Chinese companies are globalizing on an unprecedented scale, but with mixed success
For the investors, it was all backwards. In early 2011, Chinese dairy producer Bright Food convened a meeting with outside investors and consultants. The company had mountains of cash, priceless connections and Beijing’s blessing. Having grown to become China’s second-biggest food and drink company, it was now looking to expand into the UK market. All it needed was something to actually sell there.
“We asked them, ‘So you’re planning to sell Guangming milk [the company’s flagship milk brand] in Manchester?’” says Paul French, founder of market research firm Access Asia and one of the consultants at the meeting. Bright Food executives responded that yes, they were. “We just said, ‘Well then, good luck with that one.’”
The episode, compounded by later failed attempts to acquire brands like United Biscuits and Yoplait, illustrates in part why caution–bordering on skepticism–is by far the most common theme that cuts across conversations with consultants, investors and managers involved in cross-border Chinese expansion.
“Don’t do it,” laughs Torsten Stocker, a China-based partner at the consulting firm Monitor, when asked for the advice he gives to Chinese companies expanding abroad. “Or at least, really think about why you’re doing it. These things sound easy and look great on a Powerpoint slide, but in reality they’re very, very difficult to do.”
That may be an understatement. Of the 300-odd foreign mergers and acquisitions Chinese companies conducted between 2008 and 2010, around 90% failed (by definition of losing 40-50% or more of their initial purchase value), according to a report by the Brookings Institution, a US-based think tank. Many Chinese companies have little experience in M&A, much less of the complexities involved in cross-border M&A.
Get past the obligatory notes of caution, however, and nearly everyone in the field says business is booming like never before, thanks to a combination of bigger and more ambitious Chinese companies, fiercer competition and a slowing economy at home. Outbound Chinese investment grew by an average annual rate of 45% between 2002 and 2011. It surged by almost 50% in the first half of this year, and the sub-category of outbound mergers and acquisitions jumped by 29%, according to data from Dealogic. China is now the world’s sixth-biggest global investor, and is on track to invest $1-2 trillion abroad by 2020, estimates the research outfit Rhodium Group.
Moreover, the global success of at least some Chinese companies is now undeniable, bolstered in no small part by their dominance in the world’s second-biggest economy. Haier is the world’s largest manufacturer of major home appliances by volume. Huawei is the biggest telecoms equipment maker. Lenovo may soon overtake HP as the largest computer maker. PetroChina is the world’s fifth-biggest resource company.
Chinese companies vary widely in why they choose to go global, how they go about it and their ultimate success. But those studying and involved with cross-border Chinese investment say it is still possible to tease out some basic patterns and approaches, and identify what works–and what doesn’t.
Lifan is the model many other Chinese manufacturers look to when going global, says French of Access Asia. Not only do many also find themselves with products that could sell well to consumers in other emerging markets, but they also look to foreign expansion as a way to subsidize their operations back in China.
But the jury is still out on Haier’s chances of success in mature markets, according to consumer goods analysts. Moreover, the home appliances industry may be so unique that Chinese companies cannot easily replicate Haier’s model in other sectors. “I think what Haier is doing works for Haier,” says Stocker of Monitor. “But is it something that Chinese consumer goods companies in other sectors can follow? I would say no, because in other sectors both the demand dynamics and [competitive] landscape are different.”
For Wanxiang, the acquisition provided a chance to purchase next-generation electric battery technology, production facilities, as well as the company’s talent (Wanxiang’s memorandum of understanding with A123 includes plenty of incentives to keep the brains on board). The acquisition also bolsters Wanxiang’s position in the Chinese auto parts market, because A123 was a supplier to one of China’s biggest auto manufacturers, Shanghai Automotive Industry Corporation (SAIC).
[This article has been reproduced with permission from CKGSB Knowledge, the online research journal of the Cheung Kong Graduate School of Business (CKGSB), China's leading independent business school. For more articles on China business strategy, please visit CKGSB Knowledge.]