In the afternoon of 22 April, the Cross-Border M&A and Hi-Tech Investment Summit (3rd) and the Award Ceremony of Golden Whistle Price (2nd) hosted by Morning Whistle Group and China Association of Private Equity, supported by Cadillac were held in Shanghai. The leading authority in the academy, heads of government and business leaders from the field of cross-border investment and M&A participated in a series of speech and round-table discussion about the topic of Overseas M&A.
Yufang Guo, the chairman of the Board of Jomec Investment delivered a speech titled “The Current Situation of Overseas Mergers and Acquisitions of Chinese Enterprises”. The following is the transcripts of the speech.
Mr. Yufang Guo:
Thank you, the host. Thank you, President Wang. I am very delighted to share my thought with you.
The topics of high-end manufacturing industry with Industrialization 4.0 and Chinese overseas M&A have been discussed during the summit forum hosted by the Morning Whistle Group.
The Investment and M&A have become a popular statement these years. However, the problems are always more than successes in practice.
Let us talk about the current situation about the overseas M&A of the Chinese enterprises. Nowadays, there is a phenomenon of impetuosity in the field of overseas M&A. The conversion rate of international M&A is low, but the success rate after the M&A is lower. The Industrialization 4.0, the Manufacturing Renaissance, the “Going Global” strategy of Chinese manufacturing industry and “look to the most advanced in the world” are aimed at avoids detours by using for reference the experience and lessons abroad. If we operate the overseas M&A with a blundering mood, the detours are inevitable.
Plenty of Chinese companies choose to do overseas M&A businesses due to the financial consideration. The listed companies tend to choose the large overseas company with high profits as the M&A target. Therefore, the PE ratio in China will grow up faster. However, during the M&A, the Target company and Chinese company usually lack a good connection.
Once I was accompanied by a principle officer of a Chinese company doing M&A business in France. A French senior official greeted us. This French Official asked us: “do you have any experience in the field of international M&A? How to recombine this company after the M&A?” The target company is a large French company. The M&A means a recombine of the company management. The principle officer of the Chinese said, “We will retain the whole of the target company including the management, the staff and the production. We hope that the capacity of the company can also be expanded since the company is facing the problem of capacity adjustments in Europe.”
In previous years, the European market is not too optimistic as a whole. Chinese entrepreneurs tend to tell the target companies that the Chinese market is huge enough to accept any product. Our M&A is aimed at helping European enterprises to develop Chinese market. China has a large market. We can solve all the problems you are struggling with. After that, you are still you and I am still I. In the end, it gives us more opportunity to cooperate. The above arguments are quite popular among the Chinese entrepreneur when they are dealing with the overseas M&A business. This is the objective reality which is quite attractive to the target company. Until now, almost all the transnational corporations are facing all kinds of difficulties in China. Why? The current Chinese economic development and the special cultural of Chinese enterprises are different to the cultural of the transnational corporation. These kinds of differences lead to the problems in the process of internationalization of Chinese enterprises.
Furthermore, I would like to talk about the weakness of the Chinese manufacturing industry. All the middle and low-level industry products manufactured in China are over capacity, not only in the Chinese market, but also the world market. This phenomenon mainly exists in middle and low-level industry rather than high-level industry. China is the largest consuming country of the high-end manufacturing products in the world. Some kinds of brands in Europe, like the automobile industry, luxury, and food which are facing sales difficulties in Europe, are popular in China. When Chinese customers come to Europe, they usually buy five or six luxury handbags per person. If a European want to buy a such a handbag, the seller will give a cup of coffee to the customer first. Then they will talk about the history and culture of the handbag. When it comes to Chinese, a shop might be sold out immediately.
During the last thirty years, there are lots of excellent Chinese enterprises appeared. However, the Enterprise Culture still needs to be deepening compare to the first world level for the company. Now we still have a long way to go. The weakness of the Chinese manufacturing industry is that there are too many enterprises concentrated in middle and low-level manufacturing industry. We are in need of famous brands and key techniques. There are some foreigner calls the innovation of Chinese enterprises as “copy innovation”. On one hand, “copy” made lots of Chinese enterprises stand up at the international level. On the other hand, “copy” can lower the price. Although European and American enterprises cannot manufacture with a high speed and a low price, their level of research and development is higher than Chinese enterprises. If always follow with others, then the Chinese enterprises will never become the world leading enterprises.
What is the meaning of high-end manufacturing? I have been working and living in Europe for a long time. I can tell you that most of the Chinese entrepreneurs in Europe are patriots. We always talk about how to catch up with and surpass the European and American enterprises. The thing is, we need to be in the right frame of mind.
The Industrialization 4.0 is not a new phenomenon. From the second industrial revolution in the 19th century to now, the European and American industry have always been ahead of China. This is lead by the spirit of the craftsmanship. The craftsmanship does not only exist in Germany, but also in other countries in Europe. The core of the craftsmanship is, be meticulous at their jobs. The manufacturer will not stop improving unless they have made the best. This spirit has nothing to do with the level of technological development. A few years ago, I rent an apartment in Beijing. The apartment was located in the central area of the city. It looks very exquisite from the appearance. However, no matter how hard I try, I could not turn the water tab on. This problem is very easy to be solved. It has nothing to do with high technology. But the manufacturer was careless. They might think that it is ok with a beautiful outlook. This is not a craftsmanship. Most of the staffs in the European enterprises are likely to change when they saw something need to be changed, even it will only make a tiny improvement. Huawei has developed this craftsmanship these years so that it can make a perfect job in the mobile phone industry. I believe, more and more Chinese enterprises are working hard to catch up. Of course, this will need time.
The heart of the high-end manufacturing in Europe is not the manufacturing itself, but the purpose of the manufacturing. The purpose of the manufacturing is to satisfy the need of customers. The target of European enterprises is not only to produce the products, but also design a solution with modern high technology. Thus, the size of the line scale is not so important anymore.
A month ago, I received a delegation of Chinese manufacturing industry. They went to the Netherlands and Germany to visit the manufacturing enterprises. After the visiting, some of the Chinese entrepreneurs were a little bit disappointed. They said: those machines are not as advanced as ours. Our products will definitely better than theirs. Therefore, they can send the orders to China. Our Chinese enterprises can arrange the production. After a discussion, the Chinese entrepreneurs found out that things are not as easy as they imagined. Although the Chinese enterprises have the manufacturing capacity, they are weak in R&D and brand effect. They also lack the quality control system and after-sales service. These are what Chinese enterprises need to make improvements. This kind of development can also be beneficial to creating a better market environment. The overseas M&A can be helpful to remove the weakness of Chinese manufacturing industry. This kind of weakness does not only exist in China, but also in the whole world.
During the process of overseas M&A, plenty of Chinese enterprises are willing to chase short-term financial returns rather than the sustainable development of the enterprises. German enterprises are good examples. German enterprises seldom use price leverage. They seldom prioritize the short-term financial returns but to focus on the sustainable development of the enterprises. From the end of the 19th century, the whole world admires the export of the German manufacturing industry. Entrepreneurs should be patient, neither extreme nor impetuous. “Some of the opportunity to make money should be given up.”
A client of mine has been cooperated with the Chinese company for three years. Once, they sent a technical team to the Chinese factory to check the product quality. During the inspection, they found that the products are of poor quality. The German entrepreneur considered that the quality of the products should be improved before entering into the market. The Chinese entrepreneur held an opposite opinion. He said that although our products here are not as good as that produced in Germany, our products are the best in China. Besides, my products have the largest Chinese market share. If the quality were improved, the cost would be improved at the same time. The profit will not be increased. Therefore, I should not improve the products quality. Then the German entrepreneur said: under this circumstance, you cannot use my brand any more. At last, Chinese entrepreneur took the German share and the German entrepreneur took three times good. The German entrepreneur took the money and left China in frustration. Here is an unavoidable question: the quality of the products or the financial profit, which one should be chosen. Chinese entrepreneurs would more likely to choose the latter.
In order to pursue the financial profit, the private equity (PE) has been introduced into exists in China. I heard the statement “PE is becoming more like venture investment (VC), the VC is in the process of bubblization.” Chinese enterprises must make the right choice between the products and the financial profit.
Now we are facing a more important issue, the narrow-minded psychology. Some Chinese entrepreneurs consider that the transnational corporations after the M&A should be Chinese enterprises. In their opinion, these enterprises should serve the interest of Chinese entrepreneurs. They also think that Chinese should be the leaders of the transnational corporations. The fact might not be like this. In the context of globalization, the transnational corporations are not Chinese enterprises, German enterprises or American enterprises. Almost all the transnational corporations are developing their agencies in different countries. Almost all the transnational corporations have shareholders, executives and staffs from every country and culture. I call transnational corporations as “community of interests”. Chinese entrepreneurs should consider the whole world as their interest holder. Transnational corporations rely on global resources. Meanwhile, transnational corporations are not only serving the personal interest of entrepreneurs but also creating social value.
When Chinese enterprises become transnational corporations, their sense of social responsibility will be globalized. There is a distribution in the global market. For the next 20 years, it is impossible for the Chinese enterprises to catch up with and surpass the European and American. But it is fine. The core of the overseas M&A is the globalization of capital and creative ability. We can imagine that China as the largest manufacturing industry base will not be shaken in 10 to 20 years. We can learn from the European and American to accelerate innovation. More and more Chinese enterprises will participate in the world manufacturing industry through overseas M&A.
Now the essence of the process of the globalization of Chinese high-end manufacturing is joining in the world market through M&A. There are cultural differences between China and western world. We need more and more Chinese with the western background as the bridges of communication. Hope they can introduce more and more Chinese entrepreneurs turn out to the world and invite more and more manufacturer into China.