David Iwinski Jr.
The intelligence about recent China stock market corrections has been largely focused on how it’s potentially dangerous to the global economy. That is somewhat ironic, as many business leaders have clamored for years for more transparency and open markets from China.
They have claimed that the days of strong economic growth of 10.5 percent in 2010 and 9.5 percent of 2011 were artificial and propped up by the Chinese government. At last the Chinese support a much-needed correction, and the same voices worry about a dip in global growth rates now that China looks to have stabilized at 7.5 percent growth.
We can’t have it both ways, folks. Further, some fret that the growing appetite for U.S. acquisitions may cool as China firms reel from valuation drops and tighter cash.
Nothing is further from the truth. In fact, we think China-based acquisitions of U.S. firms strong in technology, manufacturing and solid brands will continue to grow in 2016 and beyond. There are several factors driving this trend.
Need for new markets
As China markets cool and the economy evolves toward a more consumer-based platform, China firms will need new markets to serve the production and operational resources that have ramped up over the past 20 years.
To stay with a “China only” approach means a race to the bottom with lower margins and tougher competition amongst a shrinking industrial customer base — this time without preferential government deals to provide a soft landing.
Need for new technology
While China does many things very well, they still lag significantly in the creation of new technology. For all the challenges that the U.S. economy faces, we are still largely the innovation source for much of the world’s most creative and market-ready technology.
Corporations in China that may not seek U.S. domestic markets and brands will still need to find new sources of technology to stay competitive in China. This will be a boon for young pioneering companies as their innovative products and services are acquired by China firms hungry for an edge in their increasingly demanding domestic markets.
Need for diversification
Many large Chinese enterprises still have a significant portion of their ownership vested in the founders or founding family. Keeping all these assets under close control in an economy growing 11 to 12 percent is a great strategy, but when things start to cool, it’s not likely that the pain will be spread equally.
As the China market shifts, businesses with a very narrow focus tied to large industrial markets will be particularly vulnerable. Owners of these organizations will be looking to diversify.
All of these reasons will drive continued interest from Chinese corporations in acquiring U.S. firms, even while the growth rate in China falls.
As an associate of mine in Beijing recently commented, “There is still so much opportunity to pursue here, and yet a prudent leader will use this current state of adjustment to consider placing a bet elsewhere … and there is no better location to place such a bet than the United States.”
We heartily agree.
David Iwinski Jr. is the managing director of Blue Water Growth. A global business consulting firm with extensive experience and expertise in Asia, Blue Water Growth services include merger and acquisition guidance, private capital solutions, product distribution, production outsourcing and a wide variety of business advisory services for its Western and Asian clients.