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Capital Agenda insight : investir en Chine

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Les nouvelles réglementations en Chine contribuent à l'évolution rapide du climat d'investissement dans le pays. Comment les investisseurs étrangers tentent d'y répondre en adoptant de nouvelles approches ?
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CapitalAgenda
Insights
March 2011
Boardroom issues
Do you plan to invest in China, but are
concerned about choosing the right
Chinese partner?
How do you deal with differences in
objectives and aspirations between you
and your Chinese partner?
Are you concerned about maintaining
the Chinese authenticity of the
partnership when you are either a
majority or minority owner?
Do you face the challenge of choosing
the right team to work in China and
selecting the best candidates for key
officer positions?
How do you maintain alignment
with the local partner on integration
priorities?
How do you ensure that the partnership
creates the value that was anticipated?
Investing in China: mapping JV
integration to deliver value
The dynamism of the Chinese market remains a compelling story for
western companies, as many continue to vie for stakes in Chinese
companies. Yet, red-hot valuations and new regulatory regimes are
contributing to a rapid change in the investment climate, and foreign
investors need to be agile enough to consider different approaches and
adapt their strategic options in China accordingly.
Ten years ago, there were numerous
opportunities for multinationals seeking
to acquire Chinese companies, although
at that time, the strategic intent for
most investments was access to low-cost
manufacturing. Many Chinese companies
in need of western technology and capital
were willing to enter into partnerships in
which the western buyer would have a
controlling stake in the business. However,
the investment climate has changed rapidly
over the past few years.
Rising valuations have been one of the key
factors helping to transform the investment
environment in China, as the country
has become one of the most desirable
destinations for investors in emerging BRIC
markets. Chinese businesses are more
cash-rich and have evolved rapidly over the
past decade. Driven by strong economic
growth, many listed Chinese companies
have become increasingly successful,
making them more expensive for potential
foreign buyers.
At the same time, new government
regulations, including anti-monopoly
laws and legislation on government
procurement, are making deals more
challenging. This is in part because the
new regulatory climate has increased the
bargaining power of local players, forcing
potential amendments to the terms and
scope of acquisitions of Chinese assets and
reducing the benefits for multi-national
corporations (MNCs) looking to acquire local
companies with government contracts.
Overall, Chinese companies and policy
makers are becoming more savvy when
dealing with western investors than they
were 10 years ago. Many, if not all, are
asking, “Why do we need you in our
own market?”
The average transaction life cycle is
12 to 24 months in China, compared to
around three to six months in mature
markets. These protracted timetables for
concluding deals are clearly taking a toll;
in 2007, just 3 out of every 10 Chinese
transactions were successfully completed,
and those numbers have changed little in
the intervening three years.
Given this longer transaction life cycle,
investors need to remain patient and
manage their headquarters’ expectations,
while at the same setting the right
expectations during initial JV discussions.
We believe that foreign companies need
to get several crucial steps right during
the pre-deal planning stage in order to set
the transaction on a reasonable path to
success.
For all of these reasons, multinationals
need to rethink their investment
approaches in China, whether they are
new entrants or dab hands at the market.
Investing in minority stakes or forming
joint ventures (JVs) is not uncommon
these days, especially in sectors like
consumer products, pharmaceuticals
and retail. Such new approaches have
implications not only for the formation
of investors’ inorganic growth strategies
in China — namely, how the target
companies will fit into their existing
business — but also for their subsequent
approach to integration and decisions
on how best to extract value from these
transactions.
Planning for value:
getting the initial
steps right
The portfolio investment strategy is
gaining popularity as many foreign
buyers focus on a series of smaller
acquisitions, partnerships or JVs instead
of one transformative deal. One foreign
company that has adapted to conditions
on the ground in China while at the same
time pursuing a long-term investment
strategy is a Belgium-based global
brewer, which took equity stakes ranging
from 20% to 71% in a series of Chinese
companies over a period of 20 years.
Determining the strategic intent of
the JV and objectives from both
sides
Foreign and Chinese companies come to
the table with very different aspirations
and perspectives on one another. There
is an old Chinese saying that aptly
describes the challenges of a partnership
between a Chinese company and a
foreign company: “same bed, different
dreams.” This highlights the often large
divergence in objectives between foreign
and local partners. In order to set the
initial discussion on the right path, each
side needs to maintain a clear view of its
own objectives for the partnership and
develop a realistic assessment of the
likely underlying objectives of its partner.
In a rapidly changing market like China’s,
partners’ objectives are likely to change
as well. Therefore, it is also important for
both partners to think strategically about
how to preempt or influence the other
when one party changes its objectives
for the JV. Thinking creatively about
reshaping the JV and (or) developing
robust contingency plans will be
important even at this early stage.
2
Capital Agenda Insights
Appointing key officers
While minority shareholders’ influence
over the board is likely to be limited, the
ability to exercise management control
of operations is important. If the minority
partner is able to name the chief financial
officer, they are likely to end up with a
candidate who is more attuned to Western
styles of running a company and better
able to fulfill compliance measures, both
during the integration phase and over the
longer term.
The CFO controls all financial matters,
from setting the annual budget (especially
important for companies with high capital
spend), to finance and management
reporting and internal controls.
A successful CFO will hold broader
responsibility for the operational side of
the business and will also have compliance
officers reporting to him or her.
Another key position that most foreign
investors plan for is in manufacturing
operations or quality control. While local
employees often have valuable know-how
in this area, Western leading practices are
frequently needed to bring manufacturing
and quality control to the next level,
especially when the JV is seeking to
export its products to overseas markets.
By contrast, sales and distribution, which
tend to be more localized, are better left
in the hands of the local partner.
In 1996, a leading Chinese fast moving consumer goods (FMCG) brand formed a
JV company with a France-headquartered global food and beverage company. The
Chinese company owned 49% of the JV with the Western company owning 25.5%.
Two years later, the Western JV partner became the majority shareholder after
buying out the interest of another investment partner, taking control of the JV
and its trademark. However, this change in ownership was not recognized by the
Chinese JV partner, which continued to maintain control of the JV’s day-to-day
operations. The Chinese JV partner claimed that it had not transferred ownership
of the trademark to the JV, just its exclusive license. By 2000, the Chinese JV
partner had established other companies to sell the same products as the JV and
used the Chinese trademark, setting off a series of arbitration and lawsuits on the
part of both parties.
Having won the battle to have the right to elect a CFO for the JV, many foreign
companies then face the challenge of selecting the right candidate. In a recently
completed transaction, a US industrial products company elected an expat CFO
for the JV. A highly regarded veteran with several years of operating experience
in China, the CFO-elect had the dilemma of deciding whether to relocate to a
third-tier city where the JV is headquartered or attempt to run the business from
Shanghai. In addition, due to a lack of Chinese-language skills, the CFO-elect cannot
effectively communicate with the local finance team without an interpreter, making
it harder for him to forge a strong relationship with the local teams.
3
Capital Agenda Insights
Protecting intellectual property (IP)
and other rights
Foreign investors need to ensure
adequate measures are put in place from
Day One to protect IP rights, whether for
the technology or for the management
processes and know-how that Western
partners are introducing. Such measures
may seem unusual, but Chinese JVs
have a defined lifespan; therefore, it is
incumbent upon the Western partners
to ensure that their IP is not merely
“transferred” to the Chinese partner’s
hands, but instead reflects some of
the value that the Western partner
contributes to the venture.
Mapping out a clear path for the
future
Finally, foreign companies will also need
to anticipate the end game for the JV.
Do they see an eventual increase in their
equity stakes or a buy-out of the Chinese
partner that will allow them to become
the majority owner of the JV? Do they
anticipate listing the JV on the public
market? Alternatively, do they expect
to form similar JVs in other product
categories or geographies?
Mapping out the potential evolution of the
JV they are getting into is as important
as, if not more important than, setting
the right set of objectives at the onset of
partnership discussions. While it will be
extremely difficult to anticipate potential
end-game scenarios, foreign companies
investing in China are encouraged to plan
rigorously for such outcomes and for their
potential triggers. This has implications
during JV negotiations, whether they
involve the valuation of the business at
a time of sale or non-compete clauses.
Developing and rigorously testing a set
of key assumptions will help to shape
decision-making and trade-offs during
JV negotiations.
In a recently completed JV in a metals-processing business, the
Western party’s contribution included their “know-how” around
efficient processing systems deemed leading in their industry.
In forming the JV, the Western partner insisted that a portion of
the final processing be completed by one of their wholly owned
facilities, thereby allowing them to ensure that not all aspects of
their highly valued systems were simply given to the
Chinese-controlled JV.
Capital Agenda Insights
4
Focusing on JV value creation
Both parties to a negotiation are likely
to agree on value creation as a common
business objective for any JV. Chinese
companies look for foreign partners
for many reasons: to achieve a global
profile in a scalable way and gain access
to massive export markets; to develop
branding expertise and gain access to
new technologies or to learn new ways of
overcoming quality issues that can restrict
their ability to export.
Foreign companies, meanwhile, must
prove to their Chinese shareholders
that they are active minority investors;
they need to ensure effective transfer
of knowledge and business practices to
their local partners. The JV will create
value by leveraging the foreign partner’s
manufacturing, technology and marketing
capabilities and the local partner’s local
market and regulatory knowledge, market
access and distribution capabilities.
Successful value creation requires both
sides to agree on a set of integration
priorities and rapidly translate these into
specific initiatives within each functional
area. This process will also allow each
functional area to deeply understand
the capabilities of the other and work
out feasible plans through assignment
of responsibilities. If done correctly, this
will also give the foreign party a greater
degree of management control and
influence in the specific areas of focus.
However, our experience tells us that this
is often not a straightforward process.
Watching your language
Let’s start with what to call the integration
project. In Chinese, an integration plan
is “
” (zheng he ji hua), which
colloquially means “a plan to fix things
up.” While Chinese senior management
will understand the goal of the project,
line managers, who are often proud of
the history and achievements of the
enterprise, frequently react negatively
or defensively. China-savvy foreign
companies, therefore, will refer to the
integration project as “
(xiao neng ti gao ji hua), which means
“performance improvement plan.” This
is likely to go down well throughout the
organization as the central government
has often called upon all enterprises in
China, be they state-owned or privately
owned, to continue the drive toward
performance improvement in their
respective sectors.
5
Capital Agenda Insights
Getting behind a common plan
Next comes the challenge of agreeing
what integration priorities should be.
Both parties often have different views
as to what is a value-creation priority and
what is not. Even when both sides agree
on priorities at the onset, these may
change very quickly as each side absorbs
the realities of the partnership and the
changes that are necessary to make it
successful. Focus is critical, given the
fast-changing competitive and regulatory
environment in China.
MNCs often focus on the control
elements in their integration plans.
For example: checking and ensuring
existing suppliers and customers have
properly documented contracts, there is
compliance with the relevant regulatory
and health and safety executive (HSE)
requirements, checking and ensuring
employees and compensation are
managed through a structured appraisal
system, cash management has the proper
internal controls, among others.
Chinese managers, by contrast,
sometimes do not see these control
priorities as so important; after all, they
have achieved success without “fixing”
these areas. They are most eager to see
their products exported overseas and
their plants upgraded so they can start
producing the foreign partner’s products,
increase utilization and allow their
sales force to scale up quickly and sell
more products in the domestic market
— even if gaps still exist between quality
requirements and implementation of
the Customer Relationship Management
(CRM) system.
Agreement on integration priorities for
both sides will require them to work out
their short-term and longer-term value
creation priorities, which unfortunately
may mean another round of negotiations.
Setting realistic expectations about
what can be achieved in the initial
period is important and will require a
fine balancing act between securing
control and addressing longer-term value
creation needs. Another problem is that
foreign partners often make the first
assessment of what skills to transfer to
the Chinese JV on the basis of a Western
view of what is needed in China. This
usually is driven by a multinational’s
experience in its home market and does
not necessarily take account of the
Chinese context. Left unchallenged, these
sorts of assumptions can potentially lead
to a poor use of resources and wasted
market opportunities.
In a recently completed JV in
Southern China, the European
headquarters of the foreign
partner quickly assembled a
“first strike” multifunctional team
armed with a comprehensive
integration plan. The essence
of the plan was risk mitigation,
from ensuring the licensing and
HSE compliance of the Chinese
factory, to putting in place a
set of rigorous controls and
budgeting in the partner’s finance
department. The integration
kickoff in China did not go well.
There was strong resistance
from local management, who
were expecting the roll-out of
plans to upgrade their facilities,
prepare products for export and
shift some production capacity
to China, hence increasing the
Chinese partner’s factory’s
utilization. Both sides ultimately
learned the importance of
involving both sides in decision-
making about integration
priorities. Reaching a common
understanding of what are
priorities and what are not during
integration is the first step of a
successful partnership.
6
Capital Agenda Insights
Choosing the right team to back you
up
Finally, both sides will face the challenge
of implementing value-creation initiatives.
Foreign companies face the bigger
challenge of selecting a group that can
parachute into the newly formed JV with
the appropriate mix of technical, business
and China-savvy managers to accelerate
knowledge transfer and operational
improvements. Without proper preparation
and incentives, members of this team
often see their current assignment as their
“day job” and can lack sufficient focus to
work with the JV partner. On the Chinese
side, there may be a limited number of
managers with the requisite international
experience to work effectively with the
incoming partner. Such a mismatch of
expectations and capabilities often cause
the first challenges in the JV relationship.
7
Capital Agenda Insights
Contact
Yew-Poh Mak
Operational Transaction Services — Asia-Pacific
T: +86 21 2228 3002
E: yew-poh.mak@cn.ey.com
The deal environment in China continues to be a dynamic one with strong
appeal to foreign investors, but international companies need to recognize the
extent to which terms have shifted and adapt their strategies to take account
of these new realities. Starting and managing JVs will increasingly become
part of any multinational’s winning China strategy going forward. However, this
continues to be a complex, uncertain and at times, emotional process.
Preparation is more critical than ever to the success of a JV or similar alliance,
and investors need to understand the steps that are key to this process,
including having a clear vision of the overall strategy behind the deal and what
both sides view as the objectives of the partnership, choosing the executives
who will have responsibility over major financial operations and envisioning the
ultimate endgame for the alliance. Success requires continued engagement,
pragmatism, and focus. Due to the differences in culture, experience and
management practices, each side needs to pay systematic and explicit
attention to clarity of communication and trust-building between the partners.
Be patient!
Partnerships that excel in the Chinese marketplace are those that relentlessly
focus on market opportunities, remain alert to the evolving objectives of the
partnership and focus post-JV-formation efforts on the opportunities that
will create the highest value. Those whose initial partnerships fail to develop
according to plan also have the potential to become winners, so long as they
apply the experience they have gained to new opportunities in China, either
on their own or with new and (or) existing partners. Whatever the route, the
Chinese market continues to offer significant opportunities and rewards to
those that take a long-term view, make the effort and persevere to the end.
Conclusion
8
Capital Agenda Insights
Ernst & Young
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© 2011 EYGM Limited.
All Rights Reserved.
EYG no. DE0228
This publication contains information in summary form
and is therefore intended for general guidance only. It is
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