Why are Chinese investors mostly buying the wrong companies?

25 Aug

Over the past decades, Chinese companies – both privately owned and state-owned (SOEs) – have improved their market position domestically and accumulated significant financial resources. Many of these companies are successful players in their home market, which could be limited to just one or a few cities or province or region in China. It is not unusual that local companies find it hard to expand within China from their traditional home market to other areas in China due to the vast differences in consumer behavior between the North and South or between the well-developed Easter coastal areas and the Western more rural areas.

Now think of these cash-rich companies and how they would go about their globalization plans given that even domestic expansion is still a challenge. Many investments in China are still done on a very rudimentary basis. As with private investors who like to gamble on the stock market (and earn decent returns in the past), corporate investors are sometimes not much more structured in their approach. Recommendations of friends or affiliated business partners oftentimes form the basis for the acquisition of a company overseas. That this is not very strategic in most cases, is probably obvious. There is a lack of a well thought-out globalization strategy for many private and public companies in China.

This lack of strategy is also not addressed by the increasing number of small and large M&A advisory firms who usually suggest deals to their clients based on either their own portfolio of contacts or on opportunities brought forward by potential sellers. If these advisors are locals, then their visibility and understanding of overseas markets is usually limited. For global firms, the collaboration among their international network possess a challenge with P&L and incentives often structured on a country basis.

What most Chinese investors need is a development of a strategic, global vision and a corresponding aspired positioning. This strategy together with a thorough assessment of their current capabilities should form the starting point of any M&A investment activity. Based on the gap resulting from this exercise, it will become much more obvious what kind of partnership or acquisition is needed overseas. This can range from a technology licensing or acquisition to strengthen their home market in China to a market entry overseas through the network and market access of the acquisition target.

As with many things in life, it is better to make up your mind and thoroughly think through what you want to achieve before chasing deals that seemingly appear to be attractive. Most of them aren’t in the mid- to long-run. I will discuss this in more detail in one of my next articles.

Please feel free to share your views with me in the comment section.

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