Ca- Investing In China

March 2011

Capital Agenda Insights

Investing in China: mapping JV integration to deliver value
Boardroom issues

• Do you plan to invest in China, but are
concerned about choosing the right Chinese partner?

• How do you deal with differences in

objectives and aspirations between you and your Chinese partner? the Chinese authenticity of the partnership when you are either amajority or minority owner?

The dynamism of the Chinese market remains a compelling story for western companies, as many continue to vie for stakes in Chinese companies. Yet, red-hot valuations and new regulatory regimes are contributing to a rapid change in the investment climate, and foreign investors need to be agile enough to consider different approaches and adapt their strategic optionsin China accordingly.

Ten years ago, there were numerous opportunities for multinationals seeking to acquire Chinese companies, although at that time, the strategic intent for most investments was access to low-cost manufacturing. Many Chinese companies in need of western technology and capital were willing to enter into partnerships in which the western buyer would have a controllingstake in the business. However, the investment climate has changed rapidly over the past few years. Rising valuations have been one of the key factors helping to transform the investment environment in China, as the country has become one of the most desirable destinations for investors in emerging BRIC markets. Chinese businesses are more cash-rich and have evolved rapidly over the pastdecade. Driven by strong economic growth, many listed Chinese companies have become increasingly successful, making them more expensive for potential foreign buyers. At the same time, new government regulations, including anti-monopoly laws and legislation on government procurement, are making deals more challenging. This is in part because the new regulatory climate has increased thebargaining power of local players, forcing potential amendments to the terms and scope of acquisitions of Chinese assets and reducing the benefits for multi-national corporations (MNCs) looking to acquire local companies with government contracts. Overall, Chinese companies and policy makers are becoming more savvy when dealing with western investors than they were 10 years ago. Many, ifnot all, are asking, “Why do we need you in our own market?”

• Are you concerned about maintaining

• Do you face the challenge of choosing
the right team to work in China and selecting the best candidates for key officer positions? with the local partner on integration priorities? creates the value that was anticipated?

• How do you maintain alignment

• How do you ensurethat the partnership

For all of these reasons, multinationals need to rethink their investment approaches in China, whether they are new entrants or dab hands at the market. Investing in minority stakes or forming joint ventures (JVs) is not uncommon these days, especially in sectors like consumer products, pharmaceuticals and retail. Such new approaches have implications not onlyfor the formation of investors’ inorganic growth strategies in China — namely, how the target companies will fit into their existing business — but also for their subsequent approach to integration and decisions on how best to extract value from these transactions.

The portfolio investment strategy is gaining popularity as many foreign buyers focus on a series of smaller acquisitions,partnerships or JVs instead of one transformative deal. One foreign company that has adapted to conditions on the ground in China while at the same time pursuing a long-term investment strategy is a Belgium-based global brewer, which took equity stakes ranging from 20% to 71% in a series of Chinese companies over a period of 20 years.

Planning for value: getting the initial steps...