China is not just the World Factory, most booming market for resources and consumer goods and the fastest growing economy in the world with an average GDP of over 10% in the past decade, it is also an attractive destination for foreign investment since China opened its door to foreign businesses in 1978. With China's access to WTO in 2000, less restriction on foreign investment, new infrastructure, supply of abundant quality and cheap labour, there are good opportunities to invest in a quality business or acquire businesses in China.
Acquiring or investing in an existing business is a way to quickly establish your own presence in China and leverage its facilities, resources and networks to access the Chinese market or conduct low-cost manufacturing in China and then export to the global market. With the global financial crisis, China presents a great opportunity for Australian companies to acquire export-oriented manufacturers especially in East China and South China. However, it is usually a complicated and exhausting process.
Here are some Must- knows you need to be aware of before take your first move to acquire or invest in a business in China:
- Take a strategic approach to acquire or invest in a business in China. Review your internal resources, corporate strategy and business strategy, and identify needs and gaps so as to better assess the option to acquire or invest in a business in China. You may start by reflecting such questions: what is the ultimate goal to do so? How does this acquisition/investment serve my long term business strategy? Is there any alternative? What resources can I allocate to this acquisition and investment? What attributes do I need from the acquisition target.
- When search for acquisition or investment target, bear in mind you are looking for the best fit rather than the cheapest or biggest. How does the target fit in your overall business strategy and China strategy? Do you have a criteria list of must-have and ideal attributes of acquisition/investment target?
- Do your research and search carefully among a large pool of acquisition/investment targets. When foreign companies enter China, they are often amazed by the "low price" they are paying to acquire a business without much comparison with other potential targets.
- Conduct comprehensive due diligence on your acquisition/investment target. The due diligence is much more than just financial auditing. You need to fully understand the target from tip to toe: industry reputation, business scope restricted in their business licence and industry licence, ownership of their venue and facilities, financial aspects, manufacturing capabilities, current ownership and corporate structure, marketing and sales capabilities, corporate culture, team, relationship with local government, supplier and client references, patents and trademarks, legal issues, default history, market scandals and brand crisis, etc. You may leverage a consulting firm to assist.
- Have a competent Chinese negotiator in your acquisition team who can understand all the cultural nuances and negotiation tricks of your Chinese target. Bear in mind: not any Chinese can do this job as not any Australian can negotiate a good deal in Australia. Find competent and experienced ones.
- Understand compliance and governance issues and smartly structure the deal and the organization. China restricts foreign investment in some industry sectors in term of maximum percentage of shareholding, especially financial sector, media and some critical resources sectors. Also these is restriction on the number of directors and normal practice on the appointment of Chairman and Managing Director.
- Do not under-estimate the complexity of the bureaucratic procedures and timeframe. As a foreign investor, you may have full proof of your qualification and financial capabilities and then go through Chinese government agencies to get all documents chopped. It will be more cost effective and efficient to appoint an experienced agent who knows where to knock at the door and get things done in China.
- Develop a profit repatriation mechanism and an exit strategy. You invest in China not to lock your money in China and be there forever. Think about the end from the very beginning. As Chinese saying says " without thinking on a long term basis, you will always have immediate trouble".
For more tips and information on doing business with China, visit Sara Cheng's blog: http://ChinaSolutions.wordpress.com