Slower growth back home, the pursuit of established brands globally with their management plus distribution channels in the West and the shift towards Global M&A Landscape, a consumer society are the main drivers.

2016 was a banner year for China´s overseas M&A deals. They were worth a combined USD 222 billion. The country´s outbound global M&A landscape deal volume surged by 142 percent. In late 2016, China´s leadership became nervous. It tightened the reigns on capital outflow because Chinese companies borrowed heavily to fund their overseas shopping spree. The country´s regulators started to crack down on “irrational” outbound global M&A activity. As a consequence, the deal activity slowed down sharply in early 2017, but only to rebound from March and April 2017 at double digit rates.

In historical terms the quarter to June 2017 became the second most active with more than $26 billion invested by Chinese companies in Europe alone. Overall, the first half of 2017 registered a third less deal activity by Chinese companies on the “Old Continent” because of the weak first quarter, according to a July 2017 deal analysis by EY. The paper highlights that Germany remains the number one target for acquiring companies in Europe, ahead of Great Britain and Italy.

In terms of the target industries, China´s state-owned and private companies are mostly interested in the industrial sector, as well as high tech and financials. Several recent deals have raised eyebrows in Europe and North America. Among them are Suning Commerce Group, China´s leading electronics retailer, acquiring famous Italian soccer club Inter Milan, and state-owned China National Chemical Corporation with its $43 billion offer for Swiss pesticide and seeds giant Syngenta.

From a German perspective, one of the most prominent and controversial deals was the takeover of industrial robot manufacturer Kuka by China´s appliance maker Midea Group. During the first half of 2017 China´s mixed conglomerate HNA Group became the global largest shareholder at Deutsche Bank, and Germany´s blood plasma product maker Biotest AG agreed to a takeover by Chinese investor Creat Group. Acquisitions of German companies by Chinese acquirers have become so contentious that the German government has decided in July 2017 to reserve a veto right to intervene when the target company is of strategic importance.

The apparent acceleration of global overseas deals by Chinese companies needs to be seen in context with the slowing growth of the Chinese economy. Local companies increasingly need to strive for expansion overseas. Besides, a double digit rise in labor costs on an annual basis since China joined the World Trade Organization in late 2001 has thwarted the low-price strategy that was favored by Chinese companies.

But there is more to this remarkable acceleration in cross-border global M&A landscape activity. Chinese companies are scooping up foreign targets at the lowest cost since 2012. According to Bloomberg calculations, the median price they paid in late 2016 was around 14 times Ebitda. This was down from a multiple of 16 in the previous year.

Another reason for China creating a whole new “geography of M&A” is politics. The leadership in Beijing is reinforcing its “going out policy.” M&A deals overseas are an important tool for China to transform its economy from one that is driven by cheap exports to a model where IT, innovation and domestic consumption will be the main driver of growth.

With higher volumes and increased pace in the attempted deals, China is also trying to create new opportunities for its private enterprises which have always been disadvantaged compared to the giant state-owned sector of the economy. For many years, China´s SOEs tried to secure energy and commodities for the Middle Kingdom. Now, private manufacturers and service sector companies are playing a much larger role. According to the Boston Consulting Group (BCG), only 20 percent of cross-border deals between 2010 and 2014 targeted strategic resources, while three quarters aimed at accessing technology, brands, or market share.

Chinese companies are not only starting to target and attack European and American companies in their established markets. In a rapidly growing number of cases they are outpacing Western brands who fail to keep up with fast-moving consumer markets in the emerging world. The Economist recently described what it called the “Invasion of the bottle snatchers”, detailing how “smaller rivals are assaulting the world´s biggest brands.” The magazine highlighted three examples that demonstrate a surge of local champions in large emerging economies, challenging formerly unquestioned brand giants:

“In China, for example, Yunnan Baiyao Group accounts for 10% of the toothpaste market, with sales growing by 45% each year since 2004. In Brazil Botica Comercial Farmacêutica sells nearly 30% of perfume. And in India Ghari Industries now peddles more than 17% of detergent.“

What does this mean for European companies contemplating a market entry or an expansion with their brands into large emerging economies? The simple but unsettling answer is: they need to engage with future competitors in their emerging home markets rather sooner than later, before they become strong rivals and advance onto the global stage, targeting established markets in the West, where slow growth and saturated demand is already confining limits to their own growth perspectives.

Sources for this article:
http://asia.nikkei.com/Business/AC/Acquisitive-China-Inc.-shatters-foreign-M-A-record
http://www.bloomberg.com/news/articles/2016-08-09/china-s-overseas-buying-spree-comes-with-lowest-costs-since-2012
http://knowledge.ckgsb.edu.cn/2016/04/11/mergers-and-acquisitions/chinese-acquisitions-in-the-west-making-a-meal-of-it/
https://www.jpmorgan.com/global/insights/chinas-key-drivers
http://www.chinadaily.com.cn/business/2016-08/11/content_26428172.htm
https://www.atkearney.com/documents/10192/5677643/Creating+More+Value+for+Chinas+M%26A.pdf/f2d8e2ca-9a4e-4135-8ebe-696e5074f8b3
http://www.telegraph.co.uk/business/2016/04/01/chinas-ma-boom-is-forcing-the-heavyweights-to-open-up/
https://www.bcgperspectives.com/content/articles/mergers-acquisitions-globalization-gearing-up-for-new-era-chinas-outbound-m-a/
http://www.economist.com/news/business/21701798-smaller-rivals-are-assaulting-worlds-biggest-brands-invasion-bottle-snatchers
http://www.forbes.com/sites/ralphjennings/2016/07/26/these-3-obscure-smartphone-brands-are-killing-apple-in-china/
http://www.wsj.com/articles/tencent-agrees-to-acquire-clash-of-clans-maker-supercell-1466493612
http://www.nbcnews.com/tech/social-media/facebook-let-emerging-market-companies-sell-through-their-pages-n622126

Also read CEO Positioning: How the Boss can Support Your Brand