China Expands Abroad: The Coming M&A Boom

Geely’s acquisition of Volvo is a watershed event for both the global auto industry and the international mergers and acquisitions business. The acquisition of a global auto brand by a relative industry newcomer from China demonstrates how quickly even major industries like automobiles are being transformed by the development of China’s economy. It also may well prove to be a precursor to a flood of deals from China.

In industry after industry, relatively unknown local companies are growing larger as China’s economy creates unprecedented opportunities for companies that understand its markets. As these local companies gain scale in China, they inevitably set their sights globally. The new class of future global leaders now being created by the continued growth of China’s markets will ultimately reshape the landscape of nearly every industry. Overseas acquisitions of famous companies like Volvo will hasten this development. By acquiring Volvo, Geely purchased an industry leading brand, and all of the technology, engineering, styling and marketing resources and infrastructure that contribute to that position.

If acquiring overseas companies to gain access to technology, marketing and distribution channels in international markets is such an attractive proposition, why has it taken so long for industrial firms in China to venture abroad?

Historically, one obvious reason has been cash. When I first came to China almost 20 years ago, a Chinese partner could not be expected to make its equity contribution in a joint venture in cash. Chinese partners might inject buildings, equipment or what may have appeared at the time to be overvalued land use rights, but never cash. Cash, especially hard currency, was very hard to come by. The lack of it was one of the key reasons why foreign investment was welcome.

A second reason that China’s industrial companies have been slow to embrace overseas acquisitions is the daunting challenge of managing operations in countries with unfamiliar markets and vastly different cultures. In many respects, it is even more challenging for a Chinese company to operate successfully in the United States or Europe than it is for an American or European company to be successful in China. After all, the history of foreign investment in China is now entering its fourth decade, while the history of Chinese companies doing business abroad is only now being written. For this reason, the initial wave of overseas acquisitions by Chinese companies has been largely confined to asset intensive energy and natural resource companies.

Finally, the sharp slowdown in Western economies in the aftermath of the global economic crisis has caused Chinese companies to be cautious with respect to entering overseas markets. I have spoken with many Chinese companies that have aggressive ambitions outside China, but have been concerned about the United States and European economies. Despite the attraction of acquiring state-of-the-art technology, no Chinese company wants to be the first to face declining demand in markets it does not understand.

Things change quickly in China, however, and many of the impediments to overseas acquisitions are being removed.

For one, cash is now plentiful. In addition to generating cash through operations, Chinese companies can raise capital on attractive terms in China’s “A” share market; sell off valuable real estate; and/or borrow from Chinese banks. With cash in hand, Chinese companies are expanding aggressively, and in a reversal of the situation 15 years ago, many are buying back the ownership stakes held by their cash-strapped foreign joint venture partners.

In addition to Chinese sources of capital, international banking firms are now more than willing to support Chinese companies with global ambitions as well. Eager to curry favor with the next batch of global leaders, ensuring a future supply of investment banking fees, capital to expand abroad is now increasingly available from international sources.

Global economies are also improving. While the jury is still out on Europe due to the recent crisis in Greece, the United States, at least, appears to have touched bottom. With the worst of the crisis in the past, Chinese companies are now looking more favorably on acquiring operations outside China.

Finally, Geely may set an important example for other Chinese companies. To the extent that it can successfully address the issue of managing a global car brand, Geely’s acquisition of Volvo will encourage other Chinese companies to follow suit.

If Geely can bootstrap its way to the top of the auto industry, one of the largest and most technologically sophisticated in the world, it can happen in any industry — and it will. The rise of local Chinese companies in one industry after another will be the story of the 21st century. Watch for the coming M&A boom from China!

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