China's investments in the rest of Asia are booming

Hey, big spender
Jun 4th 2007From the Economist Intelligence Unit ViewsWire

China's outward investment drive has become the subject of growing media and political attention, as increasingly internationally minded Chinese companies have begun scouring the globe for takeover targets. Yet despite the hype, this shopping spree is not quite what it appears, being in some ways more modest in ambition (for now, at least) than many suppose.
Back in 2005 when Lenovo, China's leading maker of personal computers (PCs), bought IBM's PC division for US$1.25bn, some pundits hailed the deal as the beginning of a wave of big acquisitions abroad by Chinese companies. Certainly, China's overseas mergers and acquisitions (M&As) have soared recently. In 2006 Chinese companies did 103 crossborder deals worth US$20.7bn, according to Dealogic. That is a dramatic rise from 2004 levels, when Chinese firms made 53 overseas purchases valued at US$3.8bn.

But Lenovo's splashy takeover of the iconic US high-tech brand has so far proven to be an exception. That is because the bulk of Chinese acquisitions abroad are taking place with far less fanfare in emerging markets—often in China's own backyard, Asia. Of the top ten Chinese crossborder M&A deals by dollar value this year, all but two of the acquired companies were in Asia. As the volume of outbound M&A continues to increase, many expect Chinese investment in Asia to accelerate even more. "A lot of Chinese companies want to buy a company in Singapore, Pakistan, Malaysia, Taiwan, and we're going to see an increasing number of transactions between India and China," says Hong Chen, chairman and CEO of the Hina Group, a boutique investment bank in Beijing that initially focused on Silicon Valley but opened a Singapore office and stationed a staffer in Hong Kong in 2006. Other observers point out that the big population of overseas Chinese scattered throughout South-east Asia is especially well suited to act as liaisons for mainland Chinese businessmen.
For the most part, takeover targets in Asia have little to offer Chinese companies in the way of fancy technology or global brands. But they have another attraction: they are often less difficult for Chinese firms inexperienced in M&As to digest. For example, business leaders in China may be better able to apply experience gleaned at home to other Asian countries with similar income levels and customer needs. Take China Mobile's US$460m acquisition of Paktel, a Pakistan-based mobile-phone operator, earlier this year. It marked the Chinese telecoms giant's first successful overseas acquisition. As M&As go, it was not exactly ambitious: China Mobile's subscriber base is over 230 times that of Paktel. Still, analysts say China Mobile could share with Paktel useful insights into working around underdeveloped payment systems and selling more expensive services as customers' incomes grow.
Salary gap
As a further spur to investment in Asia, in much of the region salaries are likely to be roughly on a par with those in China. This is no small matter, say many who have worked on deals in China. Not only does moderate pay hold down business costs, but Chinese executives are also unsettled by the prospect of managing Western counterparts with salaries higher than their own. Mr Chen of the Hina Group offers the theoretical example of an Italian clothing company that boasts an upscale brand but lacks its own manufacturing capability or sales force in China. It would make perfect sense for a Chinese manufacturer eager to boost thin margins to snap up the Italian firm and market its clothes in China. Yet Mr Chen says so far deals like this have been few and far between in large part because of managers' income disparities. A typical salary for a Chinese vice-president might be US$20,000 or US$30,000 a year. "So they think, 'how can we have someone reporting to us who makes US$100,000 a year?'," he says. Such cultural conflicts have in fact bedevilled TCL, a Chinese television-maker that purchased France's Thomson in 2004 in what was perhaps the highest-profile Chinese M&A in Europe to date. In May TCL declared its European unit insolvent.
But the biggest incentive for Chinese firms to stay close to home may be the fact that developing Asian countries eager to promote growth are relatively more likely to welcome Chinese investment than Western countries--which are more inclined to view China with some trepidation as a powerful new economic competitor. Many companies acquired by the Chinese know that they can also secure a better platform for selling into China. That is a huge carrot, especially for Asian businessmen who want to take advantage of the booming regional trade that China is anchoring. A case in point: Bank of China's US$965m purchase in 2006 of Singapore Aircraft Leasing, the largest such firm in Asia. The bank framed the acquisition as a way to boost its non-interest income and potentially develop new business with airline companies. But the deal could also give Singapore Aircraft Leasing a stronger foothold in China's aviation market, one of the fastest-growing in the world. When Bank of China announced the deal, it pledged to tap its own contacts in the Chinese airline industry to drum up business for the Singaporean firm. "The rest of the Asian region really needs to do business with China," says one Hong Kong-based banker.
Indeed, the watershed event for China's outbound M&A strategy was the unsuccessful US$18.5bn bid by China National Offshore Oil Corp (CNOOC) to buy US-based Unocal in 2005. That deal went down in flames as US Congressmen warned the Bush administration that approving it would amount to handing over America's energy security to the Chinese government (CNOOC is a state-owned enterprise). Some observers say China's resolve to avoid any similar public loss of face in the future has made it tougher since then to win central government approval for offshore purchases. A transaction is unlikely to get Beijing's green light unless it looks likely to sail through free of political hassle in the M&A target's home country.
The US seems a particularly unwelcome place for Chinese M&As. Even before the CNOOC-Unocal debacle, Lenovo had to get clearance for its IBM deal from the Committee on Foreign Investment in the US, an inter-agency government body charged with reviewing sensitive foreign investments. As the Hong Kong banker puts it, Lenovo did not escape Congressional scrutiny even though the purchase involved "a dud commoditised business with most of its manufacturing already done in China".
This sort of prying will hardly encourage more Sino-American corporate marriages. But rumours do still make the rounds about the potential for Chinese companies to make high-profile US buys. Earlier this year the Chinese press ran stories suggesting mainland carmakers might bid for Chrysler, which its German parent, Daimler, was trying to unload. Although Cerberus, a US private-equity firm, emerged as the eventual buyer, sceptics had never taken a Chinese bid for Chrysler seriously. "Can you imagine a Chinese company going in and trying to close down a plant in Dearborn, Michigan?", asks one American lawyer based in China.
Daring and defiant
To be sure, no one doubts that as Chinese firms gain more crossborder M&A experience, they will venture into Western countries in higher numbers and with greater success. The revelation in mid-May that the Chinese government will invest US$3bn in the Blackstone Group, a leading American investment firm, shows that the Chinese will be both daring and defiantly freewheeling about spending their money. No doubt, many will be keeping a close eye on the progress of the Blackstone deal and the continued evolution at Lenovo to see if China can play the M&A game in the West. (Lenovo has struggled to gain market share in the US and in April announced the lay-off of 5% of its global workforce.) That said, Asia already looks like a hotbed of Chinese dealmaking.