Chinese companies embark on spending spree

Their new mantra: "Go Global" through M&A

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HONG KONG -- Loaded with cash from a fast-growing domestic economy and brimming with ambition, Chinese companies are snapping up assets and brands around the world.

“Outbound mergers and acquisitions have definitely increased over the past six months. A lot of it is driven by a ‘Go Global’ campaign led by the government to promote China’s national competitiveness,” said Michael Thorneman, a partner at Bain & Co. in Shanghai, who is head of the consulting company’s M&A practice in China.

“What’s happening isn’t a surprise, there have been tremendous changes in China,” said Michelle Kristula-Green, Hong Kong-based president, Asia/Pacific of Publicis Groupe’s Leo Burnett Worldwide. “New companies have established themselves and now have money. There’s a new confidence too, Asians see themselves as equal to Westerners, and just as worldly.”

Looking for growth
The U.S. white goods marketer Maytag Corp. is considering an offer from the Chinese appliance maker Qingdao Haier Ltd., for example, and the China National Oil Co. (CNOOC) has made a controversial bid for California's Unocal.

Last month in Taiwan, Acer spin-off BenQ finalized the acquisition of Siemens' mobile business. Lenovo Group, a mainland computer manufacturer, bought IBM's PC business late last year. And the Chinese TV maker TCL Corp. has acquired both the TV manufacturing business of Thomson, a French media services and equipment group that owns the RCA brand, as well as Alcatel’s handset production division.

The primary factors driving overseas expansion include:

* the competitive landscape of China’s domestic market, which is prompting Chinese to look for growth opportunities outside their core market

* access to new technologies so they can be less reliant on joint venture relationships with foreign partners

* quick access to foreign markets to help Chinese companies jumpstart their own branding initiatives

* demand for raw materials, oil and gas to fuel China’s fast-growing economy, literally

Besides Lenovo, TCL and Haier, which are already active on the global M&A stage, another Chinese company with global aspirations is Cisco-competitor Huawei Technologies, which has cornered the domestic network solutions market.

Two of three M&As fail
Mr. Thorneman said he “wouldn’t be surprised” if some of these companies succeed in building top global brands, “but I expect some of them to find trouble overseas, especially when they acquire foreign businesses. Two out of three acquistions between any two companies worldwide fail to create shareholder value, particularly when companies acquire brands in new markets.”

Challenges abound, starting with the lack of “soft skills” like language and cultural awareness and understanding, both by Chinese, and about them.

There is a significant talent gap of qualified managers, particularly ones with international training and thinking, who possess the experience and management skills to acquire and run overseas giants such as Maytag successfully.

“A new generation is coming up, but given the enormous growth in the domestic market and overseas, there is a surging demand for management skills. This is a big issue for Chinese companies,” said Mr. Thorneman.

No brand architects
When it comes to building brands, the management crisis worsens, because few Chinese companies, particularly state-owned behemoths, even have a chief marketing officer and their marketing departments seldom report to the CEO. Instead, they are a function of the sales department or have been buried within product divisions.

This is true even of Haier, which intends to become the world’s number one white goods seller by 2008, largely by following the example of South Korea’s Samsung Electronics.

Haier’s products are “pretty good,” observed an agency exec familiar with the company, “plus they’re very strong on customer service and developing new products that fit the needs of overseas markets.” In blackout-prone India, for example, it developed a refrigerator that can keep food cold for two days without electricity.

However, the company has overlooked one of the fundamental forces behind Samsung’s dramatic image transformation from cheap Asian manufacturer to world-class innovator: Eric Kim, Samsung’s exec VP of global marketing from 1999 to late 2004.

“Because of Haier’s current structure, it’s difficult to command a global branding strategy,” added the executive, who spoke on condition of anonymity. “The division of labor is so precise, it’s run like an army, it’s hard to find the right people. The mid-level marketing execs don’t have the guts to take ideas to the top management and a successful branding exercise has to be top down, but there is no brand architect at the top in Haier like Mr. Kim.”

Mr. Thorneman agreed, “It’s fair to say that in order to meet their targets, Haier needs to address some big gaps and marketing is definitely is one of them.”

TCL at Cannes
There are positive signs that Chinese companies expanding overseas can develop strong global brands.

Jerry Wang, BenQ’s exec VP & chief marketing officer in Taipei, “is one of the smartest clients I’ve met in Asia. He recognizes that a brand is far more than just a name. He also understands branding requires a methodical approach, a strong, multi-cultural consumer focus and that delivery of values is paramount,” said Michael Wood, Hong Kong-based CEO, Greater China, Leo Burnett, which handles the Taiwanese company’s global advertising.

Also, a handful of Shenzhen-based execs from TCL, another Leo Burnett client, attended the International Advertising Festival in Cannes last month for the first time, as a crash course about the global ad scene.

The event was an “eye-opening experience,” said their Cannes guide, Michael Tsang, the agency’s general manager, Guangzhou, “mostly because Western advertisers focus on a simple, single-minded proposition, which is something they have to learn. In China, ads have too much information and too many selling points.”

But their very presence in Cannes signals that some Chinese companies are aware of the challenges inherent with aggressive global expansion and are prepared to meet them.

“If any people are adaptable for commercial reasons, it is the Chinese and they are smart enough to realize there is a lot that they don’t know,” said Joseph Wang, vice chairman, China for WPP Group’s Ogilvy & Mather. “They’ll cross the river by feeling the stones, learning as they go.”

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