Chinese multinationals on a buying spree

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In recent weeks, it was reported that Chinese real estate conglomerate Wanda was in talks to buy a 49 per cent stake in US film studio Paramount Pictures from Viacom, having already bought another cinematic giant Legendary Entertainment for $3.5 billion in January 2016, and earlier in 2012 bought the US movie theatre chain AMC for $2.6 billion and London-based Odeon-UCI cinema group for $1.2 billion.  On the other hand, across the English Channel, French President Francois Hollande warned Chinese (and the world’s seventh-largest) hotel group Jin Jiang against setting its sights on a possible takeover of AccorHotels, and thus owning brands like Pullman, Mercure and Ibis; as a result, despite being its biggest shareholder, the Chinese chose not to secure a board seat in AccorHotels, happy just so that it can make “more contributions” to the French company.

Some analysts view this trend as a sinister, Chinese government-sponsored plot to corner the global market, or even to creepily invade western countries; others would argue that they are only doing this for as long as western currencies (especially the British pound) are weakened against the Chinese yuan, making western trophy assets cheap to buy, but will stop once the reverse happens.  In short, it is the same scepticisms faced by the Japanese in the Eighties and Nineties (remember Sony?).  Both assessments may be incorrect.

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Here are several factors to consider.

Weak manufacturing.  It is not a secret anymore that the manufacturing sector in China is facing a major hallowing out, especially that emerging neighboring economies like Vietnam continue to pull in further foreign direct investment, with cheaper labor as the main factor.  Gone are the years when double digit growth rates were the norm, and these days even 6.7 per cent (second quarter 2016 year-on-year growth) is celebrated with relief in China, as it falls in line with the government’s 6.5-7.0 per cent target for the whole 2016.  Never mind that growth rates nowadays are the worst for 25 years!  The immediate policy response – prop up economic growth via heavy state investment in infrastructure and credit growth, which officials admit are not going to last long as they are clearly not sustainable over the long term.  The preferred solution is still private investment and consumption, albeit with a shifted focus to the domestic rather than export market.  No, Chinese multinationals do not eye the export market as a matter of principle (although they would like too), as most analysts contend; they know better than those who give them too much credit that they are technologically way behind the Japanese and western rivals to even contemplate taking market share globally.  For the moment, the Chinese are content on exploiting its rising middle class domestic market, in an attempt to avert a national economic disaster (read: lower growth rates), despite constant official rhetoric of establishing several large world class multinationals to conquer the world market.  Indeed, successful domestic giants like Wanda and Alibaba have relatively small presence outside of China, and they are quite content to remain that way.

Foreign interest.  Yet despite the slow growing economy, foreign investors continue to flock into China, albeit with a very different perspective compared to their intention in previous decades.  Previously, China was poor but its production potential was unrivalled – masses of disciplined workers who were quite happy to be exploited by exporting foreign multinationals.  But this time, foreign investors shun the Chinese workers.  This time, China is rich, very rich.  Its middle class by whichever measure has outgrown Europe’s and potentially also the United States.  Better still, the Chinese middle class is so new to what life has to offer outside of China, and therein lies the mouth-watering opportunity for alert businesses.  Starbucks for instance, concludes that China is its future, as it aims to open one branch every day; there are already about 2,300 Starbucks cafeteria in over 100 Chinese cities.  In short, China is the modern-day equivalent of the Wild, Wild West of 19th century America.

Chinese pragmatism.  It is quite natural that, with a huge untapped market at their own backyard, there is absolutely no reason for Chinese businesses to look beyond their border for expansion, unless they are in the natural resources and government procurement businesses.  They are, and should be, content in exploiting the domestic market that is hungry for world class products.  So, therein lies the dilemma for almost all Chinese businesses.  They are simply far behind in the technological curve to be selling successfully to their own countrymen, who naturally would opt for foreign brands like Apple and Starbucks.  With deregulation of various sectors increasingly becoming an official rhetoric of the government in successive years, no established domestic giants (not even Alibaba and Wanda) can afford to ignore an opening up of the domestic Chinese market to foreign competitors like Amazon and Google.  In short, for Chinese businesses, buying up their potential foreign rivals is a very pragmatic precautionary move, especially if they have the financial resources to do so.

Comments welcomed.