They are wealthy, experienced, and successful when it comes to acquiring companies and investing in China. But when they look outside of their borders, Chinese organizations often fail with international acquisitions.
With little experience, Chinese organizations looking for international growth opportunities in Europe or North America are faced with an unfamiliar environment of trade unions, culture, government reporting structures, and an often negative media experience.
“That’s the kind of thing Chinese investors, if they come from China, will not understand,” said Ivey Professor Klaus Meyer. “And it is in a way the inverse of Westerners going to China and not understanding how the environment works.”
As Meyer’s research has shown, Chinese Multinational Enterprises (MNEs) typically are at an early stage of their learning processes in international acquisitions. But they are willing to invest in the knowledge that will help them overcome this steep learning curve.
“The problem with Chinese investors is they have a very short history of doing international business,” said Meyer. “That means they don’t have people who have experience doing business outside of China. That means they don’t have people to send overseas to run operations. But that is improving with in-house training and the experience of executives returning with experience overseas.”
State-run enterprises are at a greater disadvantage with limited career opportunities, poorer language skills, and an even more limited understanding of the business environment overseas.
The light touch
Light touch integration is a strategy that enables Chinese companies to manage acquired units with a long-term vision to preserve the value of the firm, and gradually gain knowledge of the organization. This involves leaving the management team in place with a high degree of local autonomy, and the new owners are more involved on a strategic level rather than operations.
There are multiple advantages for the company being acquired, as well.
If the company has financial bottlenecks, the acquisition can give it access to financial resources for long-term growth. As well, the new owners can give the company access to the Chinese market.
Geely, a Chinese multinational automotive manufacturing company headquartered in Hangzhou, Zheijang, acquired Swedish car maker Volvo from Ford in 2010, and uses the light touch method in running the operation. Tata, a global organization based in India that bought Jaguar/Land Rover, also uses a similar approach to what we now see in Chinese companies. The management team has targets and incentives, but the local team decides how to achieve them.
This method also involves a high degree of trust in the local team on the ground. Local autonomy is very motivating for teams, said Meyer, but earning their trust is equally important, or key employees may leave and take valuable knowledge with them.
Lessons learned
With experience under their belts, Chinese companies now come to the table knowing the essentials of international acquisition, such as how to negotiate, and do the financial structuring. Many of these companies have become serial acquirers, but there is still room for growth.
Looking ahead to future research avenues, Meyer is investigating the geographic and political relationships between organizations, and their impact on potential acquisitions and investments. While his work focuses on European companies in the manufacturing sector, Meyer is also looking at the acquisition patterns of Chinese companies in Canada, particularly in the energy sector.