The complexities of the Chinese market can be very daunting and can make the more traditional physical ways of entering China, such as Joint Ventures and WFOE (Wholly Owned Foreign Enterprise), very difficult if you are not familiar with the characteristics of this market, and as I stressed in my previous entries, with the culture and the way of thinking of the Chinese people. However, one of the great things about China’s laws on M&A is that it helps mitigate some of the difficulties cultural differences bring. For instance, if you acquire a Chinese company, you will gain access to its employees and connections, which you do not get if you just opened a WFOE. Furthermore, through newly allowed methods like share swaps, a foreign business can enter the Chinese market without any physical presence. This is an ideal way to mitigate dangers, learn about the Chinese market and increase the value of your business all at the same time. This is also another reason why in my opinion in the future M&A transactions will continue to rise in importance. It is also why M&A is a strong suggested way of entering the Chinese market. It is less time consuming, more simple and offers less risk for foreign companies. However, it should be stressed that just because M&A can help in mitigate cultural obstacles it does not mean that you should not try to understand the environment and culture in which you have your business. Remember that thinking and acting local are what will drive success. Take the example of Starbucks again. They adapted their strategies entry to the Chinese market. (
http://www.forbes.com/sites/helenwang/2012/08/10/five-things-starbucks-did-to-get-china-right/
). Starbucks has successfully opened more than 570 stores in 48 cities since it first entered China twelve years ago. Building on this momentum, it plans to open 1,500 stores by 2015! When planning to invest in China you have to
Think Different ,
but “tuning” your plans on the same frequency of the Chinese customers.
“When Starbucks entered China in 1999, many were skeptical that Starbucks had a chance. Given the fact that Chinese people have traditionally favored tea, it seemed impossible that Starbucks would be able to break into this market. However, Starbucks did not let this skepticism stop it. A careful market study revealed that as the Chinese middle class emerged, there existed an opportunity for Starbucks to introduce a Western coffee experience, where people could meet with their friends while drinking their favorite beverages. Starbucks literally created that demand. Now you can find a Starbucks almost on every major street of the coastal cities in China.”.
When a joint venture is the answer?
Many multinational companies in unrestricted industries (see my entry on the Catalo for the Guidance of Foreign Investment:
http://blawg.lehmanlaw.com/wordpress/?p=1632
; the new version of the Catalog is available at the following web-site:
http://www.fdi.gov.cn/pub/FDI_EN/Laws/law_en_info.jsp?docid=87372
) are stopped cold by the challenges of joint ventures in China. JVs require careful screening of potential candidates, addressing the tricky issues early as part of contract negotiations and joint business planning, and agreement on key business drivers and ongoing management and monitoring. However joint ventures succeed when partners clearly understand what each party brings to the table and work to accommodate their unique needs. Successful JVs create a differentiated setup for different strategic product types. (We will discuss the functioning of JV in a separate entry).
When M&A is the answer?
Among the biggest obstacles to pursuing M&As in China: the dearth of good target companies and the difficulty of conducting solid due diligence. Also, valuations are high, and post-acquisition improvements are hard to achieve because of cultural differences and top management drains. Again, companies that succeed begin with a clear strategy, investment thesis and process, designed to capture the key elements of the deal thesis while simultaneously managing the risks. They know what they’re looking for and how it will fit with their strategy.
As can be seen from the above when trying to understand how to successfully engage in business in China a foreign enterprise must look at a wide range of issues that involve not only the law but also China’s environment and culture. It can be a challenging task, but if viable and profitable M&A transactions are to be identified, then all these considerations should be taken into account. As we said before, business in China is more than just following the letter of the law.
– Cristiano Rizzi