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PricewaterhouseCoopers on Chinese Companies Going Global

oreign products with the Made in China label have become commonplace as China developed into the worlds factory. Lately, though, domestic Chinese companies themselves have stepped onto the global stage, with an expanding portfolio of international mergers and acquisitions. Computer giant Lenovo, international miner Chinalco, energy major China National Petroleum Corp., and the Industrial and Commercial Bank of China are just some of the Chinese companies that have expanded overseas in recent years. Outbound foreign direct investment from China was reported by the Chinese government to be $19 billion in 2007, and for the first four Ken Su months of 2008, outbound activity was reported at $20 billion. As increasing numbers of Chinese companies look to global markets for access to resources, customers, intellectual property (IP) and technology, they face cultural, talent, and financial reporting and legal challenges along the way. The Deal asked PricewaterhouseCoopers China M&A partners Benjamin Ye and Ken Su to discuss the factors driving Chinese companies to go global, and the challenges they confront along the way.

in China, a labor union is more like a staff club, whereas the implications of unions in developed countries are very different. Whats more, since China is still an emerging market, it doesnt have enough talent with international experience. This makes managing any acquired foreign entity a challenge. Many Chinese companies do send their own people to manage overseas operations, however, there are challenges to be dealt with. Ken Su: Acquiring Chinese companies also face post-deal challenges, such as the issue of justifying significant salary differentials. When a Chinese company acquires a U.S. or European entity, the Chinese executives find that the salaries of the management of the acquired firm are higher than what they themselves make. There is no easy answer to integrating targets. Managing a brand is another issue. Whether Chinese companies sell their products abroad using acquired brands or their own brands, they may encounter perception issues. For years, Chinese companies have relied on their low-cost advantage, but not on building a brand. Building and maintaining a global brand image will be key to Chinese companies expansion overseas. The Deal: What steps do you recommend Chinese companies take to address these issues?

Benjamin Ye

The Deal: What do you think are the driving forces behind Chinese companies investing abroad? Benjamin Ye: I think the key driving force is Chinas economic development. Resource-related deals in the oil and mining sectors account for most of Chinas outbound activity. However, were seeing companies from all industries expanding overseas to acquire brands, IP rights, technology and distribution channels. Ken Su: For example, the heavy machinery maker, Changsha Zoomlion recently acquired Italys Compagnia Italiana Forme Acciaio (CIFA), which is the worlds third largest producer of concrete machinery. The acquisition allows Zoomlion to broaden its product line and gain new research and development capabilities. The Deal: Chinas $200 billion sovereign wealth fund, China Investment Corp. (CIC), is also expanding its global footprint. What role does CIC play in Chinas outbound M&A? Benjamin Ye: While CIC has $200 billion, only a third of that goes towards overseas investments. It will act in much the same way as a pension fund, investing in funds-of-funds and also making minority investments to generate moderate, stable returns. The Deal: What are some of the key challenges Chinese companies face as they expand operations overseas? Benjamin Ye: Chinese companies are very new to crossborder expansion. They face cultural differences in terms of business practices and consumer preferences in other markets. Understanding foreign labor laws is another challenge. For example,

Benjamin Ye: To retain talent, Chinese companies will need to pay competitive local rates wherever they expand and, where relevant, get the parent management to buy-in early in the process. Understanding foreign market and business fundamentals such as the challenges mentioned can help them to integrate and manage the acquired entity. Ken Su: The short-term fix is for a Chinese company to learn how to effectively use advisers, including bankers, accountants, lawyers and other consultants such as public relations firms to help it manage international expansion. The natural medium to a long-term fix is the gradual internationalization of Chinese executives and white-collar workers. Growing numbers of Chinese nationals are going overseas to work, while increasing numbers of foreign executives are coming to China. This will enhance Chinese companies understanding of global markets and international business best practices. The Deal: What kinds of changes in management style have you seen in Chinese companies going overseas? Ken Su: We see Chinese management teams becoming increasingly flexible as they learn to navigate international markets. Benjamin Ye: Consider the example of Chinese companies listing overseas. They principally use initial public offerings to raise capital. But public listings also force companies to become more transparent and to rationalize their management skills because the listing process requires companies to meet certain reporting requirements. This will help China become more competitive globally. It is also influencing the internationalization of Chinese reporting standards. Benjamin Ye can be reached at benjamin.ye@cn.pwc.com; Ken Su at ken.x.su@cn.pwc.com.
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