Date
18 December 2017
Chinese companies are turning their attention to consumer-related firms in overseas M&A deals. Photo: Bloomberg
Chinese companies are turning their attention to consumer-related firms in overseas M&A deals. Photo: Bloomberg

China firms shift M&A focus to consumption plays

Chinese companies flexing their muscle on the international stage is nothing new. But what is interesting now is that the firms are growing increasingly fond of consumption-related targets.

According to the Ministry of Commerce, China’s outbound direct investment, excluding investment in the financial sector, amounted to US$90.17 billion last year, an increase of 16.8 percent over the previous year. Of that, US$46 billion — an 8 percent year-on-year jump — was spent on mergers and acquisitions of overseas companies.

After a study of overseas M&As in the past few years, we can find that Chinese buyers are shifting from production-related deals to consumption-related ones, echoing the Chinese economy’s gradual transition from a manufacturer to a consumer.

The changing preference in deal making can be reflected by the fact that Chinese companies’ shopping portfolio has become more diversified, with the energy sector accounting for less in the overall investment.

Last year, the energy sector, with US$37.1 billion of deals, bounced back to become the most favored sector, but this was mainly thanks to a mega deal – CNOOC’s acquisition of Nexen Inc for US$15.1 billion.

Generally speaking, the energy sector’s dominance on Chinese companies’ shopping list has been decreasing since 2010, with finance, and leasing and commercial services catching up quickly. Before 2010, energy sector often accounted for 80 percent of all overseas deals. The percentage was less than half in recent years.

The change came after China’s demand growth for energy waned after the nation’s robust export boom came to an end and its industrial overcapacity piled up. Overvaluation in previous deals also prompted Chinese buyers to behave more cautiously in seeking new deals. In addition, the new government’s push for state companies to make deals overseas seems milder compared to that of its predecessor.

As energy deals are mostly done by state companies, the change of government stance is also likely to add to these companies’ prudence.

But in a broad sense, smaller proportion of energy deals in overall overseas activity reflects China’s reducing focus on manufacturing.

Even within the energy sector, a change is happening. Oil and gas deals have replaced mineral mining deals to dominate. Since oil and gas are more related to general consumption while manufacturing and production are more related to manufacturing and production, this change is new proof that Chinese companies are buying for consumption at home.

Apart from the energy sector, two new sectors have been rising quickly on the shopping list. The first is retail and wholesale. In 2012, for example, Chinese companies spent US$13 billion, or 14.8 percent of the overall M&A money, making the sector the third-most attractive sector that year. Most of these deals were in developed economies such as the United States and the European Union, as buyers were keen to acquire local medium- to high-end consumer brands.

These deals were made to cater to the rising Chinese consumption of high-end products. In 2013, Chinese consumption of luxury goods exceeded US$100 billion, making the country the largest luxury products buyer. As US and EU brands are facing a shortage of capital for growth amid their saturated markets, Chinese companies are more than willing to buy these time-honored brands to cater to the growing mainland demand.

The other sector that is attracting more Chinese buyers is food. Meat producer Shuanghui International’s acquisition of US-based Smithfield Foods Inc last year was a typical example of such deals. Shuanghui’s deal was valued at US$7.1 billion, making it the second-largest Chinese overseas acquisition last year.

Chinese dairy companies’ acquisition of foreign peers in recent years also underpins the trend. Scarce natural resources in per capita terms and rising public awareness of food safety will prompt Chinese food companies to seek overseas deals to meet the rising Chinese consumption need.

Entering 2014, the trend of Chinese overseas M&As focusing more on consumer industries, rather than resources, is becoming more obvious.

Disclosed major deals so far this year included one only deal on mineral resources, with others concentrated on finance, auto, IT and retail sectors.

The purchases are supposed to bring buyers state-of-the-art technologies and brands to ultimately tap the rising consumer demand in China.

For example, Lenovo’s acquisitions of IBM’s sever business and Motorola Mobility suggest that the Chinese IT giant wants to repeat its success in increasing its share in the Chinese market by leveraging the influence of a global brand, as it did with Thinkpad notebooks.

In the latest deal, Sanpower Group, a conglomerate in Jiangsu province, has signed an agreement to acquire the 165-year-old British department store chain House of Fraser. The deal is apparently aimed at catering to the need of Chinese consumers, who are hungry for House of Fraser’s offering of affordable luxury alongside the world’s most-upmarket fashion brands.

Sanpower’s chairman Yuan Yafei articulates this intention. “We can bring the House of Fraser to the whole [of] China,” he said last week.

– Contact the writer at [email protected]

RC

The writer is an economic commentator. He writes mostly on business issues in Greater China.

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