Spotting China’s hot M&A sectors
WTO has unleashed market mechanisms unavailable some years ago. Very much en
vogue in the 1990’s in Western Europe and USA, Mergers and Acquisition (M&A)
hype is now invading China.
The activity, which began in the mid-90’s, has still to impact on the China
market as a whole. Due to historical and structural characteristics, we are
likely to observe concentrations of M&A in a certain number of sectors. These
sectors will share the common themes of high fragmentation, government
protection, and above-average growth rates.
1. Fragmented Sectors: Need for consolidation
A large number of Chinese industries are fragmented. This fragmentation has been
caused by a number of different factors. For example, China’s size and political
history has led to each province having its own sets of companies. The resulting
inefficiencies, and particularly the lack of economies of scale, present the
opportunity for consolidation and shake out via M&A. A prime example of an
industry ripe for massive consolidation is the logistics industry.
Competition in China has already started to see the integration of fragmented
structures under the protective umbrella of the Chinese government. Therefore,
market entrants will have to struggle with much more mature competition than
some years ago. As such, fragmentation not only presents foreign companies with
opportunities to go shopping, but also means that they are facing Chinese
companies following the same approach. It is not only Western companies that
need to be considered here; Japanese, Korean and South-East Asian companies are
also expected to implement aggressive investment strategies in the next twelve
months.
2. Governmentally Forbidden and Restricted Sectors:
M&A presents the best strategy for penetrating sectors previously protected by
the government. The insurance industry, for example, is only just opening to
foreign participation. Compared to the US market, where there are well over a
hundred competitors, China currently has only 44 companies in its potentially
enormous insurance market. With the number of competitors expected to double, if
not triple over the next five years, foreign investors have no alternative but
to get a foot in the door through M&A.
3. Sectors with Above-average Growth Rates
The ongoing boom in a number of China’s industries presents foreign investors
with attractive targets, as obtaining market share and portfolio diversity
through such acquisitions positions the acquirers well for future organic
growth.
However, a word of warning - Suffering from the current global downturn,
Western companies are hoping for an extension of their sales channels by
acquiring Chinese market share. In the past few years, many acquisitions have
failed to meet their strategic objectives. This has often been due to the lack
of attention paid to real value in such a competitive market environment. When
making acquisitions in China, companies have to look very closely at what they
are putting into the transaction, and not just what they are getting of it.
As such, we predict that the hot sectors for M&A will include logistics, fast
moving consumer goods, insurance, automotive parts & components,
pharmaceuticals, media, and professional services.
If you would like to know more about spotting China’s M&A
Sectors, please contact Mr. James Sinclair
(email jsinclair@fiducia-china.com
Tel: +86 (0) 21 5298 1805).
Successful HR retention in China
Having a strong brand for employees based on the best offer of tangibles and
intangibles is both a competitive and strategic advantage. It helps to attract
and retain the best candidates. Companies have to develop their own brand to
market to employees by providing the best offers in terms of the tangible and
intangible aspects of their reward systems.
Higher productivity, greater loyalty, and better customer relations are
achieved through closer relationships between companies and their employees.
Many companies display their organisational vision, mission and values to
thousands of potential employees on employment-related websites in an attempt to
build their corporate brands and reveal themselves as companies that reward
employee potential.
Word spreads in industry circles about a company’s reward system based on the
experiences of current employees. Hence, it is very important for an
organisation to constantly evaluate the rewards it offers to its employees
compared to industry standards and its competitors. In the job market, each
company has to promote itself and its reward systems to attract, hire and retain
the best talent available. This is a painstaking process which bears fruit with
commitment over a period of time.
However, it is precisely this commitment that will distinguish market leaders
in the long run. Why do some companies seem to exert a mysterious pull on
employees? In the battle for markets, product branding wins customers, and in
the war for talent, strong employer branding can help attract and retain the
best people.
In the past, companies have reacted to different situations by throwing more
and more money at the problem. What they have discovered is that offering staff
a premium of between 30% to 100% of their last salary in order to attract them
only works well until a competitor adopts the same strategy. The result is
little improvement in retention but a rapid escalation in costs. Companies are
now seeking a long-term, sustainable approach to developing a competitive edge
in the market.
One strategy that has begun to prove successful is the creation and
maintenance of a strong, best employer brand in the job market. Best employer
brands can only be created with strong reward systems supported by well-rounded
approaches.
It used to be that foreign companies had to promise heaven and earth
before a foreign expert or manager would consent to a life of exile in
developing China. Companies were obliged to offer a virtual bouquet of
benefits and bonuses on top of competitive base pay.
But those days may be coming to an end. Now there are a lot of people
standing in line to get into China.
As a result, many companies are wising up to the fact that they can
attract expatriate talent with more modest offerings than in the past and
the benefits of existing expatriate employees are being squeezed.
The first reason is that China is a much more hospitable place for
foreigners to live in compared to a decade ago.
A second reason is simply
that the costs of expatriate staff can be a major burden on companies
operating overseas, impacting overall profitability.
Companies are cutting costs by developing local talent to fill positions
traditionally held by expats.
If you would like to know more about HR management in China,
please contact Ms. Vanessa Moriel
(email vmoriel@fiducia-china.com Tel: +86 (0)
21 5298 1805).
Would Enron have collapsed in China?
In the wake of the Enron collapse and other accounting scandals, the European
Commission is stepping up its calls for the United States to recognise
international accounting standards and stop imposing US rules on companies
around the world.
The European Union's executive body has argued for years that the
international standards, known as I.A.S., are more effective than the
''Generally Accepted Accounting Principles,'' or GAAP, used in the United
States. By more effective, the EU refers to the framework of IAS principles
rather than specific rules used under US GAAP accounting.
For instance, Enron
used GAAP rules in line with Special-Purpose Entities (SPEs) to hide billions of
dollars of debt. Under GAAP rules, parent companies can bankroll up to 97% of
the initial investment in SPE without having to consolidate it in its own
accounts. However, European IAS rules would have prevented any company from
doing such things.
Under IAS 27 a subsidiary is defined as an enterprise
controlled by another and, as such, has to be shown in the consolidated group
accounts. It is not a percentage, but general principles that distinguish IAS
from US rules.
In regard to China, we face rules (China GAAP) that are closer to US GAAP
than IAS principles. For instance, companies only have to consolidate
subsidiaries where 50 percent or more of the equity capital is owned. However,
Special-Purpose Entities (SPE) don’t exist in Chinese corporate and accounting
legislation.
In China accounting scandals are less a result of creative accounting than by
a complete lack of disclosure. For instance, Sinopec Yizheng Chemical Fiber Co.
revealed this month that it didn’t disclose an agreement to pay RMB199.3 million
($24 million) to help build a chemical plant.
The announcement comes as several
Chinese listed companies, such as Jinan Qingqi Motorcycle Co. and refrigerator
maker Guangdong Kelon Electric Holdings Co., also revealed that their
state-owned parents used them as piggy banks, without disclosing transactions to
shareholders.
Such non-disclosures are also common among foreign-invested firms. For
instance, a Chinese balance sheet might include fixed assets like factory
buildings and land-use-rights while completely lacking the disclosure of related
liabilities, such as annual government fees & taxes.
Although some advocates claim that scandals like Enron and WorldCom could not
occur in China due to stricter accounting rules, failures can easily result due
to non-disclosures. To avoid such risks, group companies should always ask
auditors to review on- and off- balance sheet transactions in local
subsidiaries.
If you would like to know more about China’s accounting
systems, please contact Mr. Thomas Thiele
(email tthiele@fiducia-china.com Tel:
+86 (0)10 65906108
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