EY & CMAA jointly released China Go Abroad (6th Issue): Strategic collaboration - How inclusive management helps Chinese enterprises win overseas
10 August 2017, Hong Kong
- In the first half of 2017 (H12017), Chinese companies became more rational about their overseas investment and there was a slowdown in outbound investment growth on a year-on-year basis. They have started to use innovative overseas financing channels to invest abroad. EY remains positive about China’s outbound investment over the long term and expects that China’s outward FDI flows will surpass those of the US in the next decade.
- Cultural integration is the biggest challenge faced by Chinese companies when they operate abroad. Chinese companies should carry out ‘cultural integration’ rather than ‘cultural migration’.
- EY believes that creating a diverse and inclusive business environment can help Chinese companies navigate the challenges arising from cultural integration.
Today, EY and the China Mergers & Acquisitions Association (CMAA) jointly released the 6th issue of EY’s China outbound investment report China Go Abroad: Strategic collaboration – How inclusive management helps Chinese enterprises win overseas. The report points out that China’s outbound investment slowed down in H12017, while Chinese companies going abroad became more rational and further optimized their investment structure. EY remains positive about China’s outbound investment over the long term and predicts that China’s outward Foreign Direct Investment (FDI) flows will surpass those of the US in the next decade.
The report finds that cultural integration is the biggest challenge faced by Chinese companies when they are operating abroad, followed by strategic alignment and local talent acquisition and retention. EY suggests that Chinese companies should focus more on post-investment integration, leverage the synergies generated from mergers and acquisitions (M&As), develop talent management program for inclusive development and create a diverse business environment to build mutual understanding and develop mutual respect for people with different cultural backgrounds.
In 2017, as political and economic uncertainties have increased, such as Brexit and the executive order signed by US President Donald Trump to “Buy American, Hire American”, they have created potential challenges for Chinese companies investing overseas. According to the data released by the Ministry of Commerce (MOFCOM), China’s non-financial outward FDI flows in H12017 reached US$48.2 billion, down 46% on a year-on-year basis.
Loletta Chow, Global Leader of EY’s China Overseas Investment Network (COIN) says: “China’s outward FDI flows slowed down, but compared to 2016, its structure was better optimized in H12017. Outbound investment in the real economy, especially in emerging sectors, has increased significantly, reflecting a stable and positive trend. Furthermore, as Chinese companies have accumulated extensive experience in overseas investment, many of them are exploring innovative financing channels, such as leveraging Hong Kong as a platform or using the offshore assets of overseas entities for financing, leading to a statistical decrease in outward FDI flows.”
Figure 1: China’s overseas M&As by sector for H1 2016 and H1 2017, by value (US$ billion)
Source: Mergermarket, including data for Hong Kong, Macau and Taiwan
*For the TMT sector mentioned in this report, the “M (Media)” includes media and entertainment
According to Mergermarket, Chinese companies announced 302 overseas M&A deals worth US$65.7 billion in H12017, down 51% compared to the same period in 2016. There were three main reasons for the decline in China’s cross-border M&As. Firstly, Chinese regulators have issued policies to prevent Chinese companies from making irrational outbound investment. Secondly, compared to 2016 when a series of large deals, including Syngenta, dominated the M&A market, there was a decline in both the size and number of deals. Thirdly, increased geopolitical and economic uncertainties have led Chinese companies to be more cautious in investing overseas.
Chen Shuang, Rotating Chairman of CMAA and Executive Director and CEO of China Everbright Limited says: “We believe that the prospect for China’s outbound investment remains positive over the long term despite some fluctuations in the short run. Recent data shows that China’s outbound investment is steadily slowing down and Chinese companies are becoming more rational. With various sources of financing and increasingly diversified ownership of Chinese investors, financing channels are becoming more varied. Buyout funds with deep insights and resources are playing an increasingly important role in overseas mergers and acquisitions, as they can help Chinese companies manage risks more effectively and succeed overseas.”
Data from MOFCOM showed that China’s non-financial FDI flows along the Belt and Road reached US$6.6 billion between January and June this year, representing 13.7% of the total non-financial outward FDI flows and increasing by 6%. Meanwhile, the amount of newly signed engineering, procurement and construction (EPC) contracts with countries along the Belt and Road reached US$71.4 billion in the same period, up 39%. During the “Belt and Road Forum for International Cooperation” (Forum) earlier this year, Chinese President Xi Jinping pointed out a clear path for international cooperation, clarified action plans and shared a list of more than 270 detailed outcomes. Furthermore, China has committed to host the second Forum in 2019. All these initiatives provide important support for Chinese companies seeking to “go abroad”. EY expects that as these outcomes are being implemented, China will increase investments in countries along the Belt and Road. EY also believes that China will remain well capitalized and that its outward FDI flows will surpass those of the US in the next decade.
EY recently conducted a survey among Chinese enterprises that are most active in outbound investments and are headquartered in China’s 17 provinces, municipalities and Hong Kong SAR. Results show that the greatest contributions made by overseas operations are “increased brand awareness (72%)”, “increased market share (52%)” and “improved technology and production (50%)”. Loletta Chow says: “Chinese companies need to keep their focus on brand, market and visible benefits delivered by a technology-oriented global expansion strategy, as well as performing regular reviews of whether or not their overseas operations fit in with their strategic goals.”
About 70% of respondents said “cultural integration” is the biggest challenge faced by Chinese companies when they are operating overseas, adding that both investors and investees showed unwillingness to change their established culture or had difficulty in doing so. They believe cultural conflicts may jeopardize the operational effectiveness of Chinese companies operating overseas, and impede them from pushing forward their globalization strategies if they cannot bridge the cultural gap based on the potential synergies available.
To overcome the difficulty of cultural integration, EY suggests Chinese companies take the following steps: make efforts to understand the differences, evaluate the gaps, strengthen communication and build a diverse and inclusive business environment to help manage their global teams. As for strategic alignment, Chinese companies need to analyze the vision and strategy of targets prior to investment, to ensure careful selection and a deep understanding of the macro economy in the targeted market. Regarding post-investment integration, Chinese companies need to develop a detailed coordination plan and put it into action, striving for strategic alignment. Chinese companies also need to understand what they should do to retain the investee’s core talent, develop a tailored retention plan and embed diversity and inclusiveness into post-investment process design and change management.
Figure 2: D&I considerations in investment M&A
Loletta Chow concludes: “The proportion of foreign employees working at Chinese companies is far lower than that at multinational companies of developed countries. Chinese companies understand that bridging the cultural gap is the key to success in overseas M&As, while many of them see ‘cultural integration’ simply as ‘cultural migration’ in their practice.” She adds: “Diversity and inclusiveness (D&I) are critical if Chinese companies want to succeed in their overseas investments. Companies need to embed these two elements into the entire investment lifecycle from pre-investment planning to post-investment integration. D&I should be reflected in the following four areas: risk and benefit, regulation and compliance, finance and control, and talent and culture. In doing so, companies are more likely to achieve better cooperation, retain talent, develop greater market shares and succeed in new markets. Creating a diverse and inclusive business environment can help companies become flexible in managing multinational operations. As such, companies can better allocate and manage global resources and become even more competitive. EY believes that China’s outbound investment will be more normalized and healthy.”
Figure 3: Major infographics of China Go Abroad (6th Issue)
1. World Investment Report 2017 , UNCTAD, only include data of mainland China
2. Mergermarket, including data for Hong Kong, Macau and Taiwan
4. The official website of the Belt and Road Forum for International Cooperation
5. UNCTAD, EY analysis
The 6th issue of EY’s China outbound investment report China Go Abroad is jointly released by EY and CMAA. Both are committed to leverage their respective advantages in overseas investment to share valuable insights with Chinese companies, helping them create an inclusive environment to achieve win-win outcomes and sustainable growth on their internationalization journey.
The China Overseas Investment Network (COIN) links EY professionals around the globe, facilitates collaboration, and provides consistent and coordinated services to our clients with overseas investment from China. Building on the existing China Business Group in the Americas, EMEIA, Asia-Pacific and Japan areas, COIN has expanded our network in 66 countries and territories around the world. Our globally integrated structure enables us to deploy dedicated teams with strong local experience, and profound industry knowledge to provide our clients with one-stop professional service from planning stage to execution stage to integration stage, helping our clients navigate through global markets.
CMAA is a non-profit and non-government organization approved by the State Council and the Ministry of Civil Affairs. Founded in September 2004, CMAA is headquartered in Beijing with branches in Shanghai, Jiangsu, Fujian, Guangdong, Shandong, Hong Kong, Guizhou, Zhejiang, Liaoning, Henan, Japan, US and other areas. CMAA provides governments and enterprises at home and abroad with a wide range of investment banking services including strategic consultation, M&A practice, management consulting, assets appraisal, financing arrangement, legal and finance services. CMAA connects with elite professionals from all industries and is committed to driving the development of China's M&A market standardization and maturity, supporting Chinese enterprises in their globalization process.
From left to right:
Loletta Chow, Global Leader of EY’s China Overseas Investment Network (COIN)
Shuang Chen, Rotating Chairman of China Mergers and Acquisitions Association, Executive Director and CEO of China Everbright Limited
Jennifer Xie, EY’s Strategy and Development Leader in Greater China, Vice Chairman of China Mergers and Acquisitions Association
Over 50 media attended the press conference held in Hong Kong