China’s Corporate Shopping Spree

With Chinese companies trying to gobble up western firms and brands (like Hummer) by taking advantage of the global financial crisis, there are many who wonder if China will some day dominate the western corporate world.

This fear of Chinese companies driving world stock prices in future has been partly triggered by Beijing, which is pushing local companies to buy up assets overseas. The government has also set aside $200 billion for buying foreign corporate assets.

The image of a dragon dominating the western skies has led to frequent political resistance to Chinese takeovers, starting with the 2005 blocking of an attempt to acquire US oil giant Unicol. In a similar situation in Australia, a Chinese miner was not allowed to invest $19 billion in mining giant Rio Tinto.

Should this fear exist? Perhaps not. A less publicized fact is that 70 per cent of acquisition attempts made by Chinese firms on foreign soil have come a cropper. Experts at a recent CEO Forum in Beijing pointed out several reasons for such failures. The perception of China in the West and the narrow worldview of Chinese firms – nursed as they are in a controlled economy – are two important reasons.

Most experts in mergers and acquisition think it is difficult to make a merger successful if it is driven merely by the low price of shares of the target company. Speakers at the forum advised Chinese companies to first consider whether they were ready to handle the cultural transition, technological upgrades and the new market environment before they struck share purchase deals.

A major problem for Chinese firms is the absence of managerial and technical talent to handle new situations caused by buying western companies.

China is in a peculiar situation. A country, which fights to retain its position as a developing nation, is overflowing with money for foreign takeovers. But it lacks many of those very qualities that turned many western companies into successful international brands. This does not mean China will slacken its efforts to acquire businesses the world over. The recent advice from Hu Jintao asking Barrack Obama to eschew protectionism in business is significant. Protectionism will obviously hurt China’s internationalization program, which includes the dream of making the Yuan a global currency.

India Inc need not worry because China is looking West for a set of four reasons that do not apply to most parts of Asia (barring Japan) – advanced technology, western markets, training executives to be global players and political leverage.

Then there is Beijing’s insatiable hunger for natural resources like oil, which is why it targets both the developed and underdeveloped world. Such investments include PetroChina’s deal to buy 45.5 per cent of Singapore Petroleum Co. and an investment of $1.39 billion by China Minmetals Non-ferrous Metals Co in Oz Minerals of Australia. This is one reason why countries in Africa, central Asia and south Asia have inched closer to China.

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