Chinese Ventures: Chinese companies are getting more experienced at implementing acquisitions in Europe.
Nowadays, it has become increasingly popular for Chinese companies to do projects abroad. Since 2014, Chinese ventures have been booming and China will likely become one of the world’s largest mergers and acquisitions (M&A) markets. According to the Chinese newspaper Global Times , in recent years, the number of overseas mergers and acquisitions (M&As) by Chinese enterprises has increased at unprecedented speed. For the first six months of 2016, China outbound M&A deals reached US$111, 6 billion, surpassing 2015’s record.
There are many examples of successful Chinese cross-border M&A transactions. For instance, Chinese PC company Lenovo acquired IBM’s personal computer business in 2005, including the ThinkPad laptop and tablet lines. By purchasing IBM’s personal computer division, Lenovo became the top commercial notebook maker until 2014 and sold more than 100 millionth units of its ThinkPad line. Thus, Thinkpad became the new growth point of Lenovo’s business, especially in Western markets.
Besides, the Chinese automaker Geely Automobile Holdings Ltd. acquired the Swedish luxury car brand Volvo from Ford Motor Company in 2010. Geely took full advantage of Volvo’s global production bases as well as its foreign high technology to upgrade the product. Geely has demonstrated its strength by defying declining market trends and growing its domestic sales to 510,000 units in 2015, up 22 percent from the previous year, while Volvo’s earnings have tripled. “These upward sales trends are expected to continue in 2016,” Volvo said.
Many Chinese companies use foreign direct investment through merger and acquisitions as an international market entry strategy. Recently, Alibaba and Tencent have signed overseas M&A deals with several tech startups in Silicon Valley. In 2013, Alibaba invested $206 million in California-based retail website ShopRunner, which enable U.S. retailers to sell directly to Chinese consumers through Alibaba affiliate Alipay. Similarly, Tencent has completed at least 25 deals in the U.S. over the past four years, such as its participation in the New York design website Fab.com’s $150M mega deal.
But confidence has waned after the failure of most of China’s big overseas takeovers.
Several Chinese companies have tried to do projects in the West but have failed for various reasons. For instance, China property giant Dalian Wanda Group pulled out of Spain market in May 2016. Wanda chairman Wang Jianlin said that the long battle with local authorities to renovate Edificio Espana was a learning experience. He added that it was a “lesson” for Wanda and other Chinese enterprises aspiring to enter overseas markets and that planning permission should be obtained for every investment in advance. Also, Chinese meat producer Shuanghui International bought by Virginia-based Smithfield Foods (SFD), the world’s largest processor of pork, for nearly $5 billion in May 2013. So far, it is still the biggest announced acquisition of a U.S. company by a Chinese buyer.
A few months after the deal, thousands of dead pigs floating down the Huangpu River in Shanghai made the headlines in China and around the world. The event raised concerns about food safety practices in China. Shuanghui estimated its total losses from the scandal have amounted to 1.36 billion yuan.
Chinese Ventures: The major factors that cause Chinese overseas projects to fail
There are many causes of Chinese enterprises’ investment failure in Western countries.
First of all, one main reason is the unfamiliarity with local business culture and legal landscape such as environmental regulations. For example, Chinese decision makers may not consider or rarely consider the legal issues, and tend to rely more on relationships or “guanxi” than on the professional advisors.
Furthermore, Chinese ventures are often criticized for lack of a very active local HR market and for using only Chinese workers, leading to cultural ignorance.
Other causes may also include a lack of global management experience, poor communication with local media, and failure to meet Western consumers’ demands.
What Chinese and Western companies should learn from past M&A failure?
Western parties should enable Chinese investors to have easy access to legal information before they start projects. Providing the latest information about changes within legal regulation could benefit both parties as it would save valuable time and efforts.
During the post-acquisition integration phase, Western companies should help Chinese investors to understand a better western business culture, local consumers ’demands, etc. At this stage, the Western company is the window for Chinese companies to understanding the local market.
The first thing for Chinese enterprises is to find local expertise such as lawyers or experienced legal advisers so that they can better understand the local culture and political system. Besides, Chinese enterprises shall further improve the management level, develop a better understanding of the global business environment, be reasonable when facing of cross-cultural conflict and strengthen their relationship with local governments as well as the media. Real challenges remain for China’s new M&A players.
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