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.

3 Responses to “Outbound M&A (From China)”

  1. Dear Jack,

    I’ve been revelling in The Guardian’s “China at the Crossroads” coverage all week long and thought you might like to listen to the clip featuring Professor Li Wei:
    http://www.guardian.co.uk/world/video/2009/may/20/china-economy

    Li hammers home the message which you’ve been mentioning all along…China is still in a jobs pinch = more room for newcomers to step into the breach and make something happen.

    I thought your readers might enjoy it.

    –ADM from Prague

  2. Chris Devonshire-Ellis May 24, 2009 at 7:33 am

    Hi Jack;

    I think you’re right “it’ll take a bit longer”. Much of the problem as I see it with Chinese businesses expanding overseas is indeed the management issues. If one discounts the huge acquisitions made by China overseas that have been State directed, the actual amount of PE from China investing globally remains relatively small. Certainly, compared for example with Indian businesses. There are a number of reasons for this:
    1) Lack of understanding of global business culture and transparency. Chinese businessmen are used to working within a system in China that sees massive collusion between State and Commerce. This has advantages for Chinese businessmen who can work this in China, but the system doesn’t work that way in the global arena.
    2) Lack of understanding of legal responsibility.
    China’s laws, and their interpretation, are fully dependent upon the State, with no independent judiciary. When exposed to potential liability issues overseas, in a more open and responsibility-demanding regulatory system, many Chinese businessmen feel intimidated by their inability to personally influence the legal mechanism.
    3) Lack of Corporate Governance leads to an Immature Understanding of True Commerce. Corporate governance and responsibility are key words in the West, and an independent regulator helps both educate and develop businessmen, and if necessary, to punish them. This does not apply to China, (again, the State interferes with commerce). Accordingly, Chinese businessmen often lack the understanding and education necessary to properly compete on a level playing field globally.

    I short, I feel that the Chinese system and the way it operates actively discourages Chinese businessmen from developing a sensibility of handling business to international standards. It does not equip Chinese businessmen with the tools they need to globally compete, either through an understanding of transparency, nor a system whereby commerce is conducted on a level playing field. China’s own system is preventing Chinese businessmen from developing to international standards – they have hit a glass ceiling.

    Accordingly, you are unlikely for some considerable time – until China develops a judiciary and regulatory system that is indepdendent of government, to see private Chinese businesses start to move in any great numbers overseas. They are just not intellectually equipped to do so. There will be exceptions of course, but compared to entrepreneurs from other Asian countries – and significantly, ones that have democracy and independent regulatory systems in place (Singapore, India etc) the vision of Chinese private businessmen investing massively overseas is a mythical beast, and something of a chimera to those who fail to take into consideration the massive implications of government involvement in all aspects of society – including commerce – that China still imposes upon it’s executives.

  3. @Chris,

    Extremely well put! Great summary, and I’ve even retweeted it in response.

    Still, while the perception may be that Chinese overseas investment (investment in the other direction, not investment by Overseas Chinese) is in the “early adopter” phase, the numbers would likely bear out that it’s well into its “early majority” phase, perhaps even beyond that. If you’re speaking about things on the SME-level, I’d say that there indeed is a much better grasp of how to navigate the US market.

    Let’s not forget that the Chinese know a wealth more about the US and other Western cultures than is the case in reverse. This would indeed involve ways and means on how to navigate the world of Western business. The opacity and obscureness comes from the perceptions that most Americans, in particular, have about the Middle Kingdom.

    Again, let’s see what the numbers are saying on this.

    Your comment was spot-on, though.