China corporate governance report: overseas acquisitions

Euromoney guides, June 2009

China’s companies have begun to branch out over the last 10 years, taking stakes in foreign enterprises or bidding to acquire them outright. They’re likely to do so much more in the years ahead: many of China’s biggest companies are cash rich at a time when western companies have seen their valuations slashed and are in many cases desperate for capital.

This trend has implications for governance practices both inside China and at the acquired companies. It brings into focus cultural differences and the learning curve Chinese companies must go up about accepted practices overseas.

But before one even gets to that, there is a broader problem of perception, chiefly a political concern. Many western countries have reacted with suspicion and distrust when Chinese companies have sought to buy assets in their countries. CNOOC’s attempt to buy Unocal is one of the clearest examples of this: see the interview for CEO and chairman Fu Chengyu’s thoughts on this. But one sees it again in Australia today with the reaction to bids for OzMinerals and Rio Tinto assets by China Minmetals and Chinalco respectively: many politicians voice very strong objections to these assets being sold to companies controlled by the Chinese state.

“For many years, the West has viewed China’s state-owned enterprises in black or white,” notes Jonathan Woetzel, a director at McKinsey in Shanghai. “In one portrayal, they are infiltrators to be viewed with suspicion.” He cites Chinalco’s bid for a stake in Rio Tinto, which raised fears about just what China was up to in trying to acquire Australian resources, as example. “The other version sees state-owned companies as muscle-bound goons: without the smarts of a private company, but with plenty of brawn. In this characterization, they are relics of a failed economic experiment that still dominate the national economy, controlling natural resources, utilities, and many other vital sectors. Their power and influence – particularly their links to the ruling Communist Party and government – give partners and competitors pause.”

Woetzel finds those stereotypes inappropriate, and says that using out-of-date impressions of Chinese state owned companies “masks both opportunities and threats facing multinationals. A more current view would, for example, have them consider more favourably the value that certain state-owned companies might bring to a global partnership.”

Lawyers and companies who work in China find western attitudes towards their companies curious. They argue that when Chinese companies acquire overseas they will be at pains to understand management and governance practices in those countries and will mirror them accordingly.

“For any Chinese company when they go overseas, it terms of corporate governance it will be much better for sure,” says Guy Cui, managing director at Hopu Investment in Beijing. “They are going to a new country, they have less experience, so before they go out they’re going to carefully study the laws and regulations in that country and make sure everything complies.

“China generally does not have a lot of experience internationally: it’s only opened 30 something years ago and very few people understand foreign countries,” he adds. “So if China acquires a company let’s say in Australia, this company will be the same as all other Australian companies: they will make sure they use a company lawyer, for example, whereas in China they might not.”

Jane Jiang at Allen & Overy in Beijing agrees. “Chinese clients before they go overseas are well aware they need to understand the legal regime wherever they go, and that will include the corporate governance requirements,” she says. “I think the local management of Chinese companies when they go overseas are pretty professional and well prepared for the changes they have to go through.”

Chinese acquisitions overseas have run into criticism, but so far it has rarely been for governance issues. One of the real landmark transactions was Lenovo’s purchase of the home computer division of IBM in 2004. This transformed the company into a truly global player and was an indisputable landmark for Chinese corporate development. Today the company runs two headquarters, in Beijing and in the USA, and its board structures look much like boards do in the west. (Chinese boards do tend to have a lot more people on them – for one thing, there’s one regular board of directors and another supervisory board – but while that differs from the US model, for example, it is very common in other western markets such as Germany.) Lenovo had to accept some restrictions as a result of American political concerns in order to get the deal through.