Op-Ed Contributors

Going global: Missteps and opportunities

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

It is clear that global brand recognition and a management with global skills cannot be acquired in the blink of an eye. On the contrary, they require long-term strategic commitment and financial investments. Does that mean overseas expansion is a premature step for many Chinese companies? Should they focus on the domestic market on the assumption that due to its size, becoming a leader in China implies achieving global scale? Or should Chinese companies focus on growing organically in foreign markets, without acquiring existing businesses?

It would be a mistake to prescribe a general approach that is mainly inward looking. Nowadays Chinese companies are growing in the domestic market at great speed but they also face fierce competition, both by Chinese and foreign competitors. Access to Western technology, brands and know-how is essential to gain a competitive advantage not only globally but especially in China. In this regard, overseas acquisitions are critical for a Chinese company to protect and strengthen its market shares on the mainland and assure its survival through the consolidation process that is taking place in many industries.

And if internationalization can be achieved through organic growth in many instances (Huawei is a successful example in this regard), it is also true that often only M&As can leapfrog the development of a company. For a company with global ambitions to rule out M&As from the start would be like for a boxer in the ring fighting with an arm behind his back.

Which approach then should Chinese companies adopt in going global? First of all, they should be aware of fire-sale bargains. Unless they have a detailed business plan on how to revitalize a foreign brand in China (like Dongxiang did with Kappa) it is an extremely difficult proposition for an inexperienced player to turn around a comatose brand in a foreign market. It is much better to invest resources in a healthy company, with strategic technology, R&D capabilities, know-how, brands or distribution channels. The price is higher, but the opportunities for success are too. Secondly, Chinese companies should be flexible in their approach to foreign markets, as Western companies were when they entered China. They should consider alternatives to M&As that can allow them to achieve their goals while closing the experience gap: strategies based on the purchasing of minority stakes, the formation of strategic alliances and joint ventures with foreign partners can be valid alternatives in many situations. Fosun Group's acquisition of a 7.1 percent stake of Club Med last year is a good example of this approach.

When a full-blown acquisition is pursued it is critical to have a good understanding of the target and its stakeholders. This learning process is easier when targets are not publicly listed companies because in this case negotiations can extend for a longer period of time. It is also essential to reassure the target that the main goals of the Chinese company are not asset stripping and labor-cost reductions.

Here investment banks and private equity funds can play a critical role, thanks to their knowledge of the foreign markets. For example, when Hunan construction equipment company Zoomlion acquired the Italian concrete equipment manufacturer CIFA in 2008, a key role during the negotiations was played by one of the private equity investors, Mandarin Capital Partners, a fund specialized in Chinese-Italian cross-border transactions. The fund used its knowledge of the Italian market and access to its media to inform the public opinion and the powerful Italian unions about the potential benefits of the deal.

Post-merger integration has also to take into consideration the Chinese company's lack of global experience: for this reason, it is important to acquire a target with a good management team in place because it is unrealistic for the buyer to replace it in the short-medium term with Chinese executives. Integration should therefore be light, giving the target high autonomy, protecting the value of the foreign brand through a dual brand strategy and limiting integration to few key areas (such as procurement, R&D, production networks) where synergies can be captured in the short term.

Chinese companies are increasingly investing overseas. Their success will depend on sound strategy and flawless implementation. Those able to go global will also become the market leaders in China, and the world.

The author is professor and associate dean of the International Business School of Beijing Foreign Studies University.

(China Daily 04/22/2011 page12)