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2 China's overseas M&A
challenge By Olivia Chung
HONG KONG - In 2000, Beijing initiated a
strategy of encouraging Chinese companies to
expand overseas, or "Go Global".
A number
of Chinese businesses have since made aggressive
acquisitions of foreign firms. Their poor
performance after the mergers and acquisitions
(M&As), however, have raised questions about
whether Chinese businesses are sophisticated
enough to go international.
China's
outbound direct investments (ODI) rose from US$590
million in 1999 to $12.26
billion in 2005, according to the Ministry of
Commerce (MOC). However, Jun Ma, chief economist
for Greater China at Deutsche Bank, has said he
believes that the actual size of Chinese ODI could
be much larger.
"Outbound investments made
by a large number of overseas-incorporated Chinese
companies are not taken into account in the
official statistics, so we believe the actual ODI
by Chinese firms should be at least 50% higher
than the official figures. That is, in 2005,
China's total actual ODI should easily be over $19
billion, compared with the official figures of
$12.3 billion," he said in a research note dated
January 3.
As part of China's strategy to
ensure the country's energy security and resource
sustainability and to expand exports, Jun Ma
estimated China's ODI is likely to grow by over
20% annually in the next five years. By 2011,
Chinese ODI could reach $60 billion, becoming
Asia's largest source of outbound investment.
"While overseas M&A is just one type
of China's ODI, the M&A industry breakdown
gives us a very representative glimpse of China's
overseas investment trends," he said.
During the first half of 2005, funds going
into M&As accounted for 80% of China's total
ODI, according to MOC statistics. The amount had
climbed to $57.2 billion by the end of 2005, and
to $63.64 billion by the end of June 2006.
A major reason behind Chinese firms'
growing overseas M&A activities is that the
government encourages them to invest abroad
because of the country's skyrocketing
foreign-exchange reserve and trade surplus with
the United States and European countries.
According to customs statistics, China's trade
surplus swelled by 74% last year to $177.5 billion
from $102 billion in 2005, boosting the country's
foreign reserve to well over $1 trillion by end of
last year.
With their market dominance at
home, some Chinese companies are looking for new
markets and for opportunities to acquire brands
and technologies. For example, Lenovo, China's
largest computer manufacturer, acquired the PC
division of International Business Machines Corp
(IBM) in May 2005 to become the world's
third-largest personal computer (PC) maker.
In the past five years, Chinese firms'
overseas acquisitions, such as the IBM deal, have
captured international headlines, but in the end
few have proved to be successful expansion moves.
The acquisition of Siemens' entire mobile
phone business by BenQ ended in abject failure,
pouring cold water on Chinese firms' global
ambitions.
BenQ acquired Siemens' entire
mobile phone business and became the world's
fourth-largest mobile phone manufacturer in
October 2005.
However, Li Kunyao,
president of BenQ, in December 2006 declared the
deal a failure after the company posted an 800
million euro ($1 billion) loss.
Having
fired 1,900 Germany staff, BenQ shifted its
business focus to the Asia Pacific, and its
manufacturing base moved to Shanghai from Suzhou
and Taiwan.
Li blamed the two companies'
different working styles for the bankruptcy of
BenQ Mobile. "The Germany unit has strengths in
management and skills, but its working style
cannot be accepted by Asian enterprises. They take
too long to approve a plan for a new design, which
leads to slow production of new models and
outdated design," he said.
Li Dongsheng,
chairman of TCL Group, has similar complaints
about the different approaches to work in Europe
and China. Li, also chairman of TCL Multimedia
Technology Holdings, the group's flagship TV arm,
said there are many stipulations in European labor
laws that are very different from China.
When a joint venture called TTE Europe
formed by TCL and Thomson started operations in
August 2004, one of TCL's goals was to expand its
presence in Europe and North America through the
brand influence of Thomson.
In the first
nine months of 2006, TTE Europe's net losses
reached 159 million euros, bringing the Hong
Kong-listed TCL Multimedia Technology Holdings'
total net loss in the period to HK$1.519 billion
(US$194.4 million). TCL said in October that it
would close most of its European television-making
operations and return the Thomson trademark to the
French video-technology giant of the same name.
"Europeans do not work like Chinese
people, especially they do not work on weekends,"
said Wong Chi-man, telecom, technology and media
analyst at China Everbright Research.
When
IBM unloaded its shares in Lenovo again in
January, some worried that Lenovo's acquisition of
IBM's PC division might be just another example of
Chinese companies going international and failing,
as the former seemed to try to dump the
loss-making PC unit on the latter as soon as
possible.
Lenovo completed the acquisition
of IBM's PC unit for US$1.25
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