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As mentioned in Chapter Three a high failure rate is associated with M&As (Bagchi and Rao, 1992, Carwright and Cooper, 1995; Bower, 2001; Langford and Brown III, 2004; Du, 2009). With very little experience in overseas M&As, the question is whether Chinese manufacturers can go global quickly and gain respect for their brands and products through acquiring foreign brands and assets. Observing previous examples (Table 5.1), the answer is that it is probably not what Chinese manufacturers are looking for.

From previous experience (Table 6.1) it is clear that the targets of overseas M&As by Chinese manufacturers were all well-established brands and companies. However, these targets all have fundamental problems with their business. Two examples are Volvo, who tried to get the economics scales; and IBM, who were losing business in the PC market.

Collected by Author

Table 6.1 Overseas M&As by Chinese Manufacturers Year Acquirer Industry Target

1999 Pearl River Piano Group

Music instrument

Ritmuller, German

Top 10 European piano brand

2001 Haier Home

Appliances

Menghetti, Italy

2002 TCL Electronics Schneider Electronics, German Including brands: SCHNEIDER &DUAL

2002 Haixin Group Fabric Glenoit Corp‘s specialty Fabrics U.S

Including Trade mark

2002 Shanghai Automotive Industry Corp.

Automobile GM-Daewoo Moto Alliance (equity stake) Korea

2003 Shanghai Electric Group

Machinery Akiyama Publishing Machinery, Japan

2003 BOE Technology PC monitor TFT-LCD

TPV, Korea (26.4% stake hold by BOE)

Hydis, Korea

2004 Lenovo Computers IBM PC Unit, U.S

2004 TCL Consumer

Electronics Mobile Handset

Thompson, France. Manufacturing of RCA and Television and DVD products. (Thompson still controls the brands and licenses to TTE/joint venture company). Alcatel, Mobile Handset, France.

2004 SAIC Automobile Ssangyong Motor, Korean 48.92% stake

2005 Nanjing Automobile Group

Automobile MG-Rover, a century of world- renowned British car company

2010 Geely Holding Group

Automobile Volvo Cars from Ford Motor Company

Previously, about 70% of Chinese overseas M&As failed (Xin, 2009; Bin and Lin, 2009) which resulted in huge losses for Chinese enterprises. A high failure rate of overseas M&As by Chinese companies has also been reported by Xin, (2009), Bin and Lin, (2009) which is higher than the M&A failure rate of companies from developed markets. The overseas M&As by Chinese manufacturers have not been very successful, especially compared to foreign companies' achievements in China.

This has been exemplified by the decrease in profits for TCL after acquiring Thomson and difficulties for Lenovo after acquiring IBM's PC business. Many articles have been published which discuss the failures of these cases (e.g. Moon et al 2003; Liao, 2007; Deng, 2009). Unlike M&As by Western enterprises in the Chinese market, the targets of Chinese manufacturers‘ overseas M&As are almost all loss-making or bankrupt enterprises. It was revealed m in Chapter Two that Western companies tend to sell off ‗non-core‘ business to Chinese companies (Liao, 2007) and premium prices have been paid by Chinese manufacturers. Nevertheless, they have been struggling to turn around loss-making assets and second-tier brands in Western markets. Chinese manufacturers with their brand names have a long way to go before achieving internationalization through overseas M&As.

6.4 The Case of the Chinese Automobile Industry

As the most active acquirer from the list, the automobile industry is taken as an example to further investigate the situation of Chinese manufacturers‘ overseas acquisitions. There has been a noticeable increase in the interest shown by the Chinese automobile manufacturers in established brands in developed markets.

During the economic downturn, the global automobile sector experienced a difficult period and many automobile manufacturers struggled, while Chinese automobile manufacturing is on the increase and making deals to acquire technology and brand names. In recent years, Chinese automobile enterprises have purchased a number of global car manufacturers, such as MG Rover and Volvo. The Chinese automobile manufacturing industry was previously outdated; most automobile parts were imported and designs were copied from foreign companies. A large gap between Chinese automobile manufacturers and world-class levels of products and processes have been reported by the IBM Business Consulting Service (2005) in terms of a lack of design capability, production management capabilities and business management skills and experience.

In the past few years, the situation of Chinese automobile manufacturing has improved through joint ventures with well-established multinational enterprises. Access to cheap labour and the technology of foreign automobile manufacturers has enabled Chinese auto manufacturers to export auto parts and cars of reasonable quality. Further overseas M&As by Chinese manufacturers could lead Chinese automobile manufacturers to achieve higher brand awareness, advanced technology and to close the gap with world-class manufacturers. With ambitions to become a global automobile manufacturer, the Chinese government supported their automobile manufacturers in acquiring foreign automobile brands in order to strengthen Chinese automobile sector‘s position in a booming home market, and also to access mature markets. As discussed in Chapter Three, M&As can induce innovation (Prabhu et al, 2005), which leads to higher firm and brand values (Pauwels et al, 2004).

Chinese automobile manufacturers are making headlines and they are taking a big step in ‗going global‘. Recently, China mobile manufacturer Geely

completed the acquisition of 100 percent of Volvo Car Corporation from the Ford Motor Company. It was a historic day for Geely and for the Chinese automobile industry. This case has played an exemplary role for other Chinese manufacturers who hope to move into the international market via overseas M&As. With the core values of safety, quality, environmental care and the modern Scandinavian design of the Volvo brand, it is hoped that China Geely, a private, unknown Chinese automobile manufacturer, can make premium- priced products. Sichuan Tenfzhong, another Chinese automobile manufacturer intended to acquire the famous Hummer brand from GM. However, Tengzhong failed to obtain Chinese government approval to make the purchase.

6.4.1Problems

Using foreign brand names and technology, Chinese automobile manufacturers can expand their market share and promote their own brand name in the global market. However, the previous observations and experience discussed in Chapter Two show that the problems of Chinese overseas M&As seem to outweigh the benefits. In the automobile industry, there are also significant shortcomings with Chinese auto manufacturers‘ overseas M&As. Most of the problems and challenges identified in Chapter Two can be seen in mobile telephone manufacturing companies‘ overseas M&As.

Chinese automobile manufacturers have failed in their ambitions before. For example, China‘s largest automobile manufacturer SAIC suffered as a result of its purchase of SsangYong from Korea. Nevertheless, Chinese automobile manufacturers might learn from previous experience and improve their procedures. It might be too early to conclude whether Chinese automobile manufacturers are successful or not in overseas M&As, and there are still some

expectations for new acquisitions such as Geely‘s acquisition of Volvo.

The IBM Business Consulting Service (2005) criticized Chinese automobile manufacturers for not having competitive quality, brand perception and after- sales service, yet still being eager to try ‗going global‘. They point out ‗the new auto policy is seen as the wrong step for the domestic Chinese manufacturers since deregulation is important to nurture these companies’ (p.17). Similarly, Gao (2008) pointed out that Chinese OEMs ‗in their zeal to go global‘ fail to divert precious management attention away from product

quality; they do not pay enough attention to marketing and distribution; in addition, they go global before establishing strong market positions at home. He concluded that ‗such a quick-and-dirty approach risks permanently damaging brands‘. Gao (2008) suggested that insufficient quality-and-talent-

management approaches and the lack of strategic focus could ‗hinder the realization of the industry’s significant global potential’.

These problems had been also reported earlier by the IBM Business Consulting Service (2005) after a survey of the opinions of 20 leaders in Chinese industry and government as well as academic experts to gain a better understanding of how the industry looks today, and how they believe it will look in the future. In summary, a lack of corporate strategic planning by companies has directly affected quality, initiative and stability.

Quality

As in previous sections, quality problems are also apparent in the automobile industry. The IBM Business Consulting Service (2005) stressed that Chinese manufacturers should improve their product quality. China has suffered from several quality crises in the last few years, many of which have attracted a great deal of public and media attention. Chinese cars are no exception. The

poor record of Chinese automobile manufacturers on independent safety tests by Initial Quality Study (IQS) has seriously damaged the reputation of Chinese automobiles. One of the Chinese automobile manufacturers, Jiangling, scored no stars at all from the German Automotive Organization (ADAC). The negative effects of this can be fatal to Chinese automobile manufacturers. Most branded Chinese automobiles meet the needs of the low-price segment in the domestic market, yet they might face huge risks if they do not improve quality when dealing with global consumers with higher expectations after cross- board M&As.

Once again, as outlined in Chapter Three, quality is the most important factor for consumers when choosing (global) brands. Quality is a strict priority for any company to build a brand. Chinese automobile manufacturers must improve their quality and reliability; these are entry-level barriers. There is no question of the need to improve product quality by adopting foreign technology. However, Chinese automobile manufacturers should bear in mind that safety and product quality are an absolutely priority for companies; this is a basic requirement for branded products. In the absence of quality and reliability, whatever the automobile manufactures do, they will not succeed. Chinese automobile manufacturers need to implement a highly-effective quality control system before ‗going global‘; otherwise, they might fail in their ambitions in the international market after they enter through M&As. According to Aaker, the brand quality is closely related to brand association (1991) and a brand association is ‗anything linked in memory to a brand‘ (1996).

Chinese automobile manufacturers can learn some lessons from history, as the IBM Business Consulting Service (2005) illustrated, with regards to the case of Japanese and Korean automobile manufacturers‘ early exports of vehicles to established markets. Exporting inexpensive vehicles to mature markets such as

the United States by Japanese and Korean automobile manufacturers failed to meet local quality levels, and it took years to overcome the image of poor quality vehicles.

Management

At the same time, management skills are another key challenge for Chinese automobile manufacturers in post-M&As. Previous experience has shown that acquiring western companies is likely to bring management problems for Chinese automobile acquirers. They are unable to run an overall program, and have little experience of managing integrations and managing foreign staff. In other cases, such as those of Lenovo and IBM, they both required foreign managers to stay on and run the entire company from New York. Chinese companies lack good management teams and international experience. A lack of talent in management teams was reported by Liao (2007) in Chapter Two for Chinese companies making international acquisitions. Following growing overseas M&A activity by Chinese automobile manufacturers and other manufacturers, there is a high demand for experts in making M&As work in such overseas acquisitions. As Kwan and Sauvant (2008) observed, ‗It is an extremely difficult task for well-established and aspiring multinationals alike, especially in today’s competitive world market‘. For Chinese automobile manufacturers, it is even harder. Although Chinese automobile firms have developed rapidly, their competence is weak (Hu and Zhu, 2008).

Brand integration is also a crucial issue in post-M&As. In the in-depth interviews, a few interviewees pointed out that the acquisition of valuable foreign brands such as Volvo has absolutely positive effects on Chinese branding, yet the question is how to manage the brands acquired and how to operate after the acquisition. Based on previous experience, the experts pointed out that Chinese companies have been unable to manage and improve

the brand acquired. One good example they provided was Lenovo who purchased IBM‘s THINKPAD. They further suggest Chinese companies do not consider purchasing foreign brands‘ non-core business as a way to enter overseas markets. The lack of experience and ability in Chinese companies raises a problem for Chinese acquirers: how to run and reverse those noncore- businesses acquired from foreign brands.

Multinational companies are very experienced and mature in brand management and they tend to sell off their worthless sub-business brands.

Interviewee B.

Lack of management talent has been one of the main problems of Chinese companies in overseas M&As.

Interviewee J.

Technology

The copying of technology from foreign automobile manufacturers by Chinese automobile manufacturers is common. So far, as IBM (2008) pointed out, no Chinese automobile manufacturer has used its own technology to develop products and manufacture cars for foreign OEMs. IBM (2008) suggested that ‗Over the long term this approach will fall flat in export markets, particularly developed ones‘. An interviewee in IBM‘s (2008) survey with OEMs observed that:

by accumulating knowledge over time…it’s impossible to quickly develop these technology by ourselves

Chinese Manufacturer interviewee, from IBM (2008)

Chinese companies prefer to outsource some of their engineering and design:

There are lots of global engineering firms, especially from Europe, that can help with styling, prototypes and power-train development. These organizations can offer lots of experience, and they have no competing products with the Chinese manufacturers.

Chinese manufacturer interview, from IBM (2008)

In today‘s rapidly-changing market, companies need to react particularly quickly to market changes. Chinese automobile manufacturers should be inspired by foreign technology, yet be truly innovative. Chinese automobile manufacturers need to increase their R&D spending and focus on independent innovation, rather than introducing existing technology. The Chinese government has to strengthen its domestic capability for innovation and research; indeed, China‘s State Council tried to boost national R&D spending from 2 percent of GDP to 2.5 percent by 2010 (MacroChina, 2007).

To summarise, with the Chinese government‘s support, money has not been a problem in making deals; the most important challenge has been to manage the integration of people, brands, processes and systems into a cohesive entity. Hu and Zhu (2008) further criticized Chinese automobile manufacturers for overly relying on joint ventures, most of which lack capability in R&D. They doubt

the ability of Chinese automobile manufacturers to manage the foreign talent from those well-established giants in the overseas market. Gao (2008) strongly agreed with their point of view. He argued that those companies, particularly OEMs selling fewer than 300,000 cars per year, are not yet ready to go global. He was concerned that the risk is especially great for China‘s smallest automobile manufacturers i.e. those selling fewer than 100,000 units a year, and that they will face a difficult trade-off due to the cost of meeting stringent Western safety and emission standards which could price their vehicles beyond the reach of Chinese consumers.

Gao (2008) further suggested that Chinese OEMs need to re-examine their plans for ‗going global‘ and should not go global in a hurry. As he suggested, low pricing is not a way to go global. Instead, Chinese OEMs ought to improve pricing and margins by repositioning brands around value. Improving product quality is another essential step Chinese OEMs should take.

Working with global talent can explore ways of encouraging much greater cross-functional collaboration (Gao, 2008). However, for long term development, Chinese OEMs should focus more on cultivating and training their own talent with cross-culture knowledge and gaining experience of managing foreign talent. Finally, Gao (2008) suggests some OEMs need to focus on ‗building sustainable businesses, including marketing, sales and distribution activities, rather than having the ‗mind-set of pure wholesalers or exporters‘.

As discussed in Chapter Three, all transactions are faced with challenges. All multinationals are experienced in operating business on a global scale, but they still suffer from a high failure rate and unsatisfactory results in M&A activities. Chinese companies, especially manufacturers, are inexperienced, as Liao (2007) argued in Chapter Two.; they still have various fundamental problems

in their own businesses. To move their business forward, choosing non-organic strategies might shorten Chinese companies‘ path to globalization, but the question is whether they are able to meet their objectives, and whether they have the knowledge and skills in M&As, especially with regards to previously- unencountered global forces and rapid technological changes.

The above problems with Chinese OEM‘s are consistent with Liao‘s (2007) findings of problems regarding Chinese companies‘ overseas M&As. Du (2009) argued that many cases reveal that it is quite risky for Chinese automobiles to merge with loss-suffering companies in developed countries. He further pointed out that a series of cases demonstrate that it is a long and difficult task for developing countries to conduct transnational M&As. It takes decades for many automobile manufacturers to establish recognized brands, and Chinese automobile manufacturers are currently at a very immature stage of development whilst trying to shorten the process through overseas M&As. The concern is whether they are able to manage acquired assets such as brands. Improving China‘s own companies‘ brands and innovation are a basic strategy for the China automobile industry, at least in the domestic market. (Liu et al, 2008).

In the literature review it was pointed out that marketing and brands in M&A have been ignored in current literature (Jaju, et al., 2006). Although there is lack of evidence in the literature, M&As would certainly assist Chinese companies to leverage the strengths of existing brands. As Kumar and Blomqvist (2004) claim, taking the brand into consideration at the outset of a transaction would result in a stronger, more sustainable competitive advantage for a company to increase shareholder value. In the literature review it was also discussed that brand and merger integration is a very important task, and it requires decision makers to align brand and merger integration into its corporate vision and implementation. A ‗comprehensive thinking process of

integration to consider all factors from pre-M&A and forward branding to backward branding and post-M&A‘ is required (Yang et al, 2012:443). For