RSM Resources

At first glance, the advantages of acquiring a manufacturing operation in China seem clear-cut.

Laborcosts are a tiny fraction of what they would be in the United States:Average manufacturing wages in China were 57 cents an hour in 2002 — amere 3 percent of average U.S. wages. China’s manufacturing workforce,more than 100 million strong, is the world’s largest. With minimalinflation and gross domestic product hovering close to double-digitgrowth for more than a decade, it’s fair to say China’s economy isbooming. What’s more, the Chinese government has intentionally relaxedrestrictions in recent years to encourage foreign investment.

Somemidsized companies also have been drawn into the hunt for acquisitionsin China because a major customer has opened up shop on the mainland,and they’ve insisted their suppliers follow suit. Others are making themove because they’ve identified acquisition targets they believe canhelp them gain access to the entire Asia-Pacific market.

Ifyou want to acquire a real winner, and not just a long-distanceheadache, you’ve got to go into the process with your eyes wide open todifferences between acquisitions in the United States and China. You’llalso need an effective post-acquisition strategy that will keep yournew operation on the right track.

"The opportunity in China isreal," says John Tomaszewski, vice president and founder of NaviAsia, aChicago-area consulting firm that specializes in helping small- andmedium-sized companies with strategic sourcing — including acquisitions— and supply-chain management in China. "In fact, it may be greaterthan many U.S. companies realize, but so too are the challenges —starting with distance."

Different playing fields
Whenworking on acquisitions, many midsized companies work with consultantsfor the additional expertise they need in areas such as accounting andtax, operations and business strategy, and regulatory and legalrequirements. Because of the drastically different business cultures,however, it is essential that the people you work with have extensiveexperience located in China. One way to gain needed expertise is toform a joint venture with a partner experienced in doing business inChina instead of acquiring a Chinese company.

"With all of theinterest in China these days, it seems like anyone who speaks thelanguage or went to school in China or has a relative living thereconsiders himself an ’expert,’" Tomaszewski says. "Steer clear ofone-man shops and newly proclaimed experts. You want to work with firmsthat have a real and substantial presence on the ground in China."

Things are changing so fast that firms which don’t have a presence in China can’t keep pace, Tomaszewski says.

"Inthe U.S., companies are typically reactive, looking at acquisitions asopportunities arise," he says. "In China, you have to be more proactivein order to identify good acquisition opportunities. That means doinglots of searching."

That searching or discovery process can bepretty overwhelming in China, where many obstacles that don’t exist inthe United States may get in the way. Following are overviews of someof these obstacles.

A rapidly evolving marketplace. Afew years ago, the Pearl River Delta was hot. These days, it’s theYangtze Delta. If you acquire a company in the wrong location, you mayend up paying far more than you would for a similar operationelsewhere. Or you might lack good access to the infrastructure you need.

Limited access to information. Whetheryou want to do background checks on employees or investigate logisticsand shipping costs, you’re going to find useful information much harderto come by in China than in the United States. You need to work withpeople who have both the local contacts and the experience to dig outthe right kinds of information.

Inconsistent and inadequate financial information. Whatpasses for generally accepted accounting principles in China would beconsidered unacceptable in the United States. As a result, performingdue diligence is more difficult and more time-consuming.

A complex and rapidly changing regulatory environment.The laws and regulations governing business in China change almostdaily and are truly foreign to Westerners. Acquired companies may berequired to have a number of permits or stamps to do business — butacquirers don’t automatically receive these kinds of documents.Contracts and other legal documents typically don’t carry the sameweight in China as they would in the United States, and your avenues ofrecourse for breaches and disagreements are much more limited.

Arelated problem is what is known as "carve-out issues." Many foreignacquisitions in China consist of acquiring small pieces of state-ownedenterprises (SOEs). These SOEs are often huge conglomerates ofunrelated businesses. In such cases, it is often difficult for theacquiring company to determine exactly what it is they’re getting, whatit’s worth, and what rights and obligations come with the acquisition.

East versus West. Finally,the basic cultural differences between China and the United States —including language, tradition, business processes and work habits —give rise to innumerable other nuances that businesses must address asthey arise.

One of the most common mistakesU.S. companies make in acquiring Chinese companies is improperlyevaluating how an acquisition will enable them to compete within China.For example, an acquisition that enables the acquiring company toreduce production costs by 20 percent looks mighty good in terms ofcompeting against Western companies. But, it doesn’t look nearly sogood in comparison to a Chinese company that is already producing thesame products 40 percent cheaper.

Another common pitfall toavoid is undervaluing your brand name. U.S. companies often don’tunderstand how to negotiate successfully with the locals in China. Andthey don’t realize how valuable their brand name can be in a businessculture that isn’t always used to companies that pay on time, deliverconsistently high-quality products, and, in general, operate ethicallyand honestly. As a result, they often give up more than they need toand get less value in return.

Pitfalls also abound in terms ofaccurate financial reporting and analysis, taxes, repatriating profitsand liquidating investment capital. Structure any acquisitions in Chinato help minimize exposure to these risks. That means working withfinancial, tax and legal advisors with experience in China.

Thebottom line? If you want to successfully integrate your new operationin China and maximize its potential, you have to build a trust-basedrelationship with its managers and employees. It takes a bit ofpatience.

"The Chinese culture is 5,000 years old,"Tomaszewski says. "They tend to look at things over the long term andact accordingly."