Op-Ed Contributors

Going global: Missteps and opportunities

By Luca Dell' Anese (China Daily)
Updated: 2011-04-22 11:16

The last few years have witnessed a growing interest by Chinese companies in overseas deals, in part as the result of the macroeconomic environment. In fact, while the recession has been hitting US and European businesses hard, many Chinese companies have been operating in a growing economy, with healthy balance sheets and buoyant domestic sales to compensate for the sluggish demand from overseas markets. As a consequence, Chinese businesses are flushed with liquidity and eyeing potential foreign targets whose valuations are in many cases lower compared to their pre-crisis levels.

However, despite the favorable window of opportunity for overseas expansion, the world has yet to witness a wave of Chinese cross-border mergers and acquisitions (M&As). On the one hand, China's overseas direct investments (ODI) are growing at a fast pace: in 2010 China's ODI in the non-financial sector hit $59 billion (41 billion euros), up 36 percent from the year before, with around 40 percent of total investment being realized through M&As. Analysts expect a further 50 percent increase in 2011. On the other hand, China's ODI patterns, taking into consideration the country's per-capita GDP, are in line with many other emerging economies yet far behind what is observed in developed countries. And the greatest amount of ODI went towards emerging countries in Asia, Africa and South America, while Chinese investments in Europe, Japan and the US played a very limited role. This implies that while Chinese companies have been quite successful in resource-seeking acquisitions (oil, gas, minerals and metals), they have been much less effective in acquiring companies with advanced technology, brands and know-how in developed countries.

High-profile deals have certainly been concluded in recent years, but Chinese companies have also suffered significant setbacks in their attempts to go global. If it is true that Lenovo earned a global reputation in 2005 through its acquisition of IBM's PC unit, and Geely stunned the car industry last year by acquiring Volvo, there have also been significant disappointments: the failed attempt by Shanghai Automotive Industry Corporation to manage Ssangyong Motor Company, which ended up with the South Korean company filing for bankruptcy in 2009, the 2008 unsuccessful attempt by Huawei Technologies to acquire 3Com, a US IT company, and this year's failed attempt by Xinmao to acquire the Dutch cable maker Draka are all stark reminders of the difficulties encountered by Chinese companies in their process of internationalization.

What are the reasons for these mixed results? Behind the disappointing outcomes are different explanations, some of them typical of cross-border M&As everywhere, others peculiar to Chinese companies.

Foreign governments' protectionism certainly plays a role, especially in certain sectors involving natural resources and sensitive technology or when Chinese State-owned enterprises (SOEs) are involved. For example, the 2005 bid by CNOOC for Unocal, a US oil company, was blocked by the American government on concerns about the transfer of drilling technology to the Chinese SOE. Similarly, Huawei's attempt to acquire 3Com raised opposition in the US Congress based on alleged ties between the company and the Chinese military. Similar concerns were raised again this year when the Shenzhen IT company was forced to back away from its acquisition of 3Leaf's assets, a US server technology company.

In addition, bidding for publicly traded corporations is always a difficult proposition, especially for a foreign company, due to the heavy regulatory requirements and the high profile of such acquisitions. And sometimes Chinese companies can find themselves in an unfavorable position during the bidding process because approval by Chinese government agencies can be a lengthy process and so getting financing commitment from Chinese banks.

But overall, the main obstacle to the expansion of Chinese companies overseas lies in the inexperience of these companies in dealing with international markets, especially in developed countries. Chinese companies are relatively young compared to their Western competitors and their brands are often unknown to consumers in Europe and the US. This unfamiliarity generates a lack of trust by potential targets and their stakeholders. In addition, senior managers of many Chinese companies lack overseas experience, a shortcoming that can penalize the buyer both during the negotiation process and after the acquisition.