China Inc. takes stock after overseas buying spree

By Wei Gu
January 22, 2009

wei_gu_debate– Wei Gu is a Reuters columnist. The opinions expressed are her own –

Abundant liquidity, government support and a strong yuan fueled Chinese companies’ overseas buying spree.

But since they went out at the peak of the market and did not have a clear strategy for acquisitions, it should come as no surprise that most of those deals have turned sour. Once bitten, twice shy.

Crisis-ridden companies around the world are hoping that cash-rich Chinese buyers will come to their rescue, but the Chinese are not eager after getting their fingers burnt.

Chinese regulators are now giving more scrutiny to foreign deals, forcing interested buyers to lay out the most pessimistic scenario when seeking their approval.

Bankers said Beijing is skeptical about buying everything except resources, which is seen as important to China’s strategic interest and involves few integration challenges.

BUYING THE BRAND

Chinese manufacturers thought they had found a winning strategy by making goods cheaply in China and slapping a prestigious Western brand on it.

But the strategy hit a wall as companies such as TCL struggled for years to turn around businesses it bought in North America and Europe.

Lenovo’s purchase of IBM’s PC unit was widely lauded as a rare success until it announced a broad restructuring and profit shortfall earlier this month.

The acquired unit has a high exposure to large enterprises in developed markets, a segment that was hit hardest by the economic downturn, said Xin Zhao, an analyst at Cazenove.

“Before China caught the globalization wave our teachers in the West ran into problems,” said Yang Mianmian, president of China’s electronic appliance giant Haier, which last year spurned an offer to buy GE’s electronics unit.

“The financial crisis has changed our thinking and now we are looking more at rural demand.”

One of the potential pitfalls has been overpaying. Chinese buyers lack experience in valuation methodology and are at risk of paying too much. Moreover, they often do not have a strong understanding of the target experience, and tend to underestimate culture differences and powerful unions.

Some deals have not only incurred hefty losses but turned into a public relations nightmare as the crisis bites harder.

Take the example of Ssangyong Motor Co, South Korea’s No. 5 automaker, which filed for bankruptcy on Jan. 9 after getting hit by the global slump in car sales.

Analysts reckon SAIC Motor Corp, which owns 51 percent of Ssangyong, would be prepared to let the sport utility vehicle maker fail.

Some South Korean media have accused SAIC of all along planning to strip Ssangyong’s technology and dump it afterwards.

“Chinese companies have now realized there are many pitfalls on the road abroad and are learning from their experience,” said David Yu, partner at Llinks Law Offices, who advised SAIC on the deal.

FINANCIALLY SOUND

Chinese companies are financially sound — three state-owned banks trail only Warren Buffett’s Berkshire Hathaway on the global cash-rich groups list. But they’d better not try to bottom fish now.
The temptations are great — many Western brands long seen as out of Beijing’s reach are now fighting for Chinese attention.

Ford, for example, is looking for buyers to take up Volvo and a bank representing it has pitched it to at least three Chinese automakers.

“Chinese automakers need to be extremely cautious about those seemingly once-in-100-years opportunities to avoid failures which will not be recovered in many decades,” said Yankun Hou, an analyst with Nomura Securities.

To avoid more big losses, Chinese companies should cut their teeth on smaller deals in growing industries and markets, mindful that acquiring technology is much easier to manage than buying brands because it doesn’t involve taking over the whole operation.

“It is not clear that all the bad news is yet out, so assessing a target bank’s exposure is still challenging for any investor,” said Holger Michaelis, a partner with The Boston Consulting Group in Beijing.

“The timing however appears good for screening potential targets, but with a focus on smaller deals in less risky segments, like wealth management and asset management.”

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund –

9 comments

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The advice of not bottom-fishing is not necessarily sound, not because of the Chinese companies getting burnt (albeit being one of the reasons), but these Chinese Companies have little companies in turning around companies from poor assets into great ones. In other words, even if the economy turns around, and these Chinese companies still wants to pay, they’ll go on buying; but that won’t make them successful turning around the acquired companies.

Posted by tiddle | Report as abusive

I do not know where this pretty lady is trained as a journalist/financial analyst, but calling Ford as a great global brand is stretching her credential as thin as a piece of paper.True that Chinese companies are suffering huge loss, but part of the reason is the so very proclaimed transparency and good business fundamental of a lot of European and US companies is anything but a joke. I would rather use Fortis or Blackstone or Morgan Stanley to make a point than South Korea’s Ssangyong Motor Co, if the purpose is to help Chinese companies other than….In addition, there are lot of trading blocks erected byforeign companies to stopping Chinese companies to makesensible acquisitions.I find it rather amusing that you can write such a disformed story as a Chinese.

Posted by warren Qi | Report as abusive

Chinese automakers may want to buy, but the US automakers are skeptical of Chinese keeping their ends of bargain and are hesitant to sell to Chinese.UAW boss Ron Gettelfinger commented to press that his union opposed a proposed Chinese(presumably SAIC) take-over bid on Chrysler, instead endorsing the Fiat deal during the negotiation. Why did Gettelginger oppose the Chinese take-over proposal that would have resulted in injection of billions of dollars in cash over the Fiat deal with no cash? Because the Chinese take over doesn’t improve the chance of Chrysler’s long term survival. Fiat offered an access to its entire model range(except for Ferrari) and retooling of Chrysler plants to build them. If Chrysler could get $3 billion from Congress necessary to make the switch to producing Fiat models, then Chrysler dealerships would be loaded with small and luxurious European cars that are expected to sell well. Taking Chinese cash would improve cash position now, but it does not improve the long-term survival chance of Chrysler because the deal produces no new models that would turn around Chrysler sales. When another US auto brand is put up for sale to the Chinese, you bet UAW would oppose the sale once again.In the end, you will see a lot of public resistance from automaker sales to China, be it the US or in Sweden that hosts Saab and Volvo currently on sale.

Posted by Wiseman | Report as abusive

Chinese firms are in an interesting position, which might lead to the acquisition of Western assets, this is true.However, it is not a new phenomenon as the China Economic Review outlined in late 2008 when it highlighted the presence of Chinese financial capital in the FTSE 100. China is looking to buy abroad and has been for some time. The process seems to be slowing as highlighted by CIC’s announcement to slow foreign investment.But, as much press has been advocating, China must remove its reliance on her export market, and perhaps this is why VOLVO was not snapped up. The return of China’s “Gold Collar Worker” will surly help spur this change and perhaps in a 18 months to two years Chinese companies will be more willing to purchase ‘sick’ subsidiaries from Western based parent companies.Looking to China, still classified a developing country, to ‘save’ the West in its financial turmoil is perhaps being asked in too many different ways. China has much to focus on domestically before, Beijing can back an overseas spending spree.Whats to stop one or two wealthy Chinese club together and saving a few iconic western brands? Nothing. What a lot of good it would do to further ‘China Inc.’ – the emerging China brand.

Posted by Sebastian | Report as abusive

I think the young lady just forget that there is no transparency in Chinese companies.

Posted by yun | Report as abusive

Interesting that the Chinese government is cooling on these kinds of deals. Given very high exposure by Chineseinterests to U.S. $ paper, one can see strong case for exchanging some of that for tangible assets. Of course, asset prices may fall further but then the paper assets are a risk too. Real assest offer greater protection form inflation if it turns out that Benanke has let the printing presses run too hot.Treaury bonds are more liquid in theory, but China Inc can’t realise them without bringing the whole house down.So, perhaps, the underlying reason for caution is the difficulty of pricing then owning and possibly integrating productive assets. owning isirning thr hwole hosue of cards.Well, there’s been fabulous mistakes on that front made in the West too (BoA!). But ther are a lot of intermedairies there to help and some members of the Chinese diaspora are well placed. Try working via Singapore.

i am sure CHINA study each cases to buy overseas companies but seems to be some government will put some veto lets say protectionistCHINA will have more equity participation like 5%-10% to diversify their portfolio and diversify risk such as insurance fundit is not time yet to buy the bottom is not so clear.some automobile plants in USA,CANADA can be buy out by chinese automakers to have access to american market.the mineral market is special because the government was and still afraid some others companies will dictate the price and production knowing the demand and dependancy of CHINA it is very difficult and fragile to have long term development if a country cannot figure how much the price in short,middle,long term of resource especially when the growth is double-digit.China will come the right time on the market and very carefully I believe.But as soon the market will know CHINA starts investing overseas the stock market will over-expect.tks

Posted by stmm888 | Report as abusive

Why should Chinese companies buy American brand names?Nobody pays attention to the them anyway.LG is now bigger than GE I see more of LG’s stuff than GE.And as for as seeing an RCA TV I have not seen one of those in years.If the Chinese can make cute looking things for us to buy we will buy them.After all a local wild life shelter near me shelters squirrels and owls and yet buys rats to feed the owls instead of using some of the squirrels it has thousands of they even had to send a lot to three different cities they had too many from the huricane IKE. They saved the cute squirrels even spent money on them to save them and then turn around and spent good money on rats to feed the owls. Go figure. Perhaps they should have saved the rats also and turned the owls into veggie eaters. But who am I to tell them what to do.

Posted by karen smith, Houston, Tx | Report as abusive

The time is ripe for the Chinese to step forward with their own luxury brands, reliability brands, efficiency brands. If you ask the average American to name a single Chinese brand, they will be hard put to do so.