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Following the initial article highlighting the acceleration of acquisitions by Chinese companies, part two examines the risks and challenges associated with these.
It should be mentioned that the acquisitions of China’s state-owned conglomerates in developed markets have caused some concern among observers and analysts. Understandingly, some deals may be controversial and have led to some debate. Certain proposals have been blocked for various reasons, one being a lack of transparency in the financial documents of Chinese companies. Despite its economic growth, China does not appear to be undertaking any political reform and so state-owned companies will continue to form the backbone of its economy. Hence, naturally some major overseas acquisitions will have to be conducted through these publicly listed state-owned conglomerates. Simply, they are the country’s acquisition vehicles.
When demand in developed markets is noticeably slow and the capacity of Western manufacturers is not being met, it is only practical and wise to look at alternative strategies, such as working with whoever is competent and has the financial muscle to take an existing business forward, regardless of the nationality of the investor. The disquiet about Chinese acquisitions in developed markets may fade once such acquisitions have become more commonplace at global level.
From a globalisation perspective, for the past so many decades consumers in developed economies have become used to Western multinationals searching for ‘gold’ in emerging markets. However, globalisation should be interpreted as a “two way street”, with conglomerates in emerging markets also no longer content with just a domestic presence and so seeking international expansion into developed markets. Both Western multinationals and Chinese investors are looking for long-term growth opportunities instead of short-term profits so as to hopefully mitigate a future global downturn.
Mexico’s richest man Carlos Slim Helú saw revenues grow outside his home market, with the US becoming his most important overseas market. India’s Tata is also a rising star on the global stage. This means that Chinese acquisitions represent a possible challenge to some Western observers’ way of looking at things. This is a game changing period and requires a shift in people’s mind-set. The earlier they accept the situation, the quicker Western companies can adapt and make the right decisions.
Rapid overseas expansion has created opportunities but also challenges for Chinese acquirers. Chinese companies will have to operate in an unfamiliar business environment, legal framework and business culture.
Chinese CEOs appear to have become more mature and are aware of how things should be done and can be done in developed markets. But, they may still need to learn about the functionality of local trade unions, health and safety rules and local laws. Compliance with environmental regulations could also be a most costly affair than back home. In addition, cultural integration between two different companies from the West and East could also represent a challenge. For example, there is a well-documented story about a Chinese general manager who tried to summon his French middle managers in France to an important meeting at midnight but none of them replied because it was out of office hours. He was shocked that French employees were not obliged to turn up, as Chinese employees would have done in a similar situation.
Chinese players also need to earn the trust of local companies, requiring a team of competent people or even a Western PR consultancy to oversee the handling of any new venture. The Chinese government has been known to hire global talent to manage its PR. This all takes time and patience.
Those Chinese companies which are chasing certain technologies or patents may need to pay particular attention to local legal frameworks, for example with regard to at what stage the technology can be used or transferred to Chinese brands back home. Sometimes the exclusive users of certain patents may not be the owners of those patents and the acquisition of a licence costs money. In 2004, Shanghai Automotive Corporation acquired a 100% stake in the South Korean SsangYong Motor Company and there was a dispute between Shanghai and its Korean subsidiary about the Chinese company allegedly stealing the Korean technology. This led to massive industrial action against redundancy and subsequently SsangYong filed for bankruptcy. Therefore, Chinese companies need to have good advisers when it comes to due diligence.
While there are plenty of risks and uncertainty surrounding overseas investment, interestingly, behind the deals, professional services such as legal, banking and M&A advisers are perhaps the biggest winners as they are able to charge huge commissions on these big deals. Finally, regardless of the risks and challenges, Smaug the dragon, which has been sleeping on a pile of gold for years, has now woken up and is ready to breathe fire. Be prepared to embrace a future in which the Chinese will own some parts of the developed world, just like the Russians, the Arabs and the Japanese.