My article which was praised. HA!
Well, remember when moi tells all of you out that that I was writing a piece of article on M&A in China? Well, apparently, Miss J was 'very impressed' (her exact words) and so does the manager for our Business Consulting Unit! Ha, all you peeps out there now yelling "Plagarist" now, rest assured that moi did tell Miss J that I did refer from other sources, and all she was cool about it! Nothing dodgy! She said 'as long as there's reference, it's all right!' love the Brits!
So here I present my article!
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Expanding into China
Gerald Toh for BDO Raffles
As a country with varied growth rates for different geographical areas, coupled with a booming and fast growing economy, China proves to be an attractive choice for local businesses seeking expansion plans in recent years. Local firms can leverage on their strength in various sectors and carve a niche for themselves in the world’s fastest growing economy.
Along with China’s rapid growth emerges a burgeoning group of middle class population with higher income. This translates into a higher demand for lifestyle-related products and services. Singapore firm OSIM realized the importance of China and how it is vital to the company’s expansion and growth strategies. Although OSIM was faced with difficulties in the initial stages when it first started in China in 1994, it has since enjoyed steady returns from the country ever since the rapid opening up of the economy of China.
OSIM managed to attain its success in China by sticking to what it does best; by heading into a sector which is their core competency in Singapore. This gives OSIM comparative advantage over its competitors and ultimately, help established the successful branding of its products. It is due to OSIM’s comparative advantage that enables the Chinese to have the ability in adapting OSIM and make it a success.
Similarly, Singapore businesses with an edge in service industries should strive to expand their operations into China, where the level for their service sector is still at its formative years. It’s aging and populous nation needs expertise in medical care and education. Another area is the growing tourism industry. With a huge domestic market internally, and the increasing popularity of China as a tourism destination, hotel management services is another segment which Singapore firms can seek to take advantage of.
But the vast country has great differences across various provinces that the average investor may not know which part of China to invest in. An alternative to seeking out an appropriate individual investment option is to go into a partnership, or through appropriate merger and acquisitions (M&A) with a Chinese company. A recent study published on McKinsey Quarterly revealed that M&A deals between Chinese and foreign firms accounts to less than 12 percent of total foreign direct investment for China. This is in contrast to the average 47 percent for the ten countries, apart from China, that attract the greatest amount of foreign capital worldwide.
The same study also revealed that with the removal of limitations on investment in many industries, the number of cross-border M&A activity is poised to increase, the most recent example being the purchase of 5 percent shares in Bank of China by Temasek Holdings.
However, there needs to be caution as conventional approaches to M&A are inappropriate in China when one considers the peculiar dynamics of the Chinese market. Furthermore, the central government still prohibits majority foreign ownership in more than 25 industries, including banking, telecommunications, and auto manufacturing.
Chinese owners often desire control, or the appearance of control, for social or personal reasons. This helps explain why corporate control is deemed more important than ownership to the Chinese. By ensuring the Chinese locals to be in the commanding position, one can be assured of having the ability to acquire market knowledge and know-how, thus establishing networking locally and to further help develop the business through such alliances. Like what the locals say, having connections to others (guan xi) are of utmost importance when doing business in China.
Nonetheless, deals can still be structured to give an investor adequate board representation even though majority foreign ownership can be limited within the running of the firm. These foreign investors can choose to exert control through other means like the usage of governance provisions. This is to ensure that their board standing reflects the true economics of the transaction and that they have a say in the election of independent directors. Alternatively, foreign investors can also insist on the right to fill significant posts, for example, chief financial officer, or they can outline the important areas for decision making, followed by establishing the appropriate mechanisms so as to exercise control. In reality, multinationals often use a combination of methods coupled with an agreement in order to increase ownership and control over time.
The other tricky problem with cross border M&A is the difficulty in determining a correct value for the company due to a lack of appropriate and relevant past M&A cases. Traditional methods like discounted cash flow is not suitable as the ever-changing dynamics of the Chinese market will make the cash flow forecasted to be inaccurate. Therefore, investors should use a wide range of valuations in assessing the outcomes. Moreover, the company should also base its decisions on the way China fits into the overall company and industry strategy, like what OSIM did.
The presence of external factors such as industry growth and the cost of key inputs will cause differences in valuations. When such opinions differ, investors should structure a deal that factor in the cost of such uncertainties in order to minimize any further risks.
There exist much opportunities in China, and companies expanding into China may reap significant rewards. China is undergoing a period of evolutionary process and with constant economic progress, businesses needs to realize the significance that such impacts can have on and affect their business models. For a wide range of reasons, businesses seeking expansion plans into China should expect a high level of liability and risk exposure. The team needs to have sufficient time to conduct research to ensure due diligence, and hiring accounting and legal advisers with local experience are absolutely essential. This group of people with local knowledge is important in helping the investor with issues like asset ownership, land use rights, and tax and financial liabilities and benefits.
Careful planning is the key to ensuring success, and BDO is able to utilize our global presence to help local businesses in their expansion plans or M&A through our member firms in China.
---------------------------------------------------------------------
References:
James Ahn, Thomas Luedi, and Isiah Zhang, How to make M&A work in China, The McKinsey Quarterly, January 2006
Connecting Business with HSBC Series, The Business Times, 12 April 2005
So here I present my article!
-----------------------------------------------------------------------
Expanding into China
Gerald Toh for BDO Raffles
As a country with varied growth rates for different geographical areas, coupled with a booming and fast growing economy, China proves to be an attractive choice for local businesses seeking expansion plans in recent years. Local firms can leverage on their strength in various sectors and carve a niche for themselves in the world’s fastest growing economy.
Along with China’s rapid growth emerges a burgeoning group of middle class population with higher income. This translates into a higher demand for lifestyle-related products and services. Singapore firm OSIM realized the importance of China and how it is vital to the company’s expansion and growth strategies. Although OSIM was faced with difficulties in the initial stages when it first started in China in 1994, it has since enjoyed steady returns from the country ever since the rapid opening up of the economy of China.
OSIM managed to attain its success in China by sticking to what it does best; by heading into a sector which is their core competency in Singapore. This gives OSIM comparative advantage over its competitors and ultimately, help established the successful branding of its products. It is due to OSIM’s comparative advantage that enables the Chinese to have the ability in adapting OSIM and make it a success.
Similarly, Singapore businesses with an edge in service industries should strive to expand their operations into China, where the level for their service sector is still at its formative years. It’s aging and populous nation needs expertise in medical care and education. Another area is the growing tourism industry. With a huge domestic market internally, and the increasing popularity of China as a tourism destination, hotel management services is another segment which Singapore firms can seek to take advantage of.
But the vast country has great differences across various provinces that the average investor may not know which part of China to invest in. An alternative to seeking out an appropriate individual investment option is to go into a partnership, or through appropriate merger and acquisitions (M&A) with a Chinese company. A recent study published on McKinsey Quarterly revealed that M&A deals between Chinese and foreign firms accounts to less than 12 percent of total foreign direct investment for China. This is in contrast to the average 47 percent for the ten countries, apart from China, that attract the greatest amount of foreign capital worldwide.
The same study also revealed that with the removal of limitations on investment in many industries, the number of cross-border M&A activity is poised to increase, the most recent example being the purchase of 5 percent shares in Bank of China by Temasek Holdings.
However, there needs to be caution as conventional approaches to M&A are inappropriate in China when one considers the peculiar dynamics of the Chinese market. Furthermore, the central government still prohibits majority foreign ownership in more than 25 industries, including banking, telecommunications, and auto manufacturing.
Chinese owners often desire control, or the appearance of control, for social or personal reasons. This helps explain why corporate control is deemed more important than ownership to the Chinese. By ensuring the Chinese locals to be in the commanding position, one can be assured of having the ability to acquire market knowledge and know-how, thus establishing networking locally and to further help develop the business through such alliances. Like what the locals say, having connections to others (guan xi) are of utmost importance when doing business in China.
Nonetheless, deals can still be structured to give an investor adequate board representation even though majority foreign ownership can be limited within the running of the firm. These foreign investors can choose to exert control through other means like the usage of governance provisions. This is to ensure that their board standing reflects the true economics of the transaction and that they have a say in the election of independent directors. Alternatively, foreign investors can also insist on the right to fill significant posts, for example, chief financial officer, or they can outline the important areas for decision making, followed by establishing the appropriate mechanisms so as to exercise control. In reality, multinationals often use a combination of methods coupled with an agreement in order to increase ownership and control over time.
The other tricky problem with cross border M&A is the difficulty in determining a correct value for the company due to a lack of appropriate and relevant past M&A cases. Traditional methods like discounted cash flow is not suitable as the ever-changing dynamics of the Chinese market will make the cash flow forecasted to be inaccurate. Therefore, investors should use a wide range of valuations in assessing the outcomes. Moreover, the company should also base its decisions on the way China fits into the overall company and industry strategy, like what OSIM did.
The presence of external factors such as industry growth and the cost of key inputs will cause differences in valuations. When such opinions differ, investors should structure a deal that factor in the cost of such uncertainties in order to minimize any further risks.
There exist much opportunities in China, and companies expanding into China may reap significant rewards. China is undergoing a period of evolutionary process and with constant economic progress, businesses needs to realize the significance that such impacts can have on and affect their business models. For a wide range of reasons, businesses seeking expansion plans into China should expect a high level of liability and risk exposure. The team needs to have sufficient time to conduct research to ensure due diligence, and hiring accounting and legal advisers with local experience are absolutely essential. This group of people with local knowledge is important in helping the investor with issues like asset ownership, land use rights, and tax and financial liabilities and benefits.
Careful planning is the key to ensuring success, and BDO is able to utilize our global presence to help local businesses in their expansion plans or M&A through our member firms in China.
---------------------------------------------------------------------
References:
James Ahn, Thomas Luedi, and Isiah Zhang, How to make M&A work in China, The McKinsey Quarterly, January 2006
Connecting Business with HSBC Series, The Business Times, 12 April 2005
posted by gerald @ 12:12 PM
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