Economy

China’s Growing Companies Need Maturity, Not Just Money

Chinese business leaders should learn lessons from Japanese firms' spending sprees of the 1980s and 1990s.

Sinopec is China's largest company
Sinopec is China's largest company

BEIJING â€" There's a reason analysts talk so much these days about "Chinese capital," which continues to make its presence felt as top companies in China begin to buy their way into new markets.

In 2015, according to government figures released last week, Chinese companies carried out 579 overseas mergers and acquisitions (M&A) in 62 countries and regions for a transaction total of $54.4 billion. China's foreign investment, in the meantime, hit a record high of $145.7 billion, accounting for 9.9% of global traffic and ranking second in the world.

The trend stems from economic reforms in recent decades that allowed Chinese companies to amass substantial amounts of capital. That, in turn, prompted them to seek even greater sources of wealth through overseas investments and acquisitions.

As part of the "new normal" for China's economy, many companies believe the best way to transform and upgrade themselves is by grafting together global resources and the country's aggregate financial strength. This implies seeking out successful brands, networks, technologies and services on a global level. In doing so, these companies hope not only to better serve the growing Chinese middle class, but to seize the future of China's economy.

Their choice is the right one. This process will no doubt give rise to a number of world-class Chinese enterprises, and not all of them from the giant state-owned businesses. In 2015, non-state-owned enterprises outranked the state-owned enterprises in terms of foreign M&A and in the amount of capital involved.

These deals include manufacturing, information technology, finance and even culture, sports and entertainment industries. Chinese "smart manufacturing" and services already play a previously unimagined role in the global picture. And this trend will continue.

The "GE approach"

But M&A deals have always been a double-edged sword. Thus the term "winner's curse," in reference to how operational pressures increase with each M&A. As companies grow, they gain more assets, but they are also more unwieldy, eventually collapsing in some cases. As international cases show, 70% of these deals do not meet expectations. The success rate of cross-border acquisitions is even lower.

China ushered in overseas M&A for the first time in 2008. But a lot of blind bargain-hunting by enterprises did not result in the cheap resources and minerals they were hoping for. Instead, they lost. Some of these deals ended up as costly dead-ends. Enthusiasm for overseas M&A waned as a result.

Starting in 2012, however, the pace picked up again. These days, Chinese companies are again eager for new opportunities. They're also more cautious, albeit not necessarily more successful.

Generally speaking, Chinese overseas corporate deals are resource-oriented. Apart from resources like minerals, oil or gas, they mostly seek intangible assets, brands, R&D capabilities, technology or patents. Rarely, though, do they take what Professor Ding Yuan of the China Europe International Business School calls the "GE approach." They don't, in other words, try to exert total control over their partners and acquisitions and impose completely new management.

Ding Yuan sees that as a problem: Without first-class management, how can Chinese companies and the companies they merge with to achieve win-win situations?

Risk assessment

Another problem is that while Chinese companies often have leverage power to execute M&A, they're sometimes reluctant to continue investing afterwards. They use their capital advantage up front, in other words, but not necessarily over the long-term. And as the cash flow dries up, some of the mergers and acquisitions end up failing.

Hold on to your yuans â€" Photo: Mulligan Stu

Many Chinese enterprises are still absolute beginners in this kind of deal. Their inexperienced means more uncertainty, and probably more risks. As one official of the Ministry of Commerce pointed out, certain Chinese companies go into their M&A deals almost blind. Often they're driven by non-rational factors, like following a trend or just showing off, according to the source. In those cases, success is more of an accident than a probability.

The official's analysis brings to mind the lessons learned from Japanese companies that spent lavishly, proud to be buying up the whole of America, only to see the bubble eventually burst. Where are those companies today?

That's not to say Chinese should avoid overseas M&A. It's a necessary step forward, one that inevitably comes with risk. With careful planning, however, some of that risk can be mitigated, allowing certain Chinese companies will break the "winner's curse."

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Spencer Tunick Nude Installation in Israel

Anne-Sophie Goninet, Jane Herbelin and Bertrand Hauger

👋 Salam!*

Welcome to Monday, where the UK pays homage to slain MP David Amess, Myanmar frees thousands of prisoners, and Facebook gets ready to build its "metaverse." Please fasten your seatbelts: Worldcrunch also takes stock of the long-lasting effects — good and bad — the pandemic has had on the air travel industry.

[*Azeri - Azerbaijan]

🌎  7 THINGS TO KNOW RIGHT NOW

Myanmar to free political prisoners: Myanmar's junta chief Min Aung Hlaing has announced the release of 5,636 prisoners who had been jailed for protesting the coup that ousted the civilian government in February 2021.

• Powerful Haiti gang behind the kidnapping of U.S. missionaries: The notorious 400 Mawozo gang is believed to be behind the kidnapping in Haiti of a group of Christian missionaries, including 16 U.S. citizens and one Canadian. The brazen kidnapping on Saturday comes as crime is spiking since the killing of President Jovenel Moise in July.

• UK to pay tribute to David Amess: British lawmakers will pay homage in parliament to colleague David Amess, who was stabbed to death Friday in what was described by the police as a "terrorist incident." Officers arrested a 25-year-old suspect whose father, Harbi Ali Kullane, worked as a media adviser to a former prime minister of Somalia.

• COVID update: Russia has registered more than 34,000 cases of new infections in the past 24 hours, a new record since the start of the pandemic. Meanwhile, police in the northeast Italian city of Trieste used water cannons to clear striking dockworkers protesting Italy's new requirements that all employees be vaccinated.

• At least 26 killed in floods in India: Torrential rain has triggered floods and landslides in India's southern coastal state of Kerala, killing at least 26 people.

• Facebook to hire 10,000 in EU to develop "metaverse": The U.S. social media giant plans to hire 10,000 workers in the European Union over the next five years to build a "metaverse," a virtual reality version of the internet that the company touts as the future.

Punishing parents for children's bad behavior: After limiting gaming hours for minors, China is now considering legislation to reprimand parents if their children exhibit "very bad behavior" or commit crimes.

🗞️  FRONT PAGE

Colombian daily El Espectador dedicates its front page to Alex Saab, "owner of the secrets" of Venezuelan President Nicolas Maduro. The Colombian businessman, wanted by U.S. authorities for allegedly laundering money on behalf of Venezuela's government, has been extradited from Cape Verde to the U.S. where he is scheduled to appear in court today.

#️⃣  BY THE NUMBERS

4.9%

China's economy registered its slowest pace in a year as the country faces a looming energy crisis with power shortages and increasing pressure on its property sector. Gross Domestic Product (GDP) for the period between July-September rose 4.9%, the weakest numbers since the third quarter of 2020 and significantly lower than forecasts. The world's second-largest economy faces a debt crisis linked to the China Evergrande Group debt crisis, while energy shortfalls have dropped factory output to its weakest since early 2020, when heavy COVID-19 curbs were in place.

📰  STORY OF THE DAY

7 ways the pandemic may change the airline industry for good

Will flying be greener? More comfortable? Less frequent? As the world eyes a post-COVID reality, we look at ways the airline industry has been changing through a pandemic that has devastated air travel.

⛽ Cleaner aviation fuel: With air travel responsible for roughly 12% of all CO2 emissions from transport, and stricter international regulation on the horizon, the industry is increasingly seeking sustainable alternatives to petroleum-based fuel. In Germany, state broadcaster Deutsche Welle reports that the world's first factory producing CO2-neutral kerosene recently started operations in the town of Wertle, in Lower Saxony. The plant, for which Lufthansa is set to become the pilot customer, will produce CO2-neutral kerosene through a circular production cycle incorporating sustainable and green energy sources and raw materials

.🛃 Smoother check-in: The pandemic has also accelerated the shift towards contactless traveling, with more airports harnessing the power of biometrics — such as facial recognition or fever screening — to reduce touchpoints and human contact. Similar technology can also be used to more efficiently scan physical objects, such as explosive detection. Ultimately, passengers will be able to "check-in" and go through a security screening anywhere at the airports, removing queues and bottlenecks.

✈️ The billion-dollar question: Will we fly less? At the end of the day, even with all these (mostly positive) changes that we've seen take shape over the past 18 months, the industry faces major uncertainty about whether air travel will ever return to the pre-COVID levels. Not only are people wary about being in crowded and closed airplanes, but the worth of long-distance business travel, in particular, is being questioned as many have seen that meetings can function remotely, via Zoom and other online apps.


➡️ Read more on Worldcrunch.com

📣 VERBATIM

"The crimes committed that night are unforgivable for the Republic."

— Emmanuel Macron became the first French president to commemorate the killing of as many as 200 Algerian independence protesters by Parisian police in 1961. For 40 years, French officials ignored the massacre, which took place a year before Algeria gained its independence from France after an eight-year war. In 2012, French President François Hollande acknowledged the killings for the first time on a visit to Algeria, and Macron took it further by attending Sunday's commemoration at the site where the events happened in the French capital. Still, many had hoped the French President would go further and take responsibility for a "state massacre," for a crime many historians consider the most violent repression of a peaceful demonstration in post-War Europe.

📈💥  IN OTHER NEWS

​Low trust, high risk: The global rise of violence targeting politicians

The deadly stabbing of British Parliament Member David Amess confirms an ongoing study on trust and governance in democracies around the world: It's bad. In The Conversation, James Weinberg — the study's author and a lecturer in Political Behavior at the University of Sheffield — writes:

⏪ The assassination of Amess, who was stabbed to death in his constituency on Friday, is a tragic moment for democracy. What makes it even more devastating is that such a catastrophic failure is not without precedent or predictability. Labour MP Jo Cox was shot at her constituency surgery in 2016. Before her, another Labour MP, Stephen Timms, survived a stabbing in 2010. And Andrew Pennington, a Gloucestershire county councilor, died in a frenzied attack in 2001 while trying to protect local Liberal Democrat MP Nigel Jones.

☝️ Beyond these critical junctures in the public debate about politicians' safety, elected representatives must live with an increasingly insidious level of popular cynicism that threatens violence on an almost daily basis.

🇬🇧🇳🇿🇿🇦 Not only are these experiences of abuse or threats of physical violence felt across both sides of the political aisle in the UK — they also appear to be growing more common in other democratic contexts where the climate of politics has been presumed to be both calmer and more volatile, from New Zealand to South Africa.


Read the full piece from The Conversation, now on Worldcrunch.com

✍️ Newsletter by Anne-Sophie Goninet, Jane Herbelin and Bertrand Hauger

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