Interview with CEIBS Dean Prof. Ding Yuan and CEIBS Prof. Zhang Hua
How big is the risk for a Chinese enterprise today if they invest abroad?
Ding: Just today a paper in Hong Kong published an article I wrote with the title: “The failure rate for cross-border acquisition is 90%. How to become the other 10%?” Failure means you do not reach your goals. The fact is, according to a big survey, 70% of companies could not reach their targets after a merger. When you consider cross-border mergers, you must add another 10 % to this number. Considering that most Chinese managers have no experience whatsoever in cross-border M+A, you must then add another 10%. So, considering this high failure rate—we, as a school have a kind of social obligation to help the companies both for M+As at home and in host countries.
Zhang: I think one risk is also to overpay. Another one is to lose the original management, which in many cases is key to the success of post-acquisition integration.
Since the end of 2016 no state group may invest more than 1 billion abroad. How shall one interpret this decision of the Chinese government?
Zhang: In my view, such a regulation is mainly due to concerns about the outflow of the foreign capital reserve in China. Once exchange rates are stabilized, there will be deregulation. Certainly, the limit will be lifted sooner or later. Regardless of the limit, however, companies will still continue to receive preferred treatment by the state-owned banks, and receive low-interest rates.
Ding: I also think this is a temporary measure. The market was too hot and the government started to worry. The main worries were the failure rate combined with the currency drain. Of course, if somebody has a short-term view on what happens, the situation might seem critical, but let us consider a global and long term perspective: the global M+A market is worth 4.5 trillion USD. Only 30% of the mergers are cross-border transactions (1.5 trillion). Now you take the Chinese numbers: last year everybody thought that 170 billion USD was a huge number, but it only amounts to maybe 15% of the global cross-border investments. When I read these numbers, I looked at the stock of Chinese overseas investments. The stock is merely 20% of the French stock--and then you look at the size of the Chinese economy. China has just started, and that is the reason why the number is high and that is also the reason why we, as a school, are so strongly committed to supporting companies in this matter.
How would you distinguish Chinese FDI in the U.S. from investments in Europe?
Zhang: I think it is easier for Chinese companies to find good brands and good technology in Europe at a relatively low price, compared to the U.S. In addition, the “one belt, one road” is also a reason.
Ding: There are two things. One is the complementarity of China and Europe. You see more synergies between China and Europe because the goals in life seem to be similar. Let us look at European entrepreneurs, for example. Many have the dream of their company becoming a legacy. Chinese entrepreneurs have the same dream. In the United States, the affection for the business in general is lower: you make your business big, sell it and become rich. But I really feel that there is an easy relationship between Chinese and European entrepreneurs.
If you bring Chinese executives to Victorinox, a family business founded in 1884, and compare this with a Silicon Valley company which has just recently been founded and sold shortly thereafter for millions—then for Chinese executives the latter is just a boring story. On the technical side, one also sees a lot of complementarity. China is by far a manufacturing place and they do not want to abandon, but rather upgrade their businesses.
That’s the reason why the only place to get inspiration is the triangle of Switzerland, Germany and Austria, where one finds this high-quality manufacturing. There is another place like Germany--and that is Japan--but it does not work for us to bring executives to Japan. Japan is a closed society and they unfortunately do not want to collaborate that much.
Here in Europe however, people are neutral towards the Chinese and many see the cooperation as something positive. In the USA, the perception is mainly negative because they see China as a challenger. The Swiss do not care about this, but rather wish to work with companies and people with whom they can make a deal. Europe is an open-minded continent. That makes it a more favorable area for Chinese companies to expand.
Can you make a prediction about the future of Chinese FDI?
Zhang: The Chinese economy will continue to have a high growth rate in the future and Chinese consumers will also continue to demand more high-quality products and services. FDI, with the purpose to upgrade Chinese firms’ competencies, will grow accordingly. We call it a consumption upgrade: not only consumer goods but also the demand for industry goods will spur continued growth.