The Hidden Risks in China’s Leapfrog Overseas Acquisitions
In addition, some overseas Chinese enterprises are crippled by their domestic management mindset. With little understanding of foreign business cultures, some have suffered public relation crises abroad. Such issues hamper their ability to successfully do business overseas.
Many Chinese enterprises are further handicapped by their lack of international management talent and negotiation prowess. By failing to introduce international talent into their businesses, some Chinese companies that make global acquisitions have been unable to achieve genuine and effective global resource integration.
Differences in the legal systems of China and other countries can also lead to troubles in global expansion. For example, great differences exist between the Chinese and French legal systems concerning the rights of sacked employees. Due to its ignorance of French laws, after acquiring Thomson SA, a French technology and media services company, China’s TCL Group found itself having to pay 270 million Euros in compensation for laid-off employees.
In an international management forum held at Fudan University, Xiang commented that it is inclusion, rather than transformation, that should be emphasized once global acquisitions have been made. “If I married a German woman, I think it’s impossible for me to remodel her into a Chinese lady, and vice versa. Accordingly, after it merged with Putzmeister in Germany, SANY didn’t assign one Chinese employee to Putzmeister. Still the company’s profits have increased markedly in the months after the acquisition. I think that to make successful global acquisitions, firms need to truly adapt to the local environment by taking full advantage of local employees.”
Bargain Hunting and Its Pitfalls
When discussing Chinese companies’ foreign investments against the backdrop of the global financial crisis and the European debt crisis, many domestic commentators like to use the term chaodi, meaning “to buy something at the lowest price.”
Xue Qiuzhi, vice dean of the School of Management at Fudan University, said there were two different ways to chaodi.
The first way usually involves firms conducting a long-term study of overseas markets and enterprises, and making their acquisitions when prices hit cyclical lows. This kind of chaodi, Xue says, is a reasonable form of investment.
However, enterprises should be wary of another kind of chaodi, he says. Commissioned by their clients, it’s quite common for investment institutions to hoodwink Chinese firms into purchasing non-performing assets abroad. For this, investment institutions walk away with sizable commission fees, and Chinese firms are left with clunkers.
But more generally, gung-ho Chinese enterprises, lured by low asset prices, can become trapped in their overseas investments without a long-term business plan and lacking the local talent to successfully integrate with overseas assets and resources.
Problems in global management have been recognized as some of the major challenges for enterprises in their overseas expansion and acquisitions. “Chinese enterprises are usually weak in their ability to integrate international assets and resources, as well as in their cross-culture management. How to successfully integrate with purchased enterprises and achieve their management goals is a big problem,” Xue noted.
In their global operations, many Chinese transnational corporations also face a host of other conundrums: How do we achieve unified management domestically and abroad? How do we balance power and responsibilities between our headquarters and overseas subsidiaries? How do we achieve effective control and cost-effective management of subsidiaries while bringing their flexibility and advantages into full play?
“What’s encouraging is that China-based transnational companies have realized their weaknesses, and are endeavoring to improve their management systems,” Zhou Shuyuan remarked. One thing is for sure: expanding overseas has been – and continues to be – a steep learning curve for ambitious Chinese firms.
