Direct investment a better way to go global

• Source: Global Times
• [22:36 July 02 2009]
• Comments

Although the cost of foreign purchase is relatively low, however, the success rate is low as well. It’s not only because of the drawbacks of Chinese enterprises, but also the universal rule of mergers. To most Chinese enterprises, the opportunities came as a sudden surprise that they were not fully prepared for, since they were not familiar with multinational management and local customs, traditions and rules.

On the other hand, the general success rate of mergers and acquisitions is about 20 to 30 percent. According to statistics of the McKinsey, less than 50 percent of mergers brought benefits to the buyers in the past 20 years, and the failure rate for mergers initiated by Chinese enterprises stands at 67 percent.

Recently many Chinese companies showed interest in purchasing foreign automakers. This is unlikely to succeed because Chinese automakers are in the stage of being purchased by foreign companies, not the other way around. Additionally, it is difficult to break foreign restrictions and monopolies when it comes to buying a resource company, which was the fundamental reason for the failure of the proposed Chinalco-Rio Tinto acquisition.

Without any doubt, Chinese companies should go global. But foreign purchase is not the only way. Many foreign companies chose to enter the Chinese market by investing directly. It saves them money on early management, and when their enterprise is mature enough they can gradually go local. This model should be considered by more Chinese companies, because it promises a higher success rate than merging.

For instance, neither TCL nor Lenovo had a happy ending in merging, but companies like Haier and Lifan Group made their success by building their ground steadily in foreign markets.