China buying up the world?

Woman buys Shuanghui supplied pork

This week, the largest acquisition of a US firm by a Chinese company was announced. Chinese pork producer Shuanghui International had an offer of $4.7bn accepted by US meat giant Smithfield Foods, the world's biggest pork producer.

Just a fortnight earlier, China's State Grid, the world's largest utility firm, said it was investing in a couple of companies in Australia. And China is also branching out into movies. The new owner of US cinema chain AMC theatres, Wanda, is Chinese.

Overseas investments by Chinese firms require permission from the government, because the country controls capital movements across its borders.

But that is rarely a problem if you are in an area favoured by the Chinese government, such as food, technology, resources, etc. In other words, when a Chinese firm wanted to buy Hummer, which makes the giant off-road vehicles, that wasn't approved.

In fact, the government is pushing for more overseas investment as part of its Going Global policy, which was launched in 2000.

The aim is to create multinational companies, with a particular emphasis in the areas that are important to support China's economic development.

There are macroeconomic benefits in helping China diversify its investments (see my earlier post on China's global ambitions). That is why, for firms that meet those aims, the Chinese state can offer to help by financing the deals using its foreign exchange reserves.

One way to create multinationals is to buy existing companies, especially trusted brands, as the Chinese companies hope the goodwill associated with these names will rub off on them.

Shop selling Lenovo products in China China's biggest PC maker, Lenovo, bought IBM's PC business in 2005

Lenovo's purchase of IBM's PC business, as well as the use of the IBM brand name for five years, is the most prominent example of this. The aspiration was to make Lenovo synonymous with a global brand known for its quality.

The deal also showcases some of the difficulties, however. A key one is that businesses that are for sale aren't usually the most successful ones.

So what firms such as Lenovo try to do is to make the products more cheaply. A typical Chinese merger and acquisitions strategy involves cutting costs. Plus, the product can be sold to a larger market. A Chinese owner can offer entry into one of the biggest consumer markets in the world. This can work, but can't be taken for granted.

Value of trust

Nowhere is the importance of brand and quality more apparent than in the area of food products.

Shuanghui's reputation suffered when a banned chemical, clenbuterol, which makes meat leaner, was found in its products.

This may explain why the Chinese firm bid $34 a share for Smithfield, more than a third higher than the value of the shares before the bid was announced.

Of course, as pork is a staple of the Chinese diet and the country will consume more meat as it grows richer, the growth potential is sizeable.

With outward investment in quality and brands an important part of China's growth strategy, this may not be the biggest deal for long.

So is China buying up the world? Well, not quite.

China still receives more investment than it invests overseas. But big Chinese takeovers such as these are certain to keep making headlines.

Linda Yueh Article written by Linda Yueh Linda Yueh Chief business correspondent

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  • Comment number 232.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 231.

    As long as the Chinese owners allow the companies to carry on and support the employees what is the problem?

    If they ensure that the business model and product continues to successful that's fine.

    The only problem that the employees should worry about is if the Chinese squeeze them on wages and rights otherwise there is no difference between Chinese or another country running the business.

  • rate this

    Comment number 230.

    I don't mind them buying up the world, as long as they buy some shares that I hold! If the Chinese state have all these vast amounts of reserves on tap it is no wonder that they are buying up companies in a more dynamic western setting, just like the oil states have been doing for decades. Just watch out if they ever buy any media stocks, such as newspapers, TV chanels etc..........

  • rate this

    Comment number 229.

    224. rideforever
    Mankind is quite insane.

    Nobody knows what they are doing. Ever.

    Even if they think they do at the time - try looking back 30 years on, and wondering if you'd make the same decisions again - knowing what you know now.

    i don't think so

  • rate this

    Comment number 228.

    Let's see if this version gets "moderated"! Screen shots of all moderated postings being posted on Flickr.

    As I was saying:

    China has a hugely important place to play in the near future world and will soon be teaching the BBC the meaning of GENUINE media objectivity, even if that seems a distant fantasy just now.

    Will I be eating Smithfield's pork anytime soon? What do you think!


Comments 5 of 232



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