Why China's Appetite For American Brands Is Getting Stronger
Volvo, ThinkPad, AMC Theaters and, possibly soon, Smithfield Foods. All household names in the U.S., all with Chinese owners. And if the world's two largest economies can strike an investment treaty -- as is being discussed -- many more could join them.
For years, China's corporate investors seeking opportunities abroad stuck to oil fields and copper mines. But now they're delving into areas like entertainment, luxury and travel, and sending a new message: Chinese companies have big bucks, and they want your brands.
"You're seeing a maturation of Chinese outward investment. They still care about resources but they've added other kinds of purchases to these buys," said Derek Scissors, senior research fellow at the Washington-based Heritage Foundation. "They're interested in sectors where brands matter."
Major overseas investment by private Chinese companies soared to $9.44 billion in 2012, up from $790 million in 2007, according to data compiled by Mr. Scissors. Shuanghui International Holdings' $4.7 billion bid for pork producer Smithfield, if approved, would be the country's largest acquisition of an American company.
Earlier this month, senior U.S. and Chinese officials agreed to restart negotiations over a treaty that could help companies make bigger investments between the two countries. But talks have stalled before, and both sides are reluctant to fully roll out the welcome mat. The announcement about the talks came just days after the Senate Agriculture Committee raised red flags over the Smithfield deal.
It's not clear how successful these deep-pocketed Chinese suitors are as brand stewards. ThinkPad's popularity has declined since Lenovo bought it from IBM in 2005, but so has the entire PC category. Volvo, owned since 2010 by Zhejiang Geely Holding Group, is in the midst of an identity crisis. Chinese companies are generally inexperienced brand builders; until recently, the country's domestic growth was so strong that marketing wasn't a big priority.
HUNGER FOR FOOD
A few companies with global aspirations have made significant investments to build a multinational image. Telecom giant Huawei hired WPP to handle its global corporate branding. Consumer-electronics and appliance maker Haier has sponsored the NBA, and struggling sporting-goods maker Li-Ning signed basketball star Dwyane Wade as a brand ambassador last year for a reported $100 million.
Acquiring an established brand is an attractive alternative to building an image from scratch. But Chinese companies are chasing much more than that: Besides offering growth potential, it's important that these brands can help the Chinese parents improve internal practices in areas such as operations, technology or safety, said James Roy, senior analyst at China Market Research Group.
That's why food brands are particularly enticing. China's struggles with food quality are well known; in the most notorious case, six babies died and 300,000 were sickened in 2008 by infant formula tainted with an industrial chemical. More recently, thousands of dead pigs were found floating in a river that is a source of Shanghai's drinking water.
Among ambitious Chinese entrepreneurs, Wang Jianlin is one to watch. The former soldier and property tycoon is worth $8.6 billion, according to Forbes, and his Dalian Wanda conglomerate has $23 billion in annual revenue.
He spent $2.6 billion last year buying the AMC movie-theater chain in the U.S., and is reportedly eyeing similar businesses in Europe. This month, he paid $500 million for British yachtmaker Sunseeker and announced plans to invest $1 billion to build a luxury hotel and apartment complex overlooking the Thames in London.
Mr. Wang has said he wants a third of Wanda's revenues -- about $30 billion -- to come from overseas by 2020. "We must build up our acquisition power," he told the Financial Times. "Wanda is determined to go international and to do it fast."
A Dalian Wanda spokesman said he could not speculate on acquisition plans. The company's website noted that Mr. Wang is open to the possibility of buying foreign TV stations.
Funding is typically not a problem for Chinese investors, who tend to be cash-rich and get additional support from bank loans. Nor are there major regulatory hurdles except in cases where the acquisition target is politically sensitive, such as when Washington in 2008 scuttled a deal for China's Huawei to buy telecoms equipment maker 3Com.
The biggest challenge is inexperience, with many investors operating outside of their home market for the first time, said Patrick Chovanec, chief strategist with Silvercrest Asset Management and a former business professor at Tsinghua University in Beijing.
"The Chinese companies realize there's more at stake when they [acquire a brand]," Mr. Chovanec said. "They're buying something that only has value if they can really tap in and maintain that value. It's a much greater operational challenge than if you buy an iron-ore deposit."