What is behind China's global shopping spree?

16 May 2017

Chinese businesses are buying up overseas companies at an increasing rate, but not for the reasons you might think, says Peter Williamson. 

In recent years, Chinese companies have internationalised rapidly – not only through exports, but increasingly through acquisitions and other foreign direct investment. Of late, this push from China has confronted rising nationalism and a backlash against globalism in many parts of the world.

But what lies behind Chinese internationalisation, what might it mean for companies competing with the Chinese both within China and globally, and what are the likely impacts on countries that are the target of Chinese investments?

Peter Williamson, a professor of International Management at the University of Cambridge's Judge Business School, who has studied Chinese enterprises for three decades, says what we are seeing is a new strategy for globalisation.

"Until about 2005, there were not many acquisitions by Chinese companies abroad, but since 2014 it has increased exponentially, and I believe it will continue," says Williamson.

In 2016 alone, such acquisitions totalled almost US$230 billion, up from a previous peak of about US$70 billion in 2008.

Williamson says many of the recent acquisitions in Europe involve smaller firms, and have the aim of boosting the technology and R&D capacity of the Chinese parent company. Often, these deals go unnoticed because they are off-market purchases of private companies, he says.

For the most part Chinese companies have weak brands and lack proprietary technology; they have immature international organisational structures, limited networks, and a shortage of managers with international experience. So, what value can a Chinese company bring to a foreign firm to justify the price premium of the acquisition?

"They do have competitive advantages, but not the ones we often think of. Mostly, they revolve around innovative ways to exploit the advantages of China," says Williamson.

They include:

  • rapidly applying new technology to value-driven mass markets
  • providing customisation and choice at low cost
  • reducing the breakeven price to turn niche businesses into mass markets
  • unlocking latent demand for people with little disposable income
  • dealing with weak institutions and infrastructure
  • developing innovative production processes and business models, especially in emerging markets
  • speeding up the innovation process by making it more like a production line.

Williamson says Chinese companies initially bought firms that could act as springboards to foreign markets, as was the case with Shanghai Automotive's US$500 million, 49% equity stake in Korean carmaker Ssangyong.

"Most were absolute failures. In the case of Ssangyong, it was struggling under Korean management – how was an inexperienced Chinese management going to make that company successful? "

He says the "springboard" strategy was made worse by the fact that most foreign companies that were for sale, such as the French electronics company Thomson, bought by TCL in 2006, were in financial difficulties.

Even the subsequent switch by Chinese companies to investment in resource companies, which were easier to integrate, didn't overcome their fundamental weaknesses, says Williamson. So, eventually, they began to concentrate on technology companies with R&D capabilities.

For example, little-known Shenzhen-based AAC Technologies, which supplies the microphones for Apple and Samsung mobile phones, bought firms in Denmark, Switzerland, Japan, Korea, Singapore and the US which had specialist technologies or capabilities.

"AAC Technologies didn't go international to sell things, but to get new technologies in order to go on producing new products."

The scale of such acquisitions is impressive. For example, Chinese companies have bought some 700 middle-sized firms in Germany alone in the past few years.

Interestingly, says Williamson, Chinese buyers tended to retain the staff of foreign acquisitions, and to hire additional research engineers and invest in R&D equipment, because they want to use this capability to feed their businesses in China.

Which brings us to Williamson's main point: Chinese companies integrate the capabilities of foreign acquisitions to strengthen their domestic position by deploying and scaling up the new technologies in China. Only when this has been achieved do they use that as a platform to expand globally – first in other emerging markets, then in developed markets.

"It fundamentally causes us to rethink our view of what the path to globalisation should be," he says.

Established multinationals need to learn such things as how to do high technology at low cost and how to speed up innovation. And the Chinese must learn how to build networks, how to build brands and intangible assets.

"So, when people tell me that it is a race for catch-up, I say it isn't a race for catch-up, it is a race to the future. Both are going somewhere new."

The question, he says, is who will learn fastest.

"That is a very interesting question because the answer is not obvious."

Professor Peter Williamson spoke on 'the rapid internationalisation of Chinese businesses' at a Dean's Distinguished Speaker Series event hosted by the Business School in May, 2017.

Peter Williamson

Peter Williamson is Professor of International Management at the University of Cambridge's Judge Business School.



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