Article – How ChinaReset Its Global AcquisitionAgenda

Peter J. Williamson, Anand P. RamanHarvard Business Review, April 2011

Prateek Singh SidhuUniversity Business School

“If you get up one more time than you fall, you will make it through”

- Old Chinese Proverb

The first wave of overseas mergers by Chinese companies ended in a failure but that hasn’t

prevented them from trying again, and succeeding at it.

In 1990’s, Beijing mostly allowed state-owned enterprises (SOEs) to buy small equity stakes in overseas energy companies and natural resource producers. Private sector had to get into technology-licensing deals with foreign companies.

That changed in 2000, when govt. became convinced that Chinese companies would forever play second fiddle if they depended on technology transfer from MNC’s

Over the next 3 years, Beijing dismantled several hurdles to cross-border investments. In 2004, Premier Wen Jiabao formally announced, “The Chinese government encourages more enterprises to go global”.

The number of foreign acquisitions by Chinese companies doubled from 40 in 2003 to 82 in 2006, and reached a peak of 298 in 2008.

The SAIC – Ssangyong Company Saga • Shanghai Automative Industry Corporation’s short-lived attempt to run

the South Korean automaker Ssangyong.

• SAIC picked up 49% equity stake in Ssangyong, which had been reeling under debt burden, for $500 mn in Oct 2004, beating many bidders including General Motors.

• Ssangyong had 10% share in its home business, as well as growing export business. SAIC thought buying Ssangyong would allow it to improve its improve development capabilities, make headway in markets such as US.

• Original plan to expand manufacturing capacity in South Korea and launch 5 new models worldwide. However things didn’t go as expected.

• Raising gasoline prices in 2006 and stringent new emissions standards in Europe and North America sent SUV sales tumbling.

• SAIC’s relations with Ssangyong’s union grew strained, resulted in 7 week strike because of cultural differences, Chinese and Korean executives couldn’t agree on how to improve performance

• Global Recession, Ssangyong’s sales fell by 53% in Dec 2008

• SAIC initially supported its subsidiary, buying $4.5 mn worth of Ssangyong’s vehicles in late 2008 to sell in Chinese market.

• When the situation worsened, SAIC said its ready to pump in $200 mn more provided restructuring plan that included an overhaul of work practices to practices to improve productivity and a 36% reduction in the workforce is implemented.

• Ssangyong’s unions refused, protested, initiated legal action for allegedly transferring SUV design and technologies to China.

• Left with no other option, Ssangyong filed for bankruptcy in 2009.The angry workers went on strike again, barricading themselves inside plant for 77 days.

• In the five years that SAIC controlled Ssangyong, it invested $618 million in the company – and earned virtually nothing.

The D’long Group – Murray Disaster

• First overseas takeover by China’s private sector company.

• In 2000, $4 bn D’long conglomerate entered the lawn mower and garden equipment business by acquiring Murray Inc., in a deal backed by GE Capital, which provided $400 mn in financing.

• Murray’s profits had been falling steadily because of price-based competition from overseas.

• D’Long integrated its Chinese manufacturing facilities with Murray’s, identified lower cost sources of components, and restructured the organization to reduce overhead.

• Soon after this, the American company suffered from a series of quality issues and product recalls. In 2004, 100,000 lawn tractors because of cracks in fuel tanks. This dented its image and made it difficult to raise money.

• After the Chinese govt. hiked interest rates and reduced money supply, D’long found itself running out of resources.

• The group raised capital by pledging the shares of its listed companies as collateral for loans, making right issues, and providing guarantees for loans.

It illegally started using the funds from its trusts and finance companies to prop up its share prices.

• In 2004 the house of D’Long collapsed, after the China Banking Regulatory Commission named it among the country highest-risk companies and banks refused to extend it any more loans.

• Murray Inc. filed for bankruptcy in Nov 2004

The TCL – Thomson debacle

• TCL, China’s largest maker of color Tv’s and 2nd largest maker of mobiles, struck a $560 mn deal to merge its TV and DVD operations with those of France’s consumer electronics giant Thomson.

• TCL had 67% equity stake in the new TCL-Thomson Electronics (TTE) company.

• TCL hadn’t examined Thomson’s B/S carefully before investing. It refused to hire M&A experts to perform due diligence.

Also ignored BCG analysis report suggesting too much risk was involved.

• TCL didn’t realized the Thomson brand in Europe and Thomson’s RCA brand in America were both old and tired. In 2003, Thomson lost more than $100 mn in DVD and TV operations.

• Complex Deal – separate contracts to access those parts of business which weren’t transferred to TTE such as sales division and intellectual property.

• TCL lacked the capabilities to assimilate Thomson’s people. The shortage of Chinese managers with international experience and expertise in global marketing.

• Cultural clashes

• Because of its troubles in Europe, TCL suffered a combined loss if RMB 5.07 bn in 2005 and 2006.

In May 2007, TCL declared European operations insolvent and overhauled them by doing away with Thomson’s business model and distribution channels.

• It closed five out of seven European centers. The grand alliance took just three years to unravel.

The Revamped Approached of Beijing

• A shift to hard assets

• A quest for high technology

• The pursuit of growth at home