China Inbound M&A: Trends, Drivers, and Key Considerations

This interview with Fiducia Managing Director Stefan Kracht was originally published on “M&A Dialogue”:
Interview by Stefan Gätzner from M&A China/Deutschland
Translation by Fiducia


1. How is M&A activity by German and European companies in China developing in recent years?

Within our client base, which consists mostly of European mid-sized companies, there is growing interest in acquiring Chinese firms. Over the last two years, this trend has been overshadowed by the more dramatic ups and downs of China’s outbound M&A. Nevertheless, we see clear indicators of moderate but steady growth in inbound acquisitions.


2. What is driving this development?

The main driver is what we call “China 2.0”. The Chinese economy is maturing and so are local businesses, while foreign companies are entering a next stage of more moderate growth. On the demand side, the consequence is that European firms are finding it harder to reach growth targets organically, so more of them are looking into M&A.


On the supply side, “China 2.0” means a growing pool of attractive targets: mature Chinese businesses whose product quality and business performance are more on-par with European standards. The quality and transparency of their accounting documentation and corporate governance is also improving, especially for those going public.


What keeps inbound M&A from growing even faster is the lack of “push factors” motivating domestic companies to sell. In general, Chinese companies have easy access to capital and vast space for organic growth in the domestic market, so why should they sell to a foreign investor? One interesting answer that we’re increasingly coming across is: generational change. Chinese family-owned businesses are willing to be acquired when they have no succession plan, which is a frequent scenario in today’s China. Founder-run businesses contribute more than half of China’s GDP according to estimates, so the M&A potential in this area is significant.


3. Which are the “hottest” sectors for inbound M&A activity in China?

Within our client base, there are two main sectors where we see continued activity. In both cases, growth is moderate and valuations are reasonable – unlike tech sectors, where M&A activity is hotter and valuations loftier.


One sector consists of consumer-driven industries such as sporting goods and packaging. There is huge potential in China’s growing and increasingly consumerist middle class, so foreign companies are trying to secure their stake in the market quickly. Government policy is also encouraging investment in these industries, as the country tries to shift away from heavy industry and exports, towards consumption-based growth.


The second branch is on the manufacturing side. Here, the driver is “Made in China 2025” – a government plan to upgrade China’s manufacturing industry beyond low-end, mass production. Under “Made in China 2025”, the government is encouraging the use of domestic components and machinery. Many of our industrial clients are considering M&A to be able to fulfill these localisation requirements.


4. When does it make more sense for a German business to acquire a company in China rather than set up a joint venture or an own subsidiary?

The main scenarios we deal with are the following, from most to least common:

  • Fastest route-to-market: Most of our clients pursue M&A as a way of growing their market share quickly by acquiring a local competitor. Nearly two thirds of inbound deals in China in 2016 were cases of horizontal integration.
  • Diversification: A common situation facing European industrial companies in China is that, once they are well-established in the high-end segment, there is limited space for growth. One option is to acquire Chinese brands to grow into the mid-end segment.
  • Localisation requirements: Some foreign firms pursue M&A to gain access to regulatory and commercial advantages reserved uniquely for domestic companies. This is the case in med-tech, for example. Some hospitals have to source a certain percentage of their equipment domestically, which makes it difficult for foreign players to win or even participate in tenders.
  • Vertical integration: In “China 2.0”, foreign companies who have relied on third parties in China in the past, are now ready to step up their commitment to the market and bring more of their business in-house. Some of our clients are focusing on upstream integration, buying their suppliers, while others are integrating downstream, acquiring their distributors.


5. How is China’s regulatory landscape developing in regard to inbound M&A?

In 2017 the government took some important steps to liberalise previously off-limit sectors. The updated Foreign Investment Catalogue, for instance, reduced the number of “restricted” and “prohibited” items by one third (from 93 to 63), including high tech and green tech sectors. Even more importantly, the government is expanding the “negative list” system beyond Free Trade Zones to the whole country, which will reduce scrutiny on inbound investments that fall outside of the negative list.


There are several reasons to believe that this liberalisation trend will continue. Firstly, China’s cost competitiveness is fading, causing FDI to dip in the first half of 2017. Secondly, China is feeling the need to balance their capital account, following last year’s record outbound investments. And last but not least, China knows it has to soften the attitude of policy-makers overseas who accuse China of allowing only one-way traffic when it comes to acquisitions.


However, at the same time, we are seeing an increase in what some people refer to as “selective protectionism”. Under “Made in China 2025”, the government is not only encouraging but also protecting high-tech sectors, putting up restrictions to buy time for domestic players to catch up with their global peers.


6. What measures can foreign M&A investors take in order to find the right target company and avoid risks?

The first thing to be aware of is that spotting red flags in Chinese M&A deals requires a trained eye. Someone who is not deeply familiar with local market structures, cultural nuances, and the inner-workings of local businesses will overlook clear warning signs. At the same time, the professionals you work with must understand European companies and culture, of course, to be able to identify a true fit.

More specifically, these key aspects should be considered at each stage of the process:

  • Target search: in most cases, a target search should have a strong market analysis element. Companies must understand the market before they can decide on the most suitable growth avenue. Which market segment has the highest CAGR? How can you buy into it? Does it make sense to acquire or is a strategic partnership more suitable?
  • Negotiation: negotiation support takes on a very different meaning in China due to cultural and organisational differences. A situation we often encounter is that you have to dig deeper to find out who the true decision-makers are.
  • Diligence: when carrying out legal, financial, and commercial due diligence in China, our guiding principle is to create long lasting value for the client. In China there are many variables that might make an acquisition unsustainable in the long term. If this is the case, we often advise clients to walk away and either look for other targets or go greenfield.


Learn more about how our China Consulting team can support your China M&A planshere, and reach out to us at if you have further questions.