“Despite the prevailing global uncertainty, Chinese corporates are hungry to expand overseas”, as the Irish Times reported last month. And as the Times noted: “about four out of every five international Chinese corporates plan to expand further overseas”, according to a survey by HSBC.
“China’s outbound investment is set to rise in the coming years, with its size in the next five to ten years expected to match the foreign direct investment the nation attracts, China’s Commerce Minister Chen Deming said last year”, as the South China Morning Post reported last November. China last year made approximately $70 Billion USD in non-financial outbound foreign direct investment. And $116 Billion USD was invested into China last year. Those figures are set to reach parity soon.
In East Asia Forum this week, Yuhan Zhang, an energy professional in a multinational energy company based in the United States and a former researcher at the Carnegie Endowment for International Peace — outlined four trends in Chinese overseas corporate expansion – and four areas where those companies need to be well prepared to avoid pitfalls – the salient points of which are:
“There are four distinct trends in Chinese overseas mergers and acquisitions that have led to particular challenges for Chinese firms:
- Chinese overseas mergers and acquisitions in the energy sector are still dominated by state-owned enterprises (SOEs), which are beginning to invest in renewables. Some private enterprises have also tried to pursue overseas mergers in renewable energy but very few are successful. A large number of Chinese private companies find it difficult to raise the money required to purchase assets overseas.
- Chinese firms are speeding up investment in manufacturing assets overseas. Private enterprise share of thos investments is increasing, and the targets of investment are expanding to Southeast Asia, Africa and Latin America.
- Chinese firms are increasingly willing to pay a high price to acquire assets. But it should be noted that paying a high price does not guarantee success.
- Most Chinese managers lack experience in overseas mergers and acquisitions and have difficulty doing their due diligence and integrating the company post-merger. Instead of seeking majority ownership — more and more Chinese enterprises are pursuing a minority overseas investment with the condition that they get a voting right on the board of directors of the target company.
In the future, there are four major things Chinese firms should pay particular attention to while conducting overseas mergers and acquisitions:
- Chinese SOEs should take the advantage of the 2008 global financial crisis and the 2010 Debt Crisis to seek favorable targets in developed economies to obtain advanced technologies, management skills and prestigious brands. But Chinese SOEs should be aware of the unfavorable regulatory conditions imposed by the Committee on Foreign Investment in the United States.
- Ambitious private enterprises, which have limited funds and experience, need to conduct a serious feasibility study before they embark on expansion attempts.
- Both SOEs and private enterprises should communicate with foreign authorities and establish a good image.
- Post-merger, Chinese enterprises have an opportunity to learn from Western practices in corporate management, financial accounting and operations, market positioning, and technological research and development.”
The opportunity for professional services firms
Professional services providers in markets that are the focus of Chinese overseas corporate expansion – from lawyers to public affairs professionals — would do well to tailor new business development initiatives around the opportunities and potential pitfalls that Yuhan Zhang has outlined. I’ve written in detail before about what specific actions professional services providers need to take around these types of opportunities. Your expertise is essential to help China’s ambitious corporate management teams realize their full potential overseas.
