SHANGHAI, China - As they shop overseas for resources and assets lacking at home, ambitious Chinese companies are learning the pitfalls of trying to build overseas empires.
They've acquired technology and brand names through a series of increasingly large foreign acquisitions, capped by Lenovo's announcement in December that it was buying IBM's PC business. In some cases China is hunting for raw materials like oil, coal and minerals to feed its booming industries, in others for brand names, technology or niches in untapped overseas markets.
But the on-again, off-again courtship between bankrupt British automaker MG Rover and Shanghai Automotive Industry Corp.'s highlights the problems that can doom such deals. SAIC said April 12 it would not be a white knight to MC Rover, the struggling British company that was put into administration - a form of bankruptcy - on April 7. SAIC, one of China's three big state-controlled auto companies, was put off by the risks of the deal, which reportedly included investing more than $1.9 billion for a 70 percent stake in Rover.
Chinese companies' acquisitions have been dogged by financial trouble, regulatory issues and conflicts over labor rights. The companies have fought back by hiring public relations help and big-gun financial expertise to troubleshoot as they navigate the unfamiliar waters of international dealmaking. In one recent deal, metals trader China Minmetals hired Citigroup to help in its bid for Canadian mining giant Noranda Inc.
"It really shows how low China is on the learning curve, how far they have to go," said Bob Broadfoot of the Economic and Political Risk Consultancy in Hong Kong.
Many of China's biggest companies are state-controlled giants used to getting what they want, with ample government support and funding from state banks. Making acquisitions overseas is a completely different experience.
"Often, they are going for the least expensive assets, not knowing how to price them or manage them," said Lester Ross, an expert on mergers and acquisitions at the Beijing office of Wilmer Cutler Pickering Hale and Dorr LLP.
In some cases, Chinese plans to buy up foreign corporate assets have run afoul of regulatory issues.
Lenovo's $1.75 billion plan to buy IBM's personal computer business raised security concerns about China acquiring technology that might be used to make weapons. The Committee on Foreign Investment in the United States approved the plan last month after the companies reportedly made concessions to concerns raised during the review, such as having the PC division purchased by Lenovo move into a facility of its own at IBM's campus in Raleigh, N.C.
In other cases, acquisitions have been dogged by labor conflicts or the companies' own financial problems.
China's largest drug manufacturer, Sanjiu Enterprise Group, was looking to buy the drug unit of Japanese cosmetics maker Kanebo until its plans were derailed by financial troubles at home. SAIC had to fight off South Korean labor unions - which later settled for a 6.8 percent wage hike and bonuses - while trying to buy 48.92 percent of automaker Ssangyong Motor Co.
Another deal, the plan by state-owned China Minmetals to buy to Noranda, caused an uproar in Canada. Critics complained the country was losing control of its economy.
"Unfortunately, in a globalized free-trade context, China's industrial take-off is posing significant risks to Canadians," a statement from the National Automobile, Aerospace, Transportation and General Workers Union of Canada (CAW) said at the time. The takeover fell through after Noranda took on a subsidiary that made the deal too expensive.
In Britain, the proposed deal with SAIC was viewed as a potential lifesaver for MG Rover, though SAIC said it never intended to buy Rover outright and was only discussing a joint venture.
Still, speculation persisted that SAIC had not given up on acquiring at least some Rover assets. Although talks between the two companies are over for now, PricewaterhouseCoopers, which is administering Rover, could approach SAIC with a new offer.
SAIC has thriving partnerships with both Volkswagen AG and General Motors Corp. in what has become the world's biggest auto market, but it makes cars under license and has no brand names of its own. The deal with Rover was seen as a way for SAIC to acquire technology and expertise, plus a European manufacturing base.
"SAIC doesn't have a global brand name and they potentially could get one," said Broadfoot, "But what price do you pay for a brand name?"
Gradually, Chinese companies are likely to expand the scope of their purchasing overseas - much as Japanese corporations did years ago. Having first focused on buying resources, brand names and technology, perhaps within a decade they'll be shopping for global markets.
"The next phase, as Chinese money increasingly flows outward, will be to, for example, buy the hotels the Chinese tourists stay in," Broadfoot said.
The Augusta Chronicle ©2012 Morris Communications, LLC. All Rights Reserved.
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