China’s M&A diplomacy: Endgame or endless game?

India’s revised FDI policy sets out a clear target to protect the domestic industry from falling easy prey to a predatory investment by Chinese Inc. It is predatory because Chinese Inc showed a strong appetite for mergers and acquisitions (M&A), and in recent years, they have been indiscriminatingly binging on takeovers despite unforeseen results.

The Chinese are on top of the list as not only India but Anglo-American, European models have been defused by the new Chinese interventions, which are more disruptive than adventure if one can call so. On the one hand, when the status of Chinese public sector investments is under scrutiny internationally, private players are eying for a more market rhythm in the time of financial distress.

Such an endgame in the form of M&A always existed. However, China’s imperceptive use let the M&A to acquire not only a fancy name of takeover diplomacy but a reputation of disruptors.

Amid the COVID-19 pandemic, the Chinese outbound M&A recorded a steady growth of $59.6bn via 946 deals in Q1 2020. This is not at an average score compared to several deals and the total investment figures. Some of the M&A activities in past three weeks show the consistency at which Chinese companies made headways in Australia, the United States, Japan, Germany, South Korea, Russia, Holland, including some usual suspects around such as Singapore, Hong Kong, Malaysia, and others from South East Asia, to name a few.

All these economies have taken a hit by the pandemic and are heading towards a definite recession. The fears of market volatility or low asset prices, allowing Chinese entities opportunities to take over loom over major economies globally. Consequently, Chinese buyers are facing increasing troubles as protectionism in various investee countries are devising their own set of safety measures.

From the early 2000s, Chinese companies, in a new spin on globalising footprint, looked at M&A as a springboard. The Chinese were big domestically, but being big in China is one thing; being big globally was another.

A focused strategy to shape global M&A was seen effective in raising the Chinese global standing dramatically. Chinese were attempting every bid to flex their deal-making muscles, especially when the supply of bankrupt companies rose sharply during the global financial crisis of 2007. From Italian home décor brands to French couture names, deep inside Europe from chocolates to hotels, Chinese went on an overtaking spree. Technology, R&D labs, startups, and many industries that were losing business were quick to find the Chinese buyers. The financial distress and market volatilities turned into perfect opportunities over financial soundness, and good credit standing of global enterprises.

It is not often that loss-making companies are the enticing acquisition targets, but the Chinese do see benefits beyond books. Especially while entering into a new market and new industries, enterprises often experience a lack of resources and capacity to pursue diversification strategies and engage in activities in different areas. Through M&A and related strategic alliances, enterprises can borrow external resources and capabilities for their use; they quickly open up new markets or enter new industries.

Just for reference, Chinese Haier decided to acquire Japan’s Sanyo Electric, a company that had been in the red since 2005 when Haier was reigning domestic appliances market and growth abroad looked difficult. After the July 2011 acquisition, the Chinese brand exploited the opportunities not only in Japan, but also in Asia-pacific. For the first time, a Chinese company had acquired the main business of a large Japanese company, and Sanyo had particular popularity in the Southeast Asian market, and Haier could use the Sanyo brand to expand its business in the Southeast Asian market.

In recent times, Chinese companies have been trying to influence not only the production chains but also the value and supply chains to stand out in the global market, and be at the top of the food chain. Any acquisition by the foreign player in India has strategic influence. The M&A in the technology-related services sector would offer the investor global prospects, and, in the productions, it will provide them a plum domestic market to expand.

Since most of the M&A has been done with a strategic mind than the business acumen or excellent commercial investment, they have perished over the period resulting in a limited success rate. According to statistics from McKinsey, in the past 20 years, the success rate of Chinese companies’ overseas M&A did not exceed 33 percent. However, this does not dampen the efforts of Chinese enterprises to snap up global brands hit by the downturn and are available at lower prices as forecasts indicate Chinese outbound M&A will continue apace.

Aravind Yelery is Senior Fellow, HSBC Business School, Peking University. Twitter: @AravindYelery. Views are personal.