Chinese-German M&A: A Guide for Chinese Business People

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Trends shaping growth and creating new opportunities in China

Today's Top News Trump outlines anti-terror plan, proposing extreme vetting for immigrants Phelps puts spotlight on cupping US launches airstrikes against IS targets in Libya's Sirte Ministry slams US-Korean THAAD deployment Two police officers shot at protest in Dallas Abe's blame game reveals his policies failing to get results Ending wildlife trafficking must be policy priority in Asia Effects of supply-side reform take time to be seen.

US Weekly Geared to go The place to be. Shenyang's 50 gas-electric hybrid buses to hit the road Victims of terrorist attacks in Paris commemorated worldwide. At other times, it has kept the door firmly closed. While some global leaders, such as automotive original-equipment manufacturers, have turned China into their single largest source of profits, others, especially in the service sectors, have been challenged to capture a meaningful share of revenue or profits.

It also lays out what I believe it takes to build a successful, large-scale, and profitable business in China today as a foreign company. As the contribution of net exports and real estate to economic growth diminishes, the focus on infrastructure and domestic consumption—as traditional and new sources of growth for the economy, respectively—rises. Whether or not the current growth of the Chinese economy is sustainable depends on the evolution of several trends.

Government policy continues to be the critical shaping force. As the ministimulus delivered in the second quarter of demonstrates, the government still possesses levers to push GDP growth rates up and down quite rapidly. At the city level, much more momentum is building, with local governments selling out of noncore activities such as hotels and many manufacturing businesses.

The anticorruption campaign continues aggressively throughout state-owned enterprises, and government has itself become a material brake on growth. Officials and executives are simply unwilling to make decisions that could possibly be held against them later. President Xi has pursued anticorruption as a theme for more than a decade; he is not going to back off. Only if they remain confident in their personal economic future will they continue to increase their spending and become a larger driver of economic growth.

China is now more than 50 percent urban , but 10 million to 15 million people a year will still be moving to cities from the countryside. Rural migrants already in the cities need to be better integrated. City governments need to make their cities more livable, more efficient, and better able to integrate their migrants. Many businesses are coming under a new level of cost and margin pressure. Margins of industrial state-owned enterprises have fallen by a third over the past four years. Often the industries they compete in, from steel production to telecom-network equipment, are simply growing much more slowly.

By the standards of China over the past 30 years, state-owned enterprises have become mature industries. This leads to three outcomes: The latter two are more often conducted on the basis that prior success in one industry in China will automatically lead to success in the next industry and country. Multinationals selling to Chinese consumers often continue to perform extremely well, using their skills in consumer insights, branding, and pricing to differentiate from local companies that, while large, are still developing world-class functional capabilities.

Multinationals selling to government, at the other end of the spectrum, find market access much more challenging. The pace at which Chinese consumers are embracing the Internet is at the cusp of causing major disruptions to many sectors in China. Perhaps because consumers are still new to our traditional ways of shopping or banking only having had modern shopping malls for a decade in many cities , consumers are very willing to switch to buying online.

Almost no consumer-facing business in China can succeed without an online and offline strategy today. Mall owners are struggling to find a new economic model. Retailers are trying to bring order to their nationwide distribution chains to exert control over the price at which their products are sold online.

The impact on employment is just starting to appear, but many millions of sought-after white-collar jobs will be eliminated in the next few years. This growth is not risk free. Perhaps most critically, Chinese consumers remain relatively unsophisticated. A loss of confidence as a result of a default in a wealth-management product, or a decline in housing prices in a specific city, could easily become a nationwide contagion creating a vicious cycle of consumers who withdraw from spending, thereby worsening market conditions.

One has to be over 40 to remember a recession in China.

M&A in China: Getting Deals Done, Making Them Work

A final and rising risk is the underemployment of graduates. Of the seven million graduates each year, maybe only three million find jobs that require a degree. The remainder discovers that their aspiration of joining the middle class and owning a home and a car is possibly out of reach permanently. They are a large, dissatisfied, and growing segment of society. Many of the industries with the highest growth potential in China over the next decade are in the services sector, but not all.

For example, energy and agriculture will have segments with very rapid growth.

Below is a very brief snapshot of where we see opportunities. E-tailing The online share of retail in China, at 8 percent in , is higher than it is in the United States and is not close to reaching saturation. Too often, foreign acquirers fail to recognize that the processes they consider basic are anything but basic to Chinese companies.

They will develop a detailed integration plan for the first year that clearly communicates the future direction internally and to business partners.

They will understand that integration can take longer in China: The second major mistake that many multinationals make is leaving critical decisions until late in the acquisition process. By this time, the acquiring company has already missed important opportunities to work with the target to build consensus on such questions as company vision, achieving synergies, and the approach to merging operations. Failure to reach consensus on the vision for the combined company early on, including a high-level growth plan, almost inevitably results in wasted time down the road—if not more serious rifts—as the two managements try to work out misunderstandings from positions of confusion and mistrust.

This can often complicate the already tricky task of extracting the value of the transaction through realizing synergies. Synergy is a new concept to many Chinese executives; they are used to looking at the overall top and bottom lines. Effective acquirers both compel agreement on vision and budget time to reach concurrence on the synergies the combined operations can achieve. Some acquirers focus on specific actions necessary to realize the synergies, starting with easy-to-implement steps, before tackling more complex issues; this is often the best way to engage Chinese partners in the process.

Others design a case-specific approach that helps demonstrate synergies to their local partners, translating them into operational metrics that managers can understand and act on. In our experience, it generally makes sense to integrate when either party has a strong platform for growth and capabilities that can immediately add value for the other, or when there is a strong leadership team on one side that can push the integration forward and manage the combined business.

As a result, sales almost doubled to reach RMB 4. Some multinationals believe it is better to leave the newly acquired company as a stand-alone operation if the business is on a good growth trajectory with a strong and stable senior management team and the two companies share the same vision for the future. The earlier there is clear understanding on how the integration will proceed, including critical staffing issues, the smoother the PMI is likely to be.

Removing these uncertainties can also clarify other PMI decisions. A common misconception among multinational buyers is that majority-share ownership confers control.

M&A in China: Getting Deals Done, Making Them Work

This is not always the case in China. The managing director and the general manager often have the authority to dictate operations, and they can act—and usually do—with little or no supervision from the board. Some acquirers, including those that have made a number of successful acquisitions in China, use a well-defined and experience-tested approach. They have clear criteria for gaining management control of acquired companies and make those criteria clear during negotiations.

These acquirers make a practice of articulating a clear value proposition, and they build a track record of helping acquired companies grow. Other companies choose to gain control over time by demonstrating their ability to add value and by building trust. Both approaches require addressing the issue of control up front. Experienced acquirers have learned that adapting the standard PMI approach to Chinese realities is essential to achieving any level of successful integration.

Finding the Perfect M&A Target

Program management requires disciplines and metrics, but there is a risk of overwhelming the target company with too many meetings and interactions. Some standard PMI rules and procedures should always be followed:. Dealing with such factors as differences in culture and management approach can be structured in a systematic manner, and a customized integration plan can be developed. In general, multinational buyers should apply PMI principles with care and remember that a light and flexible program-management approach is usually most effective.

The focus should be on value creation instead of process management.

Chinese companies' M&A in Germany expected to grow: report

And even in a fast-growing market such as China, organic growth often has its own challenges, such as customizing products to local needs or building distribution networks. Indeed, a company may well need to devote more resources and attention to a small deal in China than to a larger transaction in another market.

However, the two big hurdles—capturing synergies to justify high valuations and clearing the regulatory approval process—can both be successfully managed. Companies should start by asking themselves some basic questions at the beginning of the process. Smart buyers will approach China with eyes wide open and develop plans to address these issues as soon as it appears that negotiations may lead to a deal.

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When the team working on the transaction gets close to finalizing the deal, other teams should start working out plans for gaining the requisite approvals and moving forward with PMI. On the day the deal is signed, both companies can hit the ground running, ready to take on the challenges ahead. BCG uses cookies to improve the functionality, performance, and effectiveness of our communications. Detailed information on the use of cookies is provided in our Privacy Policy. By continuing to use this site, or by clicking "I agree," you consent to the use of cookies.

Choose your location to get a site experience tailored for you. Managing the Process The industry and markets involved, the location of the target company, and whether the target is a state-owned enterprise all affect the nature and complexity of the review. Organizing and Deploying Allies Consensus building is critical in China. Realizing Value Through Postmerger Integration Valuations in China are high, and in many cases they can be justified only if the buyer achieves significant synergies. In our experience, there are four primary causes of unsuccessful PMIs between multinational buyers and Chinese companies: Failure to bridge divides rooted in culture, business thinking, and management approach, as well as failure to build trust early on between the acquiring company and the target.

PMI planning that does not start until the acquisition is near completion. Failure to customize the PMI process for the Chinese market. Failure to Bridge Divides Multinational and Chinese companies almost always have very different cultures, philosophies, management practices, and ways of doing business. Late Postmerger Planning The second major mistake that many multinationals make is leaving critical decisions until late in the acquisition process.

Misunderstandings over Control A common misconception among multinational buyers is that majority-share ownership confers control. Some standard PMI rules and procedures should always be followed:

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