinese brands selling phones at close-to-cost prices. (Of course, in a bid to target a variety of carrier relationships and consumer groups, ZTE remains flexible in providing handsets with customized features and distinct specifications.)

In addition, ZTE's extensive portfolio of patents is also an advantage for its expansion in the US market. At the corporate level, ZTE has made the commitment to license standard essential patents on fair, reasonable and non-discriminatory (FRAND) terms (or as ZTE executives put it at public interviews: “We're paying our fair share”). ZTE entered into cross-licensing arrangements with major patent holders like Qualcomm, Microsoft and Google, and over the four years from 2011–2014, it paid more than $17 billion to US companies in licensing fees and royalties.

At the same time, ZTE has spent large amounts in research and development to build up its own patents. According to the data from the World Intellectual Property Organization (WIPO), by the end of 2014 ZTE was the only Chinese company that ranked in the top three worldwide in patent applications under the Patent Cooperation Treaty (PCT) for five consecutive years. According to ZTE's estimate, it held 13% of the world's 4G-specific handset-related patents. As will be seen later in this chapter, the lack of a patent portfolio is a major challenge for Chinese tech companies’ overseas growth. In ZTE's case, its own patent portfolio and broad cross-patent licensing arrangements provide a solid foundation for its entry into foreign markets.

Furthermore, ZTE's targeted brand marketing, supported by distinguishable design and features for the target population, has made an important impact in the North American market. At the 30th anniversary of the company in 2015, ZTE introduced a new logo and a fast-speed tagline “Tomorrow Never Waits”, emphasizing the new focus on transformative mobile technology solutions for its consumers and carrier partners. To some extent, the new brand image can be viewed as a correction from its earlier practice, which was relatively slow to incorporate the internet value into its business lines. As mentioned previously, the company reacted later than its competitors to the fact that many Chinese consumers had moved to buying new smartphones online a few years ago. But in the context of its new corporate value, ZTE has repositioned itself as a consumer-oriented smartphone brand, and consumer needs are now paramount for the company.

In the North American market, ZTE has worked hard to change the conventional perception that Chinese brands represent cheap prices, low quality and poor service. Instead, the new brand identity of ZTE is youthful, fun and sporty. ZTE's branding partnership with major NBA teams comes at a time when smartphone technology is fundamentally changing the way fans are experiencing sports such as NBA games (with photo taking, sharing on social networks, following players’ Tweets, etc.). The NBA has a large number of fans in the US, and the games are also broadcast in China and many other parts of the world. Players’ Twitter accounts are being followed by fans worldwide. The games’ global outreach to the potential targets – young people and sports fans – is a perfect match for the ZTE phones’ new brand identity. (See the “ZTE's Winning Picks” box.)

To match its new marketing theme, ZTE has teamed up with a large number of software makers and technology partners to develop distinguishable designs and features for its target market. One good example was its Axon phone released in July 2015. ZTE went to great lengths to incorporate advanced tech specifications into the model to make sure it could live up to the company's new brand positioning as the “affordable cutting-edge phone”. The phone included a “lightning-fast processor” with 4GB of RAM and a long life battery, and it had a dual microphone designed for high fidelity sound recording, which ZTE claimed to be “the first true high-fidelity phone available in the US” with “amazing high-fidelity sound playback”. In addition, the phone was equipped with full biometric authentication features including fingerprint, voice and retina recognition.

The most important feature, however, related to its camera and that played into the company's new focus on the sports theme. The Axon phone had dual rear-facing cameras that could shoot 4K HD videos. There was an 8-megapixel front-facing camera, and the sub-camera is used to speed up the auto-focus or for depth-of-field effects. According to ZTE, the front camera had “incredibly fast auto-focus” (ZTE's term), and it would allow the user to take selfies simply by smiling, a testimony that this new phone's camera is perfect for sports fans to catch fast-moving objects and scenes.

In today's market, however, almost all the brands’ new versions are equipped with better cameras and screens, more powerful processors, cooler designs and higher quality metal materials. ZTE's plan is to surpass LG to reach the top three in the US market within the next three years. Maybe the real test for ZTE in the US still lies ahead. It is worth noting that at the ceremony to add the Knicks to its list of team partners, the CEO of ZTE's North American operation, Lixin Cheng, was awarded a number 8 jersey to celebrate the deal. (In Chinese society the number eight is the luckiest number of all.) For ZTE's next major breakthrough, good luck may be as important as its technical superiority and smart marketing.

Xiaomi: Into the Emerging Markets

Competition among the Chinese smartphone brands in the domestic market is truly fierce. In 2015, according to data from the market research firm Strategy Analytics, six of the top 10 smartphone brands worldwide were Chinese manufacturers, with a few of them selling handsets only in China. Another firm, Canaccord, estimated that there were about 1,000 smartphone brands globally, with several hundred of them in China. This data certainly demonstrated the significant size of the Chinese market relative to the rest of the world, but it also explains the price war among the Chinese brands and their razor-thin profit margins.

At the same time, since 2015 the Chinese market has started to experience slowing growth. The research firm IDC estimated that smartphone shipments during the first quarter of 2015 were 98.8 million, down 4.3% from a year earlier. That was the first decrease in new orders in six years. But this was not completely surprising when put into context, because IDC also estimated that more than 800 million people were already using smartphones in China.

Therefore, the Chinese smartphone makers are looking for more opportunities outside China, particularly in emerging markets. Compared to the Chinese market, robust growth in smartphone demand is still expected in the emerging markets in Asia, the Middle East, Latin America and Africa, where many consumers are replacing their basic feature phones with smartphones. As happened in China a few years ago, many people in emerging market countries will skip landline phones and move directly into the mobile phone era. With ever increasing technologically advanced capabilities, smartphones may also replace personal computers (PCs). Therefore many customers in those markets who have never owned a phone or a computer may leapfrog directly into a low price and high performance smartphone.

As a result, the domestic competition among Chinese brands is extending into the global markets, where Xiaomi and others will also need to fight with both globally established brands like Apple and Samsung and local start-ups from those countries. For Xiaomi, the immediate test is whether its low-cost business model can translate into success in overseas markets like China. Xiaomi's current model is to sell smartphones at near cost to develop a user base quickly before focusing on more profitable services at the next stage. Its low-cost strategy looks for markets where the price of a smartphone constitutes a large part of a consumer's income. According to Xiaomi executives, after China, Xiaomi's priorities will be India and Indonesia, followed by Brazil and Russia. These countries all have large populations of people who may become first time smartphone users in the coming years.

In particular, India is the most sizable and fastest-growing market. First, it has a population size comparable to that of China and is still growing. Second, with more than 200 million Indians online, India has the third largest number of internet users in the world, and it is projected to overtake the US in second place soon. Third, although India already has hundreds of millions of people using mobile phones, the smartphone penetration rate in the country remains low. Therefore India is probably the most promising smartphone market in the world, with hundreds of millions of potential new customers.

But Xiaomi's India entry has not been an easy one. To some extent, its hard work there resembles what foreign brands like Samsung and Nokia have experienced in China. The Indian market is intensely competitive. To start with, many homegrown entrepreneurs in India have been inspired by the success stories of Xiaomi and similar smartphone manufacturers from China. They are launching internet and mobile technology ventures themselves to capitalize on Indian market potential. Equipped with local knowledge about customers and distribution, some indigenous companies are among the best-selling brands in India. (Samsung as a foreign brand is also among the top sellers.)

In addition, Xiaomi's low-cost strategy is challenged by the broad range of the “low spending power” class in India. India's local brands like Micromax and Karbonn have already offered the local market smartphones comparable to Apple and Samsung specifications at much lower prices. To reach all Indian consumers, the top-selling local brands release a high number of phone variants to cover a large price range, with the low-end spectrum set at extremely low price points for mass appeal.

For example, some of them even design phones for customers who have so little spending power that they cannot afford 3G connections, and these ultra-cheap smartphones are sold at about $50 or even just a fraction of that. These products have no ambition to win over brand-conscious consumers in the big cities, but they have proved to be popular among those Indian consumers who have modest budgets and are happy to have a “just functional” smartphone for the first time.

Correspondingly, the distribution side is similarly more fragmented than in China. When Xiaomi first entered the Indian market, it successfully launched an online flash sale as had been done in China, which offered limited batches of phones to drive up demand and build brand cachet. For the broader market, however, many Indian customers still buy phones from the corner shop. So local brands can play out their local contacts and knowledge further. For a nimble player like Xiaomi that traditionally only sells phones and seeks feedback online, managing and building brick-and-mortar retail presence is a new challenge.

Another implication of offline distribution is that Xiaomi has to deal with traditional advertising as well. In the Chinese market, internet-based marketing has allowed Xiaomi to pass substantial advertising savings on to consumers. But in the Indian market, Xiaomi went “old-school” in July 2015 and bought an entire front page of The Times of India to run a national advertisement. After Xiaomi global VP Hugo Barra showcased the advert on Twitter, some news stories speculated that that was the first ever print advertisement taken out by Xiaomi.

Furthermore, features required by local customers also increased production costs, creating another challenge to the low-cost strategy. For example, it would be a huge task to make the mobile phone systems compatible with India's 20 plus official languages and additional dialects. Local brands have already developed software features to support local languages. As reported, Xiaomi has gone to great lengths to provide local customers with interfaces in India's languages. Its Mi 4i phone, for example, supported six Indian languages, but inevitably cost more than quite a few rivals (about $200). The cost may rise even higher when Xiaomi works with local engineers to cover more languages.

Finally, without much of a patent portfolio itself (and hence few cross-license arrangements), Xiaomi has to deal with lawsuits from competitors. In India, it has already been sued by Swedish telecom company Ericsson in late 2014. Ericsson accused Xiaomi of failing to pay licensing fees on patents. The local Indian court issued an injunction against Xiaomi, blocking both sales in India and the importation of devices. The case went up to the Delhi High Court, and legal proceedings are still ongoing. But the implication for Xiaomi goes beyond India, because the case may have alerted other IT giants to search for potential patent infringement claims against Xiaomi.

To put all this into context, Xiaomi's success in China has a lot to do with particular Chinese user preferences and market characteristics. There is no guarantee that the model could be replicated easily elsewhere. For the Xiaomi model to work, the company will likely target markets with large populations, a developed e-commerce culture, and weak telecom service providers. All these factors are important because Xiaomi needs volume to lower its own operating costs, and subsidies from telecom carriers may easily upstage Xiaomi phone's price advantage. Such perfect market conditions are difficult to find globally, and where they do exist, in India perhaps, Xiaomi has to prepare to compete head to head with foreign as well as other Chinese brands.

Besides, local rivals Apple and Samsung are formidable competitors in different ways. Apple's iPhone has distinctive brand power at the high end. The risk to Xiaomi and other lower cost brands is that their high quality phones may be bought by the broad population as a first time device, but most of those people still dream of having an iPhone for its brand value and related symbolic social status. In other words, the lower-priced models may get Indian users familiarized with and attached to a smartphone, but ultimately they may become Apple customers.

Samsung is one of the market leaders in India, and its product specifications are similar to Xiaomi's offerings. But the more interesting link between the two players is whether Samsung's rise and decline in China provides a reference point for Xiaomi's experience in India. (See the “Samsung in China” box.) In India and other emerging markets, Xiaomi is challenged to react to local market dynamics and consumer needs. The “Samsung in China” case shows that premium foreign manufacturers of smart devices can quickly lose market share and profit share to local rivals, when the latter's products match technological specifications, provide lower prices and better serve the special preferences of local customers.

As mentioned, some Indian brands specifically positioned themselves for the low price category, without even attempting to compete in the top-tier cities where consumers favor high-status foreign brands. The same is true for Southeast Asian markets, where local brands as a group have rapidly secured a solid foothold in a market among the world's fastest-growing category (next only to India). In the Philippines, for example, local brands have already grabbed more than half of the market share. The Philippine manufacturers “think and behave like Filipinos”, and they develop devices in light of the feedback they receive from local users, much as Xiaomi tweaks its phones based on Mi-fans’ feedback. Like Samsung in China, Xiaomi (and other Chinese brands) risks being squeezed from two sides in the foreign markets – between Apple's iPhone in the premium product category and the commoditized Android smartphones in the low price product category.

The intriguing question is: will the Chinese brands eventually be forced to become another Samsung in the new competition, on a path of decreasing market share and profit share globally? The bottom line is that in the highly matured market for Android system-based smartphones (see Figure 9.1), it is increasingly difficult for smartphone manufacturers to differentiate their high-end products. Hence, the possibility for any company to become the premium brand within the Android system family and to challenge the status of Apple's iPhone is quite low.

In a different context, however, there is still room for competition. The mobile internet era sees consumer preferences and habits change rapidly, so dominance in a single product may not last forever. The ultimate competition is to create a firm that turns consumers into believers in the company's value and culture, who then become deeply and intensely attached to the company and treat that brand as an identity that remains continuously relevant in their life for a long time. The true winner has to be decided in the ultimate multi-device world, which is “Smart 2.0” in ZTE's words, “convergence of telecom and IT” as described by Huawei, and “all-inclusive ecosystem” to use Xiaomi's term. All these Chinese players are seeking to tie users to an expanding family of devices and services, and the global war on smart devices will eventually be decided on a much bigger battlefield than the smartphone market alone. (The next chapter will continue this discussion in connection with Chinese-led innovations.)

Lessons from Overseas Expansion and Acquisition

In recent years, more and more Chinese tech and internet companies have started testing the waters of overseas markets. However, they often face formidable challenges and suffer serious setbacks when they expand into unfamiliar territory. Even for BAT (Baidu, Alibaba and Tencent), the three internet giants that have dominated the Chinese market in their respective fields, their journeys into foreign markets have not been completely smooth, either.

For example, in 2014 Alibaba launched a US shopping website 11Main on the home turf of e-commerce giants Amazon.com and eBay, but in just a year, Alibaba sold 11Main to another US e-commerce business OpenSky. (Alibaba kept a 37.6% stake in the combined entity after the transaction.) At the start of 11Main, Alibaba envisioned a shop window for small-time US merchants that may opt out of the US marketplaces, but it didn't take too long for the merchants to complain about a lack of support for their growth.

The other two internet giants have had their setbacks too. Tencent's WeChat messaging app has achieved more than 1 billion users worldwide, but most are in the Greater China region. After having solicited 100 million overseas subscribers – most of them from Southeast Asian countries – WeChat has hit a bottleneck in further expansion of the user base. In addition, it still has little impact in the English language-based social landscape dominated by Facebook or in local-language-centered markets such as Japan (controlled by a local service called Line). For China's leading search engine Baidu, its search service in Japan did not attract significant attention after years of trials, and its Vietnamese online forum, Tieba, launched in Vietnam, apparently tripped over social network regulations there before it was shut down.

Strictly speaking, few Chinese tech and internet companies have developed into truly global players. The Chinese companies generally have the majority of their customers in China (with limited foreign customers), earn almost all of their revenue income from the Chinese market (with limited foreign revenue sources), and have few brands recognized worldwide (with limited brand awareness in foreign markets). Part of the reason, of course, is because of the fast growth and enormous size of the Chinese market itself, which has kept the Chinese companies focused on domestic market share for a long time. At the same time, Chinese companies face many more challenges when they move beyond the home court.

The first challenge is a lack of patent holdings and potential intellectual property-related lawsuits. Xiaomi's lawsuit in India illustrates that it is critical for Chinese tech companies to secure an intellectual property (IP) portfolio in overseas markets. In the case of ZTE, its extensive existing portfolio of patents provides the company with considerable bargaining power in foreign markets, because ZTE's own patents allow it to enter into numerous cross-patent cross-licensing agreements with companies such as AT&T, Qualcomm, Siemens, Ericsson, Microsoft and Dolby. But such an IP portfolio is the result of ZTE's investment and accumulation over more than a decade. With fewer internal resources, younger start-ups like Xiaomi are more likely to face tougher challenges.

While all Chinese companies have to continue investing and innovating to fight the IP war globally, the bottom line is that they still have to prepare themselves for patent litigation. Take ZTE, for example. Because ZTE is one of the fastest growing smartphone vendors in the US, a great number of nuisance patent suits have followed. According to ZTE's own data, ZTE is facing more than 50 cases at any given time for patent infringement. At times these patent cases are brought by entities that have no intention of actually manufacturing the products. In response, ZTE has invested in hiring legal experts in-house and engaging with top class external legal professionals. With its own patent portfolio and cross-licensing arrangements with other major players, ZTE is not scared of going to court.

Between 2013 and 2015, ZTE consistently defeated InterDigital Inc. four times in investigations relating to Section 337 of the Tariff Act of 1930. In December 2013, the United States International Trade Commission (ITC) rejected InterDigital's allegation of violations of Section 337 of the Tariff Act of 1930 based on seven patents, with three of the patents ruled as invalid. This ITC ruling was later upheld by the US Court of Appeals for the Federal Circuit in February 2015.

In a separate ruling in August 2014, the United States ITC issued a final determination rejecting InterDigital's allegation of violations based on three other patents. Later, in April 2015, the jury in the US District Court for the District of Delaware decided that ZTE did not infringe any of InterDigital's claims relating to US patent 7,941,151. These legal proceedings are meaningful wins for ZTE, because it is rare for a Chinese company to succeed consistently in Section 337 investigations. For many other Chinese companies with few patent holdings and limited overseas legal capabilities, such patent lawsuits can present serious problems.

Another major hurdle is branding. When Chinese companies launch more high-end products in developed markets, they have to change the stereotype that Chinese products offer cheap prices, low quality and poor service. Few Chinese technology companies have established the same brand recognition globally as the products from their Asian neighbors, such as Samsung and LG in South Korea, or Sony and Canon in Japan.

The direct solution, of course, is to get affiliated with a North American brand, or more directly, to acquire one. For example, in the US market the Lenovo brand has an advantage over other Chinese brands thanks to its PC business. The brand is well known for acquiring IBM's ThinkPad division in 2005. Similarly in its global mobile business, Lenovo made two major US acquisitions in 2014: Google's Motorola Mobility and IBM's x86 enterprise server division. To a large extent, Lenovo's success in the global mobile business will depend on how much it can benefit from these two major acquisitions, especially the Motorola assets.

Motorola was a pioneer in mobile phones and a household brand in China many years ago, but it collapsed due to disruptive technologies and changing consumer behavior. After the merger, Lenovo decided to run both brands in the Chinese market. But young Chinese consumers have no memory of the earlier glory days of the Motorola brand in China, because Motorola had largely departed from the Chinese market some years ago.

Rather than trying to revive a last generation brand in the Chinese market, Lenovo's main rationale for the $2.9 billion acquisition of Motorola Mobility probably lies in the new channel that the Motorola brand may provide for the overseas markets. Motorola is strong in the carrier markets of North America and Latin America, which gives Lenovo important access to those markets.

As opposed to acquiring a brand directly, a more opportunistic way for a Chinese company to build up a strong brand in North America is to invest in “designed in North America” research capabilities. For example, during the decline of Canadian company RIM in recent years, ZTE recruited a team of BlackBerry engineers to give its North America R&D capabilities a substantial boost. (See the “ZTE picks up BlackBerry” box.) As a result, in 2014 ZTE (Canada) released a new smartphone called Grand X Plus, which was designed for Canadians out of the company's R&D Centre based in Ottawa, Canada. The brand value from a “designed in North America” product like Grand X Plus is not limited to the US and Canadian markets. Because the North America market is considered to be “high-end”, the brand value can later be transferred to other parts of the world (including the Chinese market itself).

The third hurdle is the different consumer culture and tradition that Chinese firms have to adapt to in foreign markets. Many Chinese companies have selected emerging markets as their overseas journey's first stop because of the overall similarities between those markets and China. As happened in China a few years ago, some emerging markets have a young and mobile-first population where smartphones are taking off in a big way. In addition, the customers there are generally as cost-conscious as those in China. Therefore, the general perception is that emerging market entries can play to the strengths of Chinese companies.

In practice, consumer behavior in different markets does exhibit some similarities. For example, the flash sales – offering a limited amount of products at extremely low prices for a limited time period – can be applied universally to foreign markets to stir up some quick consumer interest. But aside from the similar cost-consciousness among customers, there are a lot more local factors that are new to the Chinese players. Chinese firms are good at identifying and satisfying their customers’ needs in the home market, but few of them have deep experience selling across different cultures.

As mentioned earlier in this chapter, when it ventures into the Indian market, Xiaomi has to tweak its products to adapt to the 20 plus local languages there. But when new language features are added, its product cost goes up, challenging the company's low-cost corporate strategy. On the distribution side, Xiaomi may have to acquire physical storefronts or enter into distribution deals in India, which can be expensive and difficult to manage. (In China, Xiaomi has smartly avoided that with its online sales model and its loyal Mi-fan group.)

When the product is inherently culturally sensitive, such as social networks and messaging services, the barrier is enormous. For example, Tencent has promoted WeChat in numerous overseas markets for new users. Conscious of the cultural differences, Tencent even signed up Argentine football star Lionel Messi for a TV advertising campaign in mid-2013. (The rationale was that sports are universal across cultures.) However, the reality is that the Japanese and Korean markets respectively have their own version of competing products in their own languages, and in the English market users have fully invested themselves in Facebook and other networks. As a result, in 2015 Tencent executives stated that its new approach to WeChat expansion is to further develop it in China, adding unique features and building an ecosystem to attract new users globally.

Fourth, investing in foreign markets is no less challenging than business expansion. Generally speaking, overseas mergers and acquisitions of established foreign firms are more direct way than business expansion to gain market entries, new customers and global market share. However, transactions in the capital markets have a different set of issues for Chinese companies.

Increasingly, Chinese firms are interested in acquiring cutting edge technology development by investing in start-ups, especially in Silicon Valley which is viewed as the innovation capital of the mobile internet. Many US start-ups are researching the same tech issues as Chinese firms, and their breakthroughs in the US are most likely applicable to the Chinese market as well. Among Chinese internet companies, Alibaba is perhaps the most active buyer in the global M&A market (see Table 9.1).

The key issue for Chinese buyers is that they have to get many things right to ensure that their acquisitions are adding value. Lenovo's earlier acquisition of IBM's ThinkPad division has successfully firmed up its global leading position in the PC business, but it took Lenovo almost eight years to fully integrate the IBM business it acquired. The Lenovo/IBM case is just one of the few successful precedents of Chinese companies’ overseas acquisitions. Even with its earlier deal experience in the US, there is no guarantee that Lenovo's recent purchase of Motorola Mobility from Google can repeat a successful integration. In short, an investment transaction is only the start of a long journey. To realize synergy value from a successful integration requires a lot of hard work after a merger or acquisition deal is closed.

The biggest challenge to integration lies in the differences and even tensions between the two sides’ business processes, governance structures and corporate cultures. It forces the Chinese firms – which have a proven model in China – to develop and execute a balanced and sustainable global operating model. From the process aspect, overseas acquisitions call for global standardization balanced by controlled flexibility in specific markets. From a governance aspect, Chinese headquarters need to empower overseas managers and build channels for easy cross-border communication. For example, according to news reports, the disappointment of 11Main businesses was partly caused by the fact that its limited scale resulted in inadequate attention and support from Alibaba headquarters.

Another related challenge is to find the right people and team to execute cross-border integration. Needless to say, a few trips a year by headquarters executives alone are not sufficient for local integration. A successful integration requires a global team from the very top, including Chinese members who are absolutely clear about headquarters’ culture and strategy, while hiring and incentivizing local talent to deeply localize day-to-day operations. The tension between different cultures is usually highlighted by the composition of the working team. On the one hand, Chinese firms may feel uncomfortable incorporating a completely new local team to manage their overseas assets; on the other hand, it can take years for a Chinese buyer to build a management team and related network of local stakeholders from scratch.

These days a new challenge emerges as the competition for frontier technologies intensifies. There are many great start-ups in Silicon Valley, but at the same time there is already so much capital, as well as so many great investors. It is therefore a very crowded marketplace, even before the Chinese firms and capital move in. Despite their financial power, the search for the right acquisition target is no easy task.

What troubles Chinese firms is that no matter how successful they are in their home market, they are not necessarily automatically networked into the start-up community of Silicon Valley. They still need to build up a network and earn trust. In particular, some unique Silicon Valley cultures may not be obvious to foreign firms who are not sufficiently local. For example, start-ups may not view large internet firms as preferred business partners, because the perception is that they tend to require more paperwork. In relation to Chinese capital, the stereotype may also involve slow decision-making and additional regulatory hassles.

Of course, Chinese buyers have one trump card in addition to their financial capital: the enormous size and rapid growth of the Chinese market. They have the opportunity to prove that they are the preferred business partner for foreign tech companies to create new values together. As is often said in the M&A market, the best way to find more good investments is to make a good investment first.

For example, in October 2014 Baidu bought a controlling equity stake in Brazilian online discount company Peixe Urbano for an undisclosed sum. (As mentioned, Baidu has one of the top Chinese group-buying sites, Nuomi, and has invested aggressively in the Chinese O2O (online-to-offline) market, including online deals/offers). After the acquisition, Peixe Urbano management had extensive exchanges with Nuomi on O2O businesses and replicated Chinese practices in the Brazilian market. According to Baidu's information, Peixe Urbano's market share increased from 35% to 55% within one year of the Baidu acquisition.

What is really interesting is that the challenges that Chinese companies now face in overseas markets are very much the same as those encountered by US companies such as Amazon and eBay when they ventured into China earlier. More than a decade ago, those American tech firms were similarly intrigued by the Chinese market's large user base and fast market growth. Yet the cultural, language, political and technological factors turned out to be more complicated than they expected. As a result, they chose to focus mostly on the North American market.

However, the bottom line for Chinese firms these days is that their overseas expansion is a must rather than an option. While there is always more growth to be found within China, the fastest growing market in the world will inevitably slow down, and the top Chinese tech companies must search for and find their next billion customers. Their journey into foreign markets is full of hurdles, challenges and competition, but with their overseas listings and significant foreign shareholder ownership, one may expect Alibaba, Tencent and other Chinese companies to manage cultural differences better than the US firms did in China a decade ago.

Similarly, the US firms also have to tackle the Chinese market in order to win the battle for global domination. Maybe Western companies today can do better in China as the country's mobile internet ecosystem has become more developed, sophisticated and globalized. Going forward, direct fights between Chinese and US firms will be seen in both markets. The next chapter will examine the opportunities and challenges that foreign firms are facing in the Chinese market.