China Inc's on the prowl worldwide

Updated: 2016-03-28 07:18

By Wang Zhuoqiong(China Daily)

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China Inc's on the prowl worldwide

Workers assemble air conditioners at a Haier Group's factory in Zhengzhou, Henan province. [Photo provided to China Daily]

Rising labor costs, global ambitions and need for brands and technology give outbound M&A activity momentum

And so, yet another Chinese company (Midea Group Co Ltd) has agreed to acquire yet another foreign company (the white goods business of Japan's Toshiba Corp), creating a sense of deja vu.

Experts on mergers and acquisitions, or M&A, reckon the March 17 agreement reached by China's leading home appliances maker could eventually lead to a transaction worth more than $1 billion. That would make it the latest, but certainly not the last, in a string of recent overseas M&A deals by Chinese firms.

Toshiba is among the Japanese makers of consumer appliances that are in a financial soup, and in February, a troubled Sharp Corp accepted to be taken over by Taiwan's Foxconn for $6.24 billion.

According to Euromonitor International, both Sharp and Toshiba mirror some consumer-oriented Japanese companies' inability to extricate themselves quickly from a financial quagmire.

Their inability provides opportunities for expansion-minded foreign companies on the prowl.

And for Chinese companies facing other kinds of trouble, like rising labor costs at home and poor visibility globally, nearby Japan appears attractive not only because of its proximity but because the country boasts many well-recognized brands in consumer electronics.

"Midea would like to expand into other regions such as North America, Western Europe and other countries in the Asia Pacific, since consumer appliances' sales volume growth has started to slow down in China," said Euromonitor International in a report.

Midea is seeking premiumisation, something that its products currently lack. Top product quality translates to global acceptance of a brand. Technology is key. Acquiring a company that could bring all those to the table would be a strategic fit.

For Midea, Toshiba is a good match: The latter ticks all the boxes of technology, quality and brand.

The deal comes at a time when rising labor costs in China are hurting companies such as Midea. The advantages that original equipment/design manufacturers, the so-called OEMs and ODMs, enjoyed so far, have been decreasing of late.

Having alternative production plants in countries like Japan that offer a labor-cost advantage would benefit Midea, according to Euromonitor International.

If the deal goes through, Midea can take advantage of Toshiba's existing distribution networks, sales volume share, and a research and development team. That would strengthen Midea's presence in Japan and Southeast Asia where it does not have a strong foothold yet.

According to Euromonitor data, Midea had a 4 percent share of the world consumer appliance market in 2015. It ranked No 2 behind Philips. If it completes the Toshiba deal, their combined volume share will be 5.2 percent, higher than Philips' 5 percent.

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