China’s massive overseas spending spree is set to end after Beijing unveiled new guidelines last week, dashing any hopes the country's business community may have had to acquire new income streams from abroad and move money offshore.
But every cloud is supposed to have a silver lining and in this case it could be that the new rules help to concentrate Chinese business minds by fostering more innovation and encouraging organisational efficiencies.
The National Development and Reform Commission said it will restrict outbound investments in a range of sectors including real estate, hotels, entertainment and sports, in the process signalling that Beijing wants to curb capital outflows putting downward pressure on the Chinese currency.
The new measures are generally seen as a setback for the private sector but one potentially positive effect is that they will encourage Chinese companies to focus more on their core operations rather than evolve into Chinese chaebol.
Until recent years, Chinese companies were not known for engaging in multiple businesses. It was hard to find a Chinese equivalent to CK Hutchison in Hong Kong, Reliance Group in India, Samsung in South Korea, or CP Group in Thailand, because Chinese cross-industry conglomerates were rare.
That's a partly a function of China's huge size (although that didn't necessarily stop Reliance). Unlike in smaller markets where corporate growth could be constrained, China’s huge population means companies have sufficient room to continue expanding in most industries, reducing the attractiveness of multi-business strategies.
Turn of the tide
Driven by favourable policies and abundant cheap financing, some Chinese firms have recently become more aggressive by tapping into new sectors, both domestic and overseas. These companies are often leaders in their respective core areas and hope to replicate their success in their new ventures.
Take HNA Group. It is arguably one of the most aggressive buyers of assets outside its core airline business. Over the last two years, the secretive conglomerate has acquired stakes in US technology giant Ingram Micro, hotel operator Hilton Worldwide, Deutsche Bank, and International Currency Exchange, extending its reach into the technology, tourism and financial services. It is also in the process of buying Singapore-based logistics company CWT.
Another notable example is Dalian Wanda, China’s largest commercial property developer, which has stepped into the cultural arena through a series of high-profile acquisitions including AMC Entertainment and Legendary Entertainment, as well as World Triathlon Corporation, Infront Sports & Media and a minority stake in Spanish football club Atlético Madrid.
But few of these cross-sector investment sectors have yet proved successful (Although Atlético Madrid has come close to winning the Champions League and just moved to a brand new stadium, the Wanda Metropolitano).
Wanda’s acquisition of Legendary, for example, has been disappointing so far. The Hollywood studio reported box office receipts of $1.3 billion over the 19-month period since it fell under Wanda’s umbrella in January 2016, compared with $1.9 billion in 2015. What didn't help in this regard was the mediocre performance of The Great Wall, the most expensive Hollywood-Chinese collaboration and one of the three movies produced by Legendary since Wanda’s purchase.
But there have also been questionable diversification plays at home.
China Evergrande Group, formerly known as Evergrande Real Estate Group, attracted widespread criticism in 2010 when it spent Rmb100 million ($15 million) to acquire Guangzhou football club, making its first major investment outside property. Existing shareholders claimed that the investment was made on the whim of chairman Hui Ka-yan.
Guangzhou Evergrande Football Club has made a combined loss of Rmb1.8 billion since listing on China’s National Equities Exchange and Quotation, commonly known as the New Third Board, in November 2015, according to the club’s financial statement.
Evergrande previously also raised investor eyebrows when it expanded into bottled water, cooking oil, and dairy production between 2013 and 2014. Three years later the property giant said it had agreed to sell these businesses for a net loss of nearly Rmb4 billion.
New businesses, new challenges
Lacking prior experience in new sectors, some cash-rich acquiring companies have adopted so-called cash-burn strategies to rapidly expand market share and try to squeeze out existing players.
Evergrande, for instance, attributed the huge loss in its bottled water business to excessive spending on marketing and advertising campaigns as it sought to build brand awareness.
Somewhat indulged by their successful core businesses, some companies are less receptive to the changes needed to operate in a new industry, such as in resource allocation, talent management or marketing.
A recent example was Wanda’s decision to remove Thomas Lull, founder and chief executive of Legendary Entertainment, less than a year after it took over the movie producer. It replaced him with Jack Gao, a senior vice president of Wanda’s own cultural division.
The failure of some cross-sector investments in China is also partly because many do not patently seek to make a profit. Instead, they are driven by a company's (or business person's) desire to raise its public profile or secure more political influence. China Inc’s recent splurge on European football clubs best epitomises this.
Regardless, as it stands there is little evidence as yet to suggest that China Inc will find success outside their own businesses. Beijing’s M&A clampdown therefore serves as a reminder to these companies to re-focus on their core operations.
As the old Chinese proverb goes, “A double-minded man is bound to accomplish nothing.”