The recent announcement of a bid for a
British-Dutch steel company (Corus) by India's
Tata group has passed without raising much hue and
cry in the United Kingdom or the Netherlands. The
tempered reaction contrasts with the noise raised
by French and Belgian lawmakers against a proposed
takeover of Arcelor by Mittal earlier this year,
which resulted in a transaction despite their
objections - in other words, Mittal impressed
shareholders enough to override political
objections.
These successes by Indian
businessmen are in contrast with the
more
labored path that Chinese companies find
themselves exposed to when trying to buy foreign
companies. US Congress members raised a ruckus
when the China National Offshore Oil Corp (CNOOC)
attempted to take over Unocal last year, and when
Haier attempted to buy Maytag. In both cases
political opposition culminated in the bids being
withdrawn by the Chinese companies.
There
have been other notable failures around the world,
which put in perspective limited successes such as
Lenovo acquiring the personal-computer business of
IBM and Nanjing Auto buying the UK's bankrupt
Rover Group. Across both Asia and Africa,
newspapers have castigated the business practices
of Chinese companies and often used nationalist
arguments against their participation. To be sure,
it isn't only Chinese companies that receive
xenophobic treatment from Americans and Europeans;
Dubai Ports World of the United Arab Emirates also
faced stiff opposition when it attempted to buy
Britain's P&O, manager of several US ports,
last year.
Of valuations and brands Before addressing the actual story of India vs
China in the markets, it is pertinent to examine
the context. Why do companies need foreign
acquisitions in the first place? From the
perspective of expected returns, the question
appears daft in that both countries have growth
rates that outstrip anything that can be seen
across North America, Europe and Japan. In
addition, equity-market valuations are stretched
thanks to the strong market rally in recent years.
The answer is to be found in structural factors,
detailed below.
As I wrote before, [1] the
primary focus for sustainable economic growth in
India and China has to be the banking systems of
the two countries. Neither possesses sufficient
strength to guarantee future economic stability,
so this calls for continued structural reforms. In
that context, I wrote previously [2] that while
Chinese reforms have stalled recently under
President Hu Jintao, Indian structural reforms are
in essence moribund for the foreseeable future.
[3]
The broadening base of domestic demand
in China has pushed more local manufacturers to
build their brand values. A number produce goods
at cheap rates for Japanese, Korean or North
American brands that are then sold in the local
market at prices much higher than what Chinese
manufacturers are paid. While some Chinese
manufacturers have built strong brands
domestically (eg Lenovo, Haier), brand extensions
to the rest of the world are proving more
difficult.
Thus even though Lenovo may
build the same laptops as IBM did, a lack of brand
recognition has allowed other manufacturers to
steal market share. Similar examples are to be
found in other areas, ranging from cars to washing
machines. Strategically, brand improvement is
important for China given the lack of
profitability across many manufacturing
operations, [1] which calls for vertical
integration upward, ie, to the finished product.
With no-brand products in essence commoditized,
Chinese manufacturers need strong brands to
produce profits going forward.
Indian
manufacturers have a different problem, which is
the lack of scale domestically thanks to halting
reforms. The lack of broad-based industrial growth
means that increases in per capita income are not
well distributed. Rather than urbanizing the rural
population, the current government has initiated
positively daft programs such as the Rural
Employment Guarantee scheme, which is a colossal
waste of taxpayers' money. [4] In this
environment, demand for consumer durables is
unlikely to increase at the same pace that Chinese
and other Asian markets have enjoyed, leaving
Indian manufacturers with no choice but to expand
overseas.
Management and governance Having established that both Chinese and
Indian manufacturers need access to global brands,
it is interesting to note that the former, despite
their higher access to capital, find the latter
stealing a march. Both Chinese and Indian
companies excel at execution, therefore I will not
attribute deal successes to this factor. To some,
the main reason is the apparent cultural awareness
of Indian entrepreneurs compared with their
Chinese counterparts.
Armed with strong
language skills and possessing marketing skills
that Europeans and North Americans appreciate,
Indian business people find it easier to open
doors. Culturally, many Indian companies making
the leap have strong centralized authority,
usually from owner-managers, with professional
management that is similar in construct to big
North American companies.
In contrast,
many Chinese state-owned companies have a more
consultative style of leadership, which mirrors
Japanese management style. [5] In most state-owned
companies, progress to senior management is
achieved because of one's position in the
Communist Party, rather than proven technical and
management skills. Down the line from senior
management, most Chinese state-owned companies
appear to have weak, bureaucratic management.
Given these factors, slower responses to global
consolidation are not surprising.
In terms
of corporate governance, Chinese companies lag
their Indian counterparts by a wide margin. With a
relatively small pool of lawyers, auditors and
accountants at their disposal, [6] Chinese
companies simply have less transparency as against
their Indian counterparts. With a longer history
of listing on stock markets, Indian companies have
a better infrastructure to deal with a wide array
of stakeholders, including bankers, market
regulators, tax authorities and pension trustees.
This experience has proved invaluable when
venturing overseas as the Indian firms encounter
very similar requests for information and
disclosures.
Economic orientation Another major difference between the two
giants is corporate attitude toward shareholders.
All proposals for mergers and acquisitions
(M&A) need to be accretive for shareholders in
Indian companies, which puts positive economic
incentives in place and also means that such
transactions will not proceed if counter-bidding
renders such returns negative. In contrast, the
top-down culture of Chinese companies provides
situations where policy mavens, usually working
with the government, determine that strategic
expansion is a priority. This in turn causes
expansion to occur at any cost, and usually well
outside the range of economic returns.
In
Western capitalist societies, the arrival of such
Chinese money is greeted in much the same way that
Japanese acquisitions were viewed in the 1980s and
'90s. Top-down decision-making on media
convergence, for example, pushed some Japanese
hardware manufacturers to acquire Hollywood
studios. While I have no comment on the quality of
movies subsequently made, results for shareholders
were nothing short of disastrous.
When
such opposing economic interests court companies,
it would be logical to sell to the highest bidder
(ie, Japanese, but in the current situation,
Chinese) - what is the objection? There is none
economically, but politicians in Europe and the US
aren't known for being logical. The key suspicion
in many cases arises from the apparently
bottomless pits of money that Chinese state-owned
companies have access to, which would bring into
sharp focus the strategic rather than economic
rationale.
This means that, once
establishing that proposed transactions are not
economic, politicians have a field day assigning
motives according to pet conspiracy theories. This
has been the biggest factor in derailing various
transactions proposed by Chinese companies and, in
any event, attracting excessive political and
media attention for mundane M&A proposals.
Confronted with capitalist Indian business
people, the same interests find themselves with
less room for such shenanigans because deal logic
is usually more persuasive and economically
appealing. This then is the biggest lesson for
China - to accelerate the pace of structural
reforms, allowing its largest companies to become
publicly owned, with little state involvement.
That would help open doors globally.
Notes 1. Indian, Chinese banks plunge at
different rates, August 3. 2. Chinese reforms: The dog didn't
bark, August 5. 3. Indian reform: All bark and no
bite, August 16. 4. Demo-crazy, September 23,
wherein I pointed that the pliable Indian middle
classes are unlikely to protest much. 5. This
is ironic, given the supposed conflict in
cultures. If it is any consolation for Chinese
managers, Korean companies aren't very
different. 6. I would attribute this to the
Cultural Revolution, wherein a number of such
professionals were purged. The situation has
improved drastically now, but it will take a few
years for any impact on corporate governance to
come through.
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