Recent overseas buyout attempts by China, like Haier’s bid for Maytag and China National Offshore Oil Corporation's (CNOOC) bid for Unocal, have run aground. Industry watchers believe this is only a prelude to future large-scale mergers and acquisitions (M&As), similar to what Japan did in the 1980s.
But Cao Yuanzheng, chief economist and vice president of the Bank of China International Ltd, says that the importance of current overseas M&A is overstated. In an interview with Beijing-based China News Week, he gives more emphasis to technical upgrades.
China News Week (CNW): Why did China's overseas buyout attempts raise so many concerns and spark so much interest in the Western media?
Cao Yuanzheng: M&As are an everyday business occurrence in every country. They don't deserve special attention. It was China's overseas investment drive that fuelled the interest of Western countries. One of the main reasons why Chinese enterprises have ventured into overseas M&As is that they now need more expansion space. The country's economy has reached a new high.
CNW: Has China truly entered the M&A arena?
Cao: Personally, I don't think it has yet. M&As are more likely viewed as a way to upgrade industrial structure and scale. Two considerations feature in an M&A attempt: the enterprise’s ability to complete the deal and its acquisition target.
It is a pity that Chinese enterprises are not leading players in their respective sectors even with 20-odd years of development.
CNW: What was the reason for the recent M&A attempts?
Cao: Chinese enterprises have found themselves in a bit of quandary in the last five years or so. Their production facilities have reached their limits.
CNW: But industrial upgrade seems unavoidable for them.
Cao: Their go-out strategies, in some sense, is to extend the life cycle of their products. They are planning something, like an industrial upgrade, when boosting their sales. However, technological innovation, a crucial factor for industrial upgrade, is always their weakness. TCL and Haier, which previously enjoyed huge market share, tried but didn't achieve the results they wanted. This affected their respective market shares.
CNW: Comparisons have been drawn between Japan, South Korea and China. Why have Japanese and Korean enterprises achieved more in industrial upgrades and technological innovation?
Cao: The relatively smaller domestic markets of Japan and South Korea make them aware that they must be export-oriented and exports must be continuously improved in order to keep their advantage.
Chinese enterprises, on the contrary, face a huge and rapidly growing domestic market. Over a period of time, they can earn lots of money and still need not worry about product sales. Following the establishment of the market-oriented system, however, competition has become keener exposing the shortcomings. Overseas M&As are believed to be an effective tool to improve their competitiveness.
CNW: Can an oversea M&A help to upgrade a company's technological innovation capability?
Cao: Technological innovation is fundamental for any nation. Obviously, China’s technological innovation, both in speed and strength, lags behind developed countries like Japan and South Korea. While overseas buyouts might directly prolong the life cycle of products, they can’t solve the technology problem.
The internal integration after an M&A is key to technological innovation. If the primary intention can’t be thoroughly fulfilled, the internal integration will fall into disarray.
CNW: Are there enough time and opportunities for them to develop technologies? Some say that China doesn’t have the benefit of a 10 or 15-year respite unlike South Korea and Japan.
Cao: Technological innovation is a loaded topic. In China, the rapid economic growth of the past 20 years was achieved through large-scale investment rather than technological innovation.
Such growth can’t be sustained once investment decreases.
During the planned economy period, technological innovation was considered a concern only for the government. Now, its status on the agenda has been elevated with greater international competition.
Technological innovation is a must for enterprises.
The majority of Chinese enterprises, whether state-owned or not, are already aware of the importance of independent intellectual property. We can therefore expect that the atmosphere for a systematic input of technology will gradually take shape. The input comprises both capital and human resources. Once this happens, the transformation of China's economic growth model will be certain.
CNW: Can the transformation be accelerated?
Cao: International practice shows that supportive government policies can have a great influence on speed, but the rate of transformation is essentially dependent on market forces. Competition is the fundamental stimulus for technological innovation.
(China News Week, translated by Tang Fuchun for China.org.cn, July 28, 2005)
