Chinese companies’ weak record on foreign deals
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Jun 8th 2017
CONSIDERING the size of China’s economy, it seems inevitable that its firms will eventually play a huge role on the world stage. Yet China Inc’s adventures abroad in the past 15 years have been a mixed bag. Thousands of small deals have taken place, some of which will succeed. But of the mergers and acquisitions that have been worth $1bn or more, it is a different story. There have been 56 abandoned deals, 39 state-backed acquisitions of commodities firms at frothy prices, and, lately, wild sprees by tycoons scooping up trophies such as hotels and football clubs.
Some deals defy any conventional logic. Last month HNA, an airlines-and-tourism conglomerate from Hainan, said it had bought a 10% stake in Deutsche Bank, having earlier considered buying a Landesbank. The Chinese firm, which runs a beach-volleyball tournament in Beijing, appears to think it can consolidate Germany’s fragmented banking industry—the financial equivalent of bringing peace to the Middle East. If China Inc is to realise its potential abroad, it needs a more credible approach.
The experience of Britain, and then America, in the 20th century suggests that economic hegemons control a disproportionate share of the world’s stock of cross-border corporate investment. Today China’s slice is only 4%, below its 15% share of global GDP and its 13% share of total stockmarket value. Its leaders want firms to go faster. If companies don’t globalise, China won’t become powerful, argues Wang Jianlin, boss of Dalian Wanda, a property firm, and China’s richest tycoon, in his autobiography.
In their hurry, Chinese firms have made mistakes. Deals worth $1bn or more account for two-thirds of activity by value since 2005. Of these about half fall into three problematic categories. First, acquisitions by state-controlled groups of natural-resources firms. The aim was to secure access to raw materials but many deals were badly timed, with high prices paid at the peak of the commodity cycle between 2010 and 2014. CNOOC, an oil firm, for example, has written off part of its $17bn acquisition in 2012 of Nexen, a Canadian oil firm.
The second difficult category consists of acquisition sprees by leveraged conglomerates, financed by debt or by the funds that policyholders entrust to these firms’ insurance subsidiaries. Four such companies—HNA, Dalian Wanda, Fosun (based in Shanghai) and Anbang—have spent $100bn on assets that include luxury hotels, a Portuguese bank, a Russian gold mine and a yachtmaker. It is hard to see industrial logic behind the purchases. Fosun and HNA, which disclose their accounts, have eye-watering ratios of debt to gross operating profit of 8 and 13 times respectively. In the last category are outright flops: $230bn of deals worth $1bn or more have collapsed because the buyer or the Chinese government got cold feet, or because of a hostile reception abroad. As a result Chinese buyers are seen as unreliable.
Other countries have been on foreign M&A benders: in 1989-90 Japanese companies bought a Hollywood studio and the Rockefeller Centre and in 2005-15 Indian firms splurged overseas. But China is different. It is much bigger. And its firms’ weaknesses abroad reflect the unique problems of its economy at home.
State-controlled firms are the most financially undisciplined. They are also more likely to provoke opposition abroad from private rivals and from politicians who can argue that China’s government is meddling in their economy. As for the country’s entrepreneurs, cheap loans from state banks and a reluctance to issue equity leads them to assume too much debt and to speculate. They need to be politically connected to get bank loans and get around currency controls, but such connections can be fickle. In 2015 Fosun’s boss was arrested and then released. This month Anbang has had to deny that its chairman is banned from leaving the country. China’s outbound foreign investment dropped by 49% year on year in the first quarter of 2017, with an official clampdown on such speculative deals partly to blame.
More sensible ways of going global may be emerging, however. State-backed firms are using new mechanisms to persuade foreign countries that they will operate on a largely commercial basis. ChemChina has just bought Syngenta, a Swiss chemicals firm, for $46bn. It has promised to keep Syngenta’s headquarters and research in Switzerland. China Investment Corporation (CIC), a sovereign-wealth fund, is to spend $14bn buying Logicor, a European warehousing business. CIC will presumably argue that it is a financial buyer and won’t meddle. China’s one-belt-one-road initiative is partly aimed at reassuring foreign countries that do business with state-backed firms, by putting contracts and activity under a bilateral, diplomatic umbrella.
For China’s private firms the focus must be on deals that contain industrial logic, rather than those with a strongly speculative or trophy-hunting flavour. Last year Haier, which makes white goods, bought General Electric’s appliances business. Even these deals are hit and miss. Geely, a carmaker, has made a success of Volvo, which it bought in 2010, but Lenovo, a computer firm, has struggled since buying Motorola’s handset business in 2014. Yet, over the long term they have a better chance of succeeding than almost anything else. As China’s internet firms accumulate cash they will go abroad; they have much to offer in terms of expertise. Last year Tencent paid $9bn for Supercell, a Finnish gaming firm.
In the past, each economic superpower has created its own corporate form abroad, reflecting its national character and the state of the world it sought to bestride. British firms used managing agents in the 19th century to run remote businesses. From the 1970s American firms perfected the multinational, taking advantage of technology and open borders to run things on an integrated basis. China’s firms are emerging out of a state-led economy into a more protectionist world. They must find their own ways to adapt to this environment if they are to fulfil their destiny.
