Buy your Chinese supplier, or risk being bought by it instead
We're all seeing the wave of Chinese acquisitions in the United States, and U.S. firms looking to purchase companies in China. While there's been a steady increase in buys for five years, it's recently taken large upswings and seems more relevant than ever.
"Merger Fever" seems to have hit Sino-U.S. relations, and reminds us of the Japanese purchasing of U.S. assets in the 1980s. But the Chinese acquisitions are far different.
The Chinese are buying hard assets in their top export market. Investing in one's market is usually a smart move, and the Chinese targets in the United States aren't merely landmark properties that we sold off to Japanese firms. These mergers have a far greater effect and have common characteristics, such as high brand awareness and stable distribution.
Tim Heberlein of TS Edgewater Associates in Denver and Miami said the time for M&A activity in China is now. He cites the following reasons:
- Until recently, Chinese products were distributed in the United States through importers, Chinatowns and contract manufacturing. The Chinese wish to own their own distribution.
- China's government agencies recently have embraced overseas mergers as a positive growth stimulator for the nation.
- Similarly, China's view has changed on foreign firms owning SOEs (state-owned enterprises) in China. While this often has been greeted with suspicion in the past, China now wants the transfer of Western technology and management into China, job creation and organizational learning due to Western influence.
- China is sitting on $600 billion in foreign reserves (cash), is buying U.S. debt and is approaching a free floating currency that will fluctuate according to market conditions.
- The Chinese government is restructuring the SOEs and looking to pitch these assets to foreign firms. There are 185 national SOEs, and thousands more provincial and municipal firms for sale.
- Local conglomerates in China have been increasingly active in M&A. They're gobbling up local companies to leverage global market share. Those conglomerates will get to choose the best deals unless we get aggressive.
- Heberlein said it's time to "be part of the play, or get out of the way," as the foreign reserves continue to grow in China. M&A may be the only way for many U.S. manufacturers to stay afloat.
What are Chinese buying?
Chinese firms are buying "strategic assets" that change the supply chain (and cut out many middlemen). They're buying brands with high recognition and often look for ways to purchase firms that are listed on stock exchanges abroad. That's because it's difficult to take a firm public in China. There are long waiting lists and few new deals.
The current allotment for China's exchange is two new listings per month. Add that the securities laws differ from country to country, and Chinese executives may do better buying firms listed on U.S. exchanges and then cashing out their shares in the United States.
Why would a U.S. firm make an acquisition in China?
The obvious answers are:
- Instant market share through domestic (Chinese) customers.
- Lower product costs.
- Broader distribution.
- Business licenses that are grandfathered in.
- Key relationships are retained (which built the firm to its present size).
- Elimination of a competitor.
As U.S. firms consider China, they should look at the key success factors for an acquisition there. The target firm should satisfy most of the following conditions:
(1) The industry should be traditional, established and have a history in China. Cutting-edge technologies are still anomalies to the Chinese government, and it's key to allow them to digest industries before foreigners jump in.
(2) U.S. firms should look for well-established domestic competitors. This means there is investment in the industry.
(3) U.S. firms should be increasing market share through the merger, and the Chinese market should be part of that increase.
(4) The Chinese firms in your industry are already exporting into your core markets.
(5) You aren't worried about the technology and intellectual property you use in China. This helps to prevent piracy.
(6) Chinese government barriers are preventing you from selling into China.
(7) Your industry's Chinese distribution is too opaque.
(8) Your acquisition will have the correct Chinese government people involved for future dealings.
(9) There are some shared values with the acquisition target, especially regarding management techniques, growth plans and the repatriation of profits.
When making a deal in China, remember that U.S. methodology may not make sense. U.S. deals often involve three teams: research, negotiation and implementation. Though this is commonplace in the West, it usually confuses Chinese firms.
Chinese need continuity in their business dealings, with dedicated champions of the deal. This champion must Shepard the deal from the start, and be available well after paperwork has been completed.
"Business is business" is untrue. In China, "business is personal."