The Future Of Industrial Chinese Companies Outbound M&A: The Importance Of Local Guanxi

According to Wikipedia, “Guanxi describes the basic dynamic in personalized networks of influence, and is a central idea in Chinese society…Guanxi can also be used to describe a network of contacts, which an individual can call upon when something needs to be done, and through which he or she can exert influence on behalf of another.” But Guanxi is not the same as the exaggerated system of special relationships that many believe dominates behind the scenes of business in Europe. The goal is the same, to gain an advantage through one’s network of friends and associates, but the methods are different. In the United States it can be likened to lobbying, but it is not as upfront. Guanxi works in secret, disguised or behind closed doors.
Although things work differently in Europe, Chinese investors looking to reach out to the continent should not underestimate the importance of guanxi. Europe’s guanxi works in different ways than in China, but the end result is the same: those privileged enough to be part of the inner circle are able to make the most lucrative deals, while those on the outside are often shortchanged. Guanxi in the EU does not hinge upon government or politics, and it is often made up of local industrial associations, lawyers, bankers; people who meet socially at their yacht or golf clubs and then become friends, with family ties going back for generations. Since Chinese investors are inherently outsiders, not being part of a network of powerful friends can deprive them of access to information that could make their decision process much easier. Their hunt for an investment target is made without knowing which companies are really for sale, and they pay a premium price for not knowing exactly where to look.
Knowing which company is more likely to be put on the market, and building a relationship with those involved, is a key success factor for a profitable investment. Most European SMEs are owned by a family or by an investment fund, so getting in early is critical when decision to finally sell can take many years, sometimes entire generations. Chinese investors who are newcomers to the European playground can often find themselves left out of the exclusive clubs. European SMEs lack the resources to become involved in lobbying and government, so political pressure is not an effective tool for muscling in to the group. Patience and significant investments in local knowledge and network building is the only way to begin cracking the barrier to Europe’s Guanxi. Chinese investors that are serious about breaking in to the European market need to open local offices to begin accessing the local Guanxi. Recruiting local talent and having them work side by side with Chinese associates is another benefit of opening locally. So far, none of the major Chinese investment houses have opened offices in Europe, despite the large number of deals being made each year, and one must wonder if they are really getting the best price.
Most western companies have a preconfigured fear of Chinese investors, thanks to China’s lengthy and unreliable decision process. Sellers are afraid to risk embarking on a deal with a Chinese investor, only to run in to internal objections later on down the road. To offset this risk, Chinese buyers often end up paying a much higher price. Integrating with the acquired asset can be a bumpy road, and Chinese investors often do not understand the managerial profiles of Western companies, and particularly their incentive schemes, which are often very different from those used in China. Chinese authorities must reduce the level of complexity in the decision-making process both within the company and at ministerial level if they want to increase their possibility to buy companies at the right price on Western markets. It also pays to be recognizable, as an investor or company that has made a name for themselves will command more respect during the buying process. Chinese banks are not yet established internationally, but in the meantime Chinese companies should leverage their relationships with more well-known Western banks.
Establishing a foothold and then inserting itself into a European Guanxi is a long process for a Chinese investment company, but they need to start somewhere. Growth does not come without effort, but sometimes it pays to be at the right place at the right time, and with Europe’s economy faltering, low growth for the next five years means low prices for investors looking to buy a European concern. China cannot afford to miss this opportunity to begin aggressively upgrading the added value of its industrial base.