International Takeovers by Chinese Companies
While a multitude of multinational companies are entering the Chinese market, there are very few Chinese companies going multinational. Therefore, the Chinese government has formulated the “Go Global” strategy in order to encourage Chinese companies to invest in business abroad. Takeover (Acquisition), which can be defined as one company being purchased by another, is generally believed to be a straightforward and effective method to achieve that goal. However, it is challengeable to make the takeover successful, especially between companies from different countries.
This paper will explore the challenges that Chinese companies may encounter while taking over multinational companies. Through the analysis of the case of Volvo acquired by Geely, it is found that the challenges mainly come from cultural differences, corporate finance and brand image. It is necessary for Chinese companies to focus on making appropriate strategies to overcome these difficulties so that benefiting from acquisitions. These strategies include cultural integration, expanding the Chinese market and brand positioning. Introduction
International takeover (acquisition) is a straightforward method of Outward Foreign Direct Investment (OFDI) which can be defined as the action of investing in business abroad. China, as the second largest economy of attracting foreign investment, has developed its scale of OFDI tremendously. Acquisition plays a significant role in this progress. According to the National Bureau of Statistics of China, the capitals of Chinese OFDI reached as large as 68. 8 billion USD. In terms of the patterns of OFDI, it was reported by the Xinhua News Agency which is the official media of China that more than 40% of the investment came from acquisitions.
However, for Chinese companies, international takeovers could be highly risky and challengeable since most of them lack the experience and skills of managing the multinational. In the past two decades, overseas acquisitions conducted by Chinese companies have increased at the rate of 17% annually, but the rate of failure is 67% (Zhang, 2011). The high failure rate reflects that Chinese companies are facing a multitude of difficulties after acquisitions. The main reason of these difficulties is that most of those companies are domestic enterprises instead of multinationals.
After acquisition, those companies suddenly become multinationals, which brings them into a total unfamiliar environment. This short essay is going to analyze the challenges faced by Chinese companies after acquiring multinationals. Furthermore, the specific case of Volvo’s acquisition by Geely will be discussed in order to explore the difficulties practically. The first section of this paper aims to give a brief explanation of merger and acquisition. The next section will focus on the challenges faced by acquirers in order to profit from the acquisition.
It will be followed by the case of Geely and Volvo, through which those challenges can be analyzed more clearly. Finally, this paper will summarize the findings and give according suggestions. The concept of takeover A takeover (acquisition) can be defined as a corporate action that the stakes or assets of one company are purchased and owned by another (Reed, Lajoux, & Nesvold, 2007). It can be described as a transfer of ownership, from the target company to the acquirer. Takeovers can be either friendly or hostile.
Friendly acquisitions mean the target firm agrees to be acquired while there is no agreement from the target firm in terms of hostile acquisitions and the acquiring company needs to purchase large numbers of stakes of the target company. Takeovers can be divided into domestic acquisitions and international acquisitions or cross-border acquisitions according to the locations of the companies. An international takeover refers to an acquisition in which the acquiring firm and target firm comes from different countries, whereas both of the companies are from the same country in a domestic takeover (Sarala, 2010).
This paper is a study of cross-border acquisitions and the acquiring company is from China. The challenges of international takeovers conducted by Chinese companies Cultural differences Cultural differences can cause obstacles to the success of a cross-border takeover. Cultural differences are divided into national and organizational types, and this paper focuses on the national cultural differences. It is claimed that organizational cultural differences tend to increase conflicts after an acquisition, while national cultural differences have no impact on the post-acquisition conflicts (Sarala, 2010).
However, Lodorfos and Boateng (2006) pointed out that cultural differences would affect the success of takeovers, and they suggested a four-staged approach to manage the integration process. Chinese culture and western culture have a vast range of differences, which may lead to conflicts between the acquirer and the target firm. It is believed that the ways of thinking and behaving in China are highly different from those in western countries because of the distinct cultures. One typical difference is that thoughts are expressed in an indirect way in China, which is totally different from the straightforward culture in western countries.
It can result in misunderstanding in the communication between the two firms. Therefore, a common system of communication needs to be established after takeovers. Corporate finance The main challenge concerned with corporate finance in a cross-border takeover conducted by a Chinese company is that the acquirer has no experience of international financial management. After taking over a multinational, the acquirer will become a multinational itself, engaging itself into the complicated international capital budgeting.
As a result, several areas need to be taken into consideration by Chinese companies such as currency exchange rate, tax differences and international fund flow (Wang, 2011). These aspects can cause serious financial problems for Chinese acquirers because it is quite different from the situation before. However, challenges do not indicate failure. Since corporate finance is a field which needs professional employees to undertake, the recruitment of human resource in the profession is of great importance and the target company can be helpful to achieve the goal.
Another part of financial pressure comes from the process of acquisition because it is costly for the acquiring company to purchase a multinational. This is obvious with Chinese private enterprises since they lack protection from the government, but not with Chinese state-owned enterprises as they are privileged. With the high expense of acquisitions, companies have to apply for loans from banks, which will aggravate the burden of their financial status. The measure to alleviate the pressure is to enable the target firm to make profit, using the profits to balance out the cost.
However, this goal may not be reached in a short period. Therefore, financial pressure could be a severe problem from the short-term perspective after a takeover. Brand image Takeovers may influence the brand image, which is considered as another challenge. Brand image can be defined as the impression that a brand makes on consumers’ mind. Domestic Chinese companies produce little impression on consumers of western countries, while multinational companies are renowned all over the world.
When an acquisition occurs, and it is the weaker side (Chinese companies) that acquires the stronger side (multinationals), the process of cognitive dissonance is likely to happen to consumers. In other words, the weaker side will be considered to enhance its brand image, whereas the stronger side will be expected to experience a downward tendency for the original brand image (Guo & Tao, 2011). Therefore, how to improve the acquirer’s image as well as sustain the multinational’s image can be challengeable.
Case study: the acquisition of Volvo by Geely Affected by the financial crisis in 2008, many top auto companies decided to sell part of its renowned brand to alleviate financial pressure. Simultaneously, Chinese corporations were eager to expand their market through merger or acquisition. Zhejiang Geely Holding Group is a Chinese non-famous private auto company in the world. However, it bought 100% equity of Volvo which is one of the strongest brands in the auto industry at the expense of 18 billion USD on March 28, 2010.
The deal was the largest acquisition conducted by a Chinese company and surprised the world since the acquirer was the weaker side. Within one year after the acquisition, it was reported that Volvo returned to make profits under the revenues of more than 18 billion USD (Wittmann, 2012). However, it does not indicate the success of the acquisition since it takes a long period for the integration of two companies. During this period, Geely and Volvo may encounter various challenges with regard to management, marketing and finance etc.
It is helpful to explore the possible challenges so that the companies are able to make preparation for them. Cultural differences are expected to be the main problems for the success of the acquisition between Geely and Volvo. Since the acquirer and the target firm comes from different countries, employers and employees speak different languages, as well as have different thoughts and values towards the same object. This is extremely outstanding in the case of Geely and Volvo because Chinese culture is believed to be totally different from western culture.
One obvious difference is that the Chinese culture considers the country and family over the individual while western culture cares more about individuals. It may lead to conflicts when Swedish employees are required to take tasks which are beyond their responsibilities by Chinese employers (Wang, 2011). Therefore, Shufu Li, who is the chairman of Geely, gives Volvo the independence of managing itself temporarily after the takeover. Another challenge Geely faced after the acquisition was the heavy financial pressure.
Wang (2011) also mentioned that the total value of profits and assets of Geely were less than the acquisition cost for Volvo. Besides, it was compared that the profits of Geely cannot cover the loss of Volvo. With such stressful financial condition, the acquisition still occurred owing to the support of the Chinese government and loans from banks. It was reported by the Swedish media that Geely borrowed 6 billion RMB from certain Chinese banks. Furthermore, an application of 6 billion RMB has been made by Geely to European Investment Bank to develop its product (Wang, 2011).
Obviously, the financial support merely made Geely’s situation worse, increasing the debt and reducing the liquid capital of the company. The method of improving the financial situation is to enable Volvo to make profit as soon as possible, for which appropriate strategies should be worked out. As a huge auto market, China can be the place where Volvo rebuilds itself. Volvo is regarded as a luxury brand like BMW and Audi in China, but its sales are far behind them. After the takeover, the owner of Volvo has become Geely instead of Ford, which is enormously beneficial for Volvo to expand market in China.
From the aspect of brands, the obvious gap between Geely and Volvo should be taken into consideration seriously. Geely is considered as a low-price auto brand in China while Volvo is a renowned brand for “Safety and Environment” all over the world. This is a huge gap between the two brands, and it may produce negative effect on Volvo’s brand image. Zakladna and Ehrl (2011) stated that certain attributes of Volvo such as safety, quality and design will be affected positively while other image including environment and family will be influenced negatively by the acquisition.
Although the top managers of Geely promised not to involve the brand strategy of Volvo at this moment, strategies need to be worked out to enhance the reputation and quality of Geely and give a clear brand positioning to Volvo in the Chinese market in order to diminish the brand gap (Chen & Liu, 2011). Conclusion This short essay has explored certain challenges faced by a Chinese company while successfully taking over a multinational. The main difficulty is that cultural differences may form obstacles for the whole group during the integration process.
Also, the acquiring company could bear heavy financial pressure due to the complicated and inexperienced international financial management or the huge expense in the acquisition. Finally, the adaption of brand image is regarded as one of the challenges since such acquisitions could affect multinationals’ brand image negatively. In order to overcome those difficulties, according strategies ought to be made such as establishing a common communication system, recruiting financial professionals, expanding the Chinese market and making a clear brand positioning.