China’s bid for Canadian energy company Nexen Inc. ignited worldwide debate over China’s perceived ambitions. What do we deduce from China’s largest-ever foray abroad?
With China’s rapid economic ascent and subsequent transformation into a market-based economy, Chinese companies are now expanding abroad and "going global", to mitigate risks stemming from their over reliance on China’s economic growth. Chinese companies are not only concerned about becoming bigger and increasing their market share in the short term; they are seeking to invest in assets abroad that will better position them at home, as well as help them gain a foothold in new promising markets over the long term.
The most competitive firms realise size alone will not guarantee long-term global success; technological know-how and technologies, gained through strategic mergers and acquisitions (M&A) – at increasingly favourable prices – are needed to enhance their long-term competitiveness. To facilitate their development into “global champions”, Chinese resource giants are now developing global strategies that match their global ambitions, rather than relying on government policy alone.
China’s overseas acquisitions in the non-financial sector, which reached a record US$68.6 billion in 2011 (36 percent of which was realised through M&A), will continue as increasingly ambitious Chinese buyers seek bargains amid the downturn among developed economies, especially in North America (see charts below).
More Than “Just Business”?
But Chinese business deals almost always face political hurdles, and China’s central government and its leading figures appear increasingly more well-versed in the “art of diplomacy”, which often spills over into the business arena. State visits by China’s leaders are now accompanied by high-profile trade and investment deals. Environmental changes are also making it easier for Chinese companies to seal attempted deals overseas. For example, CNOOC’s recent investments are now aligned with global efforts to curb greenhouse gas emissions and also reiterate the U.S.-China Shale Gas Resource Initiative announced in 2009, a policy which simply did not exist four years ago.
They are also quick to apply lessons learned from failure. Led by Chairman Wang Yilin, CNOOC has applied lessons from its unsuccessful US$18.5 billion Unocal bid in 2005, carefully crafting its US$15.1 billion bid for Canada’s Nexen – China’s largest foreign takeover – to avoid upsetting Canadian concerns over growing Chinese ambitions.
First off, CNOOC has offered a generous premium for Nexen, a company with limited assets within Canada itself and a range of foreign activities. CNOOC has made attractive concessions, saying it would preserve jobs, list its shares in Canada and make Calgary the headquarters of its North and Central American operations. Secondly, this time around, the atmosphere surrounding CNOOC’s major deal is entirely different. Canadian Prime Minister Stephen Harper, along with other top officials, has spent considerable time wooing investment from China, as the country has emerged to become a major customer of booming Canadian oil sands production.
Thirdly, Chairman Wang Yilin pledged to Nexen executives during negotiations that it would never pursue a hostile offer; this “gentleman’s agreement” helped prompt both CNOOC and Nexen to court the approval of Canadian political leaders behind the scenes. Similarly, Chinese companies are beginning to circumnavigate long-standing prejudices by buying the foreign assets of other companies (or companies with a strong portfolio of foreign assets), a trend which can clearly be seen in the pending Nexen deal.
Modest Foreign Investment
Relative to the size of its economy, China’s overseas investments are quite modest. The total stock of investment abroad rose to 5.3 percent of China’s GDP in 2011, up from just 2.6 percent in 2001, but well below the average of 27.7 percent for OECD countries. Moving forward, Chinese enterprises are projected to spend an additional US$560 billion on overseas investments in the next five years according to the country’s Ministry of Commerce.
It’s clear Chinese companies are taking advantage of the crisis, acquiring strategic assets overseas which will empower them to move toward the frontier of global competition. Globally ambitious Chinese firms are realising that the value of acquired assets lies not only in patented technologies, but also in the intrinsic value a company possesses in its management and employees. Likewise, with employment sagging in major developed economies, Chinese moves to retain or increase employment are welcomed and will likely make regulatory approval easier.
Over the short term, the on-going Eurozone debt crisis will create multiple opportunities for active Chinese investors, giving them easier access to technologies they have long coveted in developed markets. However, completing deals with China remains complex and can pose special integration challenges for both sides due to cultural, business and political differences. For Chinese companies and their new partners, the key lies in maximising synergies once the above obstacles are overcome.
Looking ahead, Chinese companies will have more tools at their disposal operated by more seasoned M&A professionals. Coupled with a greater understanding of the complexity of cross-border M&A deals, Chinese companies are poised to strike success in future Sino-foreign mega deals. Likewise, the purchase of strategic stakes by China’s dominant state sector in resource-rich regions is changing the competitive landscape not only in China, but also in developed markets.
Daniel Galvez is a Consultant at The Beijing Axis, a China-focused international advisory and procurement firm, and is responsible for executing projects in the areas of strategy formulation and implementation for leading international companies engaged in the mining, engineering and heavy equipment industries. He can be reached at [email protected].