Outbound M&A (From China)
As China’s markets resume their growth, Chinese companies will grow larger and undoubtedly become more interested in “going global.” Potential merger and acquisition activity from China already has investment bankers licking their chops as they prepare to compete for a new wave of business.
With a fast-growing home market, one might question why a Chinese company would even want to expand outside the country. The most obvious reason is to acquire technology and know-how. Companies that have had any measure of success competing in highly-developed markets such as the United States and Europe have had to develop robust quality systems and product development programs. These are precisely the areas where most Chinese companies are weakest.
Moreover, technology is a broad term that includes true technological breakthroughs on one end of the spectrum, and relatively mundane processing techniques on the other. I routinely tell manufacturing audiences in the States that they may not realize it, but many of the manufacturing methods they have developed over the years and take for granted remain unknown in China. I know this from my 15 years in the automotive business. Many times, we struggled to reach the machining tolerances expected by our export customers, or to refine our heat-treating methods to attain a higher level of durability. Even small and medium-sized companies in the United States and Europe have a great deal of technology and know-how they can bring to Chinese companies.
The other reason to make overseas acquisitions is to diversify markets. Yes, China is growing, but an overseas acquisition can be a good way to acquire global customers, gain distribution overseas and penetrate new markets.
For all of its promise, though, overseas acquisition activity by Chinese companies has been slower to develop than I, for one, have expected. There are several reasons why.
Foreign Currency Restrictions: Converting renminbi to the hard currency necessary to make acquisitions abroad requires government approval that has not always been easy to obtain. This is changing, however, as the government now encourages Chinese companies to expand overseas. As noted in a prior post, Beijing Automotive Industry (Holding) Corp (BAIC). has been given a 10 billion yuan ($1.45 billion) war chest to buy automotive assets in the United States.
Political Considerations: The offer that China National Offshore Oil Company Ltd. (CNOOC) made in 2005 to purchase Unocal Oil Company, an American company, triggered a political storm in the United States, causing CNOOC to withdraw its bid. This has made many potential Chinese acquirers, particularly the larger companies, more cautious.
Global Economic Crisis: With China recovering as many global economies remain mired in recession, the relative attraction of markets outside China has decreased. In many cases, entire industries are in a state of flux. Imagine you are a Chinese company like BAIC that is considering a U.S. acquisition. Any technology benefits that might be gained must be weighed against the current very difficult market environment in the American automotive market.
Management Issues: Making an acquisition overseas brings a host of management issues that most Chinese companies are ill-equipped to address. It may be argued, for example, that it is even more challenging for a Chinese company to acquire an American company than it is for an American company to make an acquisition in China. The cultural gaps are no less daunting and the markets no less complicated. Although neither task is easy, foreign investment in China at least has a longer history, giving foreign companies more experiences to draw from.
Over time, political resistance to Chinese capital will moderate, overseas economies will recover and Chinese companies will learn how to deal with operations outside China. Overseas acquisitions by Chinese companies are certainly one of the future trends in global finance. It just may take a bit longer to reach its full potential.