Stronger yuan could dramatically boost China's overseas acquisition drive PH
23 June 2005
Agence France Presse
Copyright Agence France-Presse, 2005 All reproduction and presentation rights reserved.
BEIJING, June 23 (AFP) -
The emergence of China's corporate superstars as avid buyers of overseas assets, highlighted in CNOOC's bid for Unocal, could get a tremendous boost if the yuan were to be revalued, analysts said Thursday.
The scenario of a stronger Chinese currency could see a repeat of the situation of the late 1980s, when Japanese enterprises went on a global buying spree on the back of the then seemingly invincible yen.
"If the yuan rises, you're going to see something similar to the post-1985 Japanese craziness of acquiring everything abroad," said Henry Yeung, an expert on Chinese business globalization at the National University of Singapore.
"Acquisitions would become cheaper -- but at the moment the currency issue is everyone's guess."
The yuan, tied to the US dollar for the past decade at around 8.28, is widely seen, especially by Washington, as being undervalued and giving Chinese exporters an unfair advantage which should be ended by a revaluation.
At the same time, it also makes overseas purchases relatively expensive for the nation's companies.
That did not, however, prevent state-run energy firm China National Offshore Oil Corporation (CNOOC) announcing Thursday a bid for US oil major Unocal of 18.5 billion dollars cash, trumping a rival offer by Chevron Corp.
If successful, it would represent the biggest overseas acquisition by a Chinese mainland company, dwarfing Lenovo Group's 1.25-billion-dollar takeover of IBM's global personal computer business earlier this year.
Prior to that, other headline-grabbing deals included television maker TCL's tie-up with French company Thomson on its TV and DVD operations and China Netcom's purchase of the Asian unit of fiber-optic cable operator Global Crossing.
CNOOC is trying to take over Unocal at the same time as Chinese refrigerator maker Haier bids for another American icon, white goods producer Maytag Corp -- and the reaction stateside has been immediate and hard-hitting.
Republican congressmen Duncan Hunter and Richard Pombo have called on US President George W. Bush to review the CNOOC bid for Unocal, citing it as a threat to America's strategic interests.
"This is also a face issue," said Belle Liang, a Hong Kong-based oil analyst at Core Pacific Yamaichi.
"Chinese companies are quite aggressive now in mergers and acquisitions, just like Japan was several years ago. Now the mergers and acquisitions trend falls to China."
Ironically, the way Chinese companies are now spreading across the globe has striking similarities with the strategies of American enterprises in earlier decades.
Strictly speaking, they are not forced to expand abroad as they have not yet exhausted their huge domestic markets.
It is just that the timing seems right because currently they enjoy a strong position at home, enabling them to make profits they can in turn use to subsidize their international expansion, analysts said.
But it is a window of opportunity that will gradually close as more foreign competitors arrive in China and force local companies' profit margins to shrink.
"They have a few years of breathing space," said Yeung of NUS.
"If you want to grow further, you just have to do this. You're number one at home. What do you do? You stay at home? Fine but you will go down because someone will come in and beat you," he said.
Most Chinese companies have so far chosen the option of leapfrogging to multinational status by acquisitions of existing companies.
The other option would be the much slower method of organic growth, gaining a foothold in foreign markets little by little by building up plants, management teams and distribution networks from scratch.
By taking over foreign companies, they immediately take possession of all this, plus they get hold of more elusive assets in the form of widely recognized brands.
"Some of these brands which might have a long history in Europe or America, but may not be doing as well today simply because it may not have been very successful in terms of its own market expansion," said Yeung.
No Chinese business has enough money to buy tier-one names but even reasonably successful brands are better than nothing if you are either unknown or associated with low quality in your target market.
"In mature markets they cannot sell under their own brands," said Gilles Guiheux, director of the Hong Kong-based French Center for Research on Contemporary China in Hong Kong.
"So in a sense, these purchases reveal more the weaknesses of the Chinese companies than their strengths."