By GUY DE JONQUIERES
9 November 2006
Financial Times
(c) 2006 The Financial Times Limited. All rights reserved
The prospect of a tidal wave of global acquisitions by Asian companies can easily lead to hallucinations. For the deal-hungry bankers adept at talking it up, it is the stuff of dreams. For western politicians it can induce nightmares, as CNOOC, the Chinese oil company, discovered to its cost when the US Congress rose up to block its bid for Unocal last year.
The recent travails of TCL, China's large consumer electronics company, ought to bring some badly-needed perspective to this feverish fantasising. TCL was an early adopter of Beijing's injunction to industry to "go global", snapping up units of France's Alcatel and Thomson. Less than three years - and a sea of red ink - later, the company is beating a disorderly retreat, shutting or selling most of its operations in Europe.
TCL is not the first acquirer to bungle a foreign merger and many of the reasons are familiar: unrealistic objectives, lack of local market knowledge and poor execution. However, in common with many other Chinese companies, TCL also suffers from more fundamental handicaps.
Much of Chinese industry's foreign expansion to date has been for defensive reasons, inspired by the relentless competition that drives down prices and margins at home. Concentrated on low-cost assembly, and still heavily dependent on imported parts and technology, Chinese manufacturers cannot easily respond by innovating and moving up-market. Geographic expansion has therefore become a survival issue.
Except in energy and natural resources, which are ruled by the dictates of national security policy, China's foreign acquisitions have typically sought access to technology, brands, marketing and distribution. But most available foreign brands are that way because they, and their owners, are weak. Lenovo's takeover of IBM's personal computer business, on the success of which the jury is still out, is a rare partial exception.
Furthermore, branding, marketing and product innovation cannot just be bolted on to a manufacturing base. They are finely-tuned functions, organically linked to the corporate whole. Integrating them smoothly into existing businesses is hard enough, even for experienced operators; doing so across borders is harder still. It is also a task for which history has poorly prepared Chinese companies.
As Arthur Yeung of the China Europe International Business School points out, decades of domestic political turmoil have produced an ultra-short-termist national business culture, with corporate structures that are typically based on a top-down model tightly controlled by a single all-powerful leader. Those attributes are ideal for serving volatile local markets. They can also be applied to basic operations abroad, such as employing Chinese labour in developing countries to dig up minerals that are transported on Chinese-built railways to Chinese-owned ships. But they are of limited value when seeking to manage more complex multinational organisations, staffed by culturally diverse labour forces with their own values and a perplexing habit of doing things their own way.
That may explain why, outside the resources sector, Chinese companies have made no big foreign acquisitions for months. As they review their options, they could learn much from the approach taken, until recently at least, by Indian competitors. Most Indian takeovers to date have been small and aimed at strengthening existing businesses incrementally, not at radically transforming them.
Usually, Indian companies have also embarked on foreign expansion from strong domestic market positions, based on clear competitive advantages that go well beyond low costs. Manufacturers such as Bharat Forge, a vehicle parts maker, have developed technical and engineering skills that can be used to improve the performance of assets acquired abroad. Tata Tea brings to foreign acquisitions decades of experience in beverage-making and marketing.
That, at any rate, has been the pattern until now. But Tata Steel's Dollars 8bn planned takeover of Corus, a European group three times it size, propels Indian acquisitions into a new league. Whether it is one that Indian companies are yet ready to play in is another question.
Adil Zainulbhai, head of McKinsey's India practice, fears other companies will now be encouraged to embark on ever more audacious international mega-deals, inspired by aggressive empire-building ambitions rather than by the solid commercial logic and careful appraisal of investment returns that have characterised past Indian acquisitions abroad. That risk is particularly great in a nation where brimming self-confidence generated by recent economic success threatens constantly to spill over into hubris.
As Mr Zainulbhai points out, history shows that more than half of all mergers and takeovers fail, and the casualty rate rises in proportion to their size. By his count, only four of the foreign acquisitions made by Japan's 15 biggest companies between 1980 and 2001 succeeded. There is no reason to believe that companies in India - or anywhere else - are immune to that grim arithmetic.
Keep things simple, keep things small and stick to what you understand are hardly electrifying management principles. They do not set chief executives' pulses racing, nor are investment bank advisers likely to commend them. But disregarding them risks seriously damaging the wealth of shareholders in Asia's new breed of globalising companies.
