Danfoss in China (A & B) - Taking the Family Firm Global

Multinationals from small countries are hardly Johnny Come Latelys in globalisation. Industrial controls maker Danfoss, one of Denmark's largest family firms, was firmly rooted in a small island and inward-looking family firm culture still quite common in the country. Beginning in the '80s, however, the controls industry entered a period of consolidation. Shell Fellow of Economic Transformation, Jonathan Story, explores how the company chose China as the stage on which it hoped to transform both its performance and its image as a stolid, somewhat dull enterprise.

by Jonathan Story
Last Updated: 23 Jul 2013

Multinationals from small countries are hardly Johnny Come Latelys in globalisation. Industrial controls maker Danfoss, one of Denmark's largest family firms, was firmly rooted in a small island and in a inward-looking family firm culture still quite common in the country. At one point, Danfoss had provided nearly half the jobs in its home base of Nordborg. Beginning in the 80s, however, the controls industry entered a period of consolidation. The arrival of new CEO Jørgen Mads Clausen in 1996 saw Danfoss launch on a very ambitious path to globalisation, while still expressing a desire to stay focussed on local needs and concerns.

Shell Fellow of Economic Transformation Jonathan Story explores how the company chose China as the stage on which it hoped to transform both its performance and its image as a stolid, somewhat dull enterprise. Case (A) concentrates on Clausen's determination to prevent Danfoss becoming stuck as a medium-sized player, at best, in a rapidly commoditising market. This was mainly done through moving production to both China and Mexico.

The author describes the setting up of Danfoss's supply chain and logistics bases in China, as well as attempts to reconcile the direct, team-oriented mentality of the Danish managers with the more hierarchical and passive Chinese workers. As a supply chain manager explained, the company was forced to "adapt to Chinese ways on the outside" in its personal relationship networks with government officials and domestic clients, while "doing things our own way inside the company". The strategy soon made Danfoss the largest foreign-owned operation in the area, in line with its stated desire to be a "big fish in a small pond" within the Chinese market.

Quite understandably, this ambitious expansion policy met with mixed reactions in Denmark, where job losses were mounting. (Clausen had often criticised Denmark for being anti-growth, particularly with what he saw as stifling industrial policies and burdensome taxes.)

The (B) case centres on the specifics of Danfoss's China experiences. By 2004, the company had captured around 45% of the domestic market. Coupled with the large OEM accounts to MNCs with substantial operations in China, Danfoss had succeeded in greatly enhancing its global market. As Story details, the firm's dual strategy of targeting both the export and the domestic market soon proved to have concrete benefits in terms of both scale and marketing.

Danfoss had also clearly reaped the rewards of "first mover advantage", having been the first major international supplier in its industry to begin manufacturing in China. While this may have gone a long way to display commitment to the country - not least, to local suppliers - human resources was still seen as critical to Danofoss's chances of long-term success. With an intensifying wave of Western companies entering the China market, building loyalty was seen as critical to retaining good staff. Quite remarkably, the corporation's declared intention was eventually to achieve 100% local management.

Story concludes his study by considering the challenges ahead for Danfoss in a market which companies are rushing to serve, with obvious profound global repercussions. China's integration into a globalised economy; the best way to transfer R&D competencies, and managing the global supply chain are all crucial considerations for the company in the next few years. Moreover, there is the inevitable peril posed by Danfoss's many competitors, anxious to knock the leader off its perch.

INSEAD 2004

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