Economy

5 things Chinese firms need to know about global expansion

By Phil Leung and Larry Zhu (chinadaily.com.cn)
Updated: 2010-07-23 17:02

China is becoming a key player in a game that it's just beginning to learn how to play. The country's explosive economic growth has spurred a corresponding boom in mainland companies pursuing expansion opportunities overseas through mergers and acquisitions (M&A), joint ventures, partnerships or organic growth. Chinese firms seeking access to other markets are discovering that a global expansion strategy is just as critical as it is for foreign companies trying to win in China. Even as the financial crisis hit in 2009, the value of deals involving Chinese companies making overseas acquisitions totaled $35.9 billion. As recently as 2004 it was only $3.5 billion.

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Cash-rich Chinese firms are in a strong competitive position to make inroads into foreign markets. They've been relatively insulated from the financial crisis while many hard-hit Western companies are trying to unload struggling businesses and assets that have lost value. Mining, telecom, utilities and financial services topped the list for outbound M&A deals in 2008 and 2009. Typically, the deals are small, with minority stakes totaling just $50 million or less. But several multibillion-dollar deals are in the works or completed, including the $7.7 billion acquisition last year of Canada-based Addax Petroleum by Sinopec International Petroleum Exploration and Production Corporation (SIPC), a subsidiary of China Petrochemical Corp, and Zhejiang Geely Holding's $1.8 billion purchase of Ford Motor's Volvo division. With growing demand for raw materials and energy, these sectors will continue to pursue M&A deal making.

But Chinese companies are discovering that expanding into foreign markets is tricky. And they aren't alone. Worldwide, we've found that M&A efforts often fail to deliver the intended value—and the stakes are even higher for companies that lack experience in M&A. A Bain & Company global survey of 750 companies showed that 55 percent - more than half - of the acquiring companies' stock failed to outperform the market one year after deals were announced.

   

 

 

However, some seasoned acquirers are getting it right. We've found that they start slow and small, gaining experience and confidence with domestic acquisitions before expanding globally. Winners often monitor the growth of acquisition targets for years before making an offer. They focus on how the deal could take full advantage of synergies for both parties. Winning acquirers understand that to excel, they have to attract and retain top talent.

ChemChina (China National Chemical Corp) became the mainland's No. 1 chemical conglomerate by following that path. After more than 100 domestic acquisitions, ChemChina, on its own or through its Blue Star subsidiary, then targeted three major foreign firms - Adisseo and Rhodia in France and Qenos in Australia. The deals helped catapult ChemChina onto the global stage, giving it the technology, management skills, capital and market access required to become a multinational player.

As the pace of global expansion by mainland firms accelerates, Chinese businesses need to learn quickly several important lessons to replicate the success of companies like ChemChina.