By Cai Xiao
China Daily
BEIJING - As it becomes tougher to exit their investments through IPOs, Chinese private-equity (PE) participants are prioritizing performance improvement and seeking other exit strategies such as secondary buyouts and strategic purchases, according to a report released on Thursday.
Grant Thornton International, a leading accounting and consulting organization, interviewed 144 top PE professionals around the world.
The report said that nearly 44 percent of the respondents now view performance improvement as the main way to drive value, with just 2 percent citing financial engineering as a value driver.
"As the market develops, people will have to think harder about their strategy. In the past, they did well in multiple arbitrage between the public and private markets, but things have changed," the report quoted a Chinese survey respondent as saying.
Grant Thornton China Partner Liu Dongdong, one of the authors of the report, said that PE firms cannot rely on arbitrage in the current environment.
"In China, building value comes down to earnings growth. They need to demonstrate that they have delivered tangible improvements to the business, such as improvements to the performance and strengthening of the management team," said Liu.
The report said that while public market sentiment is perceived to be working in favor of PE in markets such as Brazil and India, that's less likely to be true on the Chinese mainland.
"Among the latest four Chinese companies seeking IPOs, three failed," Liu said. That outcome "signals the exit channel of an IPO has become more difficult".
According to China Venture Group, a leading domestic PE research agency, 214 Chinese companies listed domestically and overseas in the first half, of which 100 had capital injections from PE or venture capital (VC) firms.
But in the third quarter, the number of newly listed companies with a PE or VC background decreased to 43.
The report also said that while PE managers in the BRICS countries (Brazil, Russia, India, China and South Africa) have seen an increase in exit activity, many on the Chinese mainland expect to see falling realizations.
Globally, IPO exits stand at a mere 14 percent as opposed to 37 percent in BRICS economies, but the option of a secondary buyout in BRICS economies (20 percent) is less common than in global economies (32 percent).
Trade sales are the most prevalent method of exit for both BRICS (43 percent) and global economies (53 percent), the report found.
Sunday, November 20, 2011
Shaping the new economy
Its extremelly important for companies to realise the R&D dynamic in China that is necessary to grow market share in China.
Shaping the new economy
The auto sector has often been seen as a classic example. Beginning in the 1980s, a foreign firm could only assemble automobiles in China through a joint venture (JV) with a Chinese firm, and it was not allowed to have a majority stake in these JVs. Local content regulations mandated that a gradually increasing percentage of the components that went into the car had to be purchased from firms operating in China. Winning approval for new contracts often hinged on a willingness to establish research and development centers (R&D) in China.
What was the outcome of these efforts to strong-arm foreign firms? Critics say very little. Rather than create "R&D" centers in China, foreign firms created what skeptics called "PR&D" centers, ones that achieved more for the firm's public (and government) relations than actual research and development. Although this skeptical view is overstated, it does capture an important point: in a world of global production and virtually-linked R&D efforts, it is not always easy to force a multinational firm to locate R&D in any particular location. It is a game of cat-and-mouse.
But a strange thing happened during this game of cat-and-mouse: somewhere along the way, the mouse stopped running away. In certain strategic sectors (e.g. aeronautics, new energy vehicles, high-speed rail), the traditional view continues to be correct - the Chinese government exerts leverage where it can and foreign firms do what they can to limit the loss of their core technologies - but in other sectors, R&D centers in China have become a normal part of a multinational's portfolio of activities in China and the activities they undertake are far more substantial than in the past.
This shift is largely a result of self-interest as multinational firms find it difficult to compete in the Chinese market without an R&D operation to support the effort.
First, the Chinese market often demands products that are significantly different from global products. Whether due to the particular features of the product or the cost of the product, it is no longer possible to assume that slight adaptations of a global product will be sufficient.
Second, the Chinese market changes rapidly, and it is difficult to keep up with the change without having a design center in China. This is partly organizational - a global design center that is located on the other side of the world has many demands on its resources - but it is also the "feel" for the market. A European engineer working on the design of construction equipment such as a wheel-loader, for example, will instinctually add more features to the machine if it will improve quality and performance even if this comes at a higher cost. A Chinese engineer will think about the balance between cost and performance very differently. Engineering is more "frugal" as a result.
Third, controlling cost in China requires aggressive localization, and localization necessitates extensive coordination and cooperation with low-cost Chinese suppliers. The engineers in an R&D center will adapt component designs so that they are more readily manufactured by local suppliers and their supplier development teams will go into the field to ensure that suppliers are able to meet the quality standards.
Although the domestic market in China usually drives the growth of R&D centers, they often will quickly become integrated in global R&D efforts and support activities outside of China.
In the longer-term, the knowledge that is gained about "frugal engineering" will be more important. In a global economy in which the primary engines of growth are in developing countries, China provides an opportunity to re-think design and innovation. Ironically, rather than fearing the loss of technology from China-based R&D centers, global firms may end up utilizing these centers as critical listening posts in a new world of innovation.
The author is a lecturer in Chinese business studies at the Said Business School, Oxford University.
Shaping the new economy
Updated: 2011-11-11 09:02
By Eric Thun (China Daily)R&D centers in China provide an opportunity for companies to re-think design, innovation
It has long been acknowledged that access to the Chinese market came with a price - technology. If a foreign firm wants to play within the Chinese domestic market, it has to play by China's rules and in many sectors, these rules are designed to transfer technological skills to Chinese firms.The auto sector has often been seen as a classic example. Beginning in the 1980s, a foreign firm could only assemble automobiles in China through a joint venture (JV) with a Chinese firm, and it was not allowed to have a majority stake in these JVs. Local content regulations mandated that a gradually increasing percentage of the components that went into the car had to be purchased from firms operating in China. Winning approval for new contracts often hinged on a willingness to establish research and development centers (R&D) in China.
What was the outcome of these efforts to strong-arm foreign firms? Critics say very little. Rather than create "R&D" centers in China, foreign firms created what skeptics called "PR&D" centers, ones that achieved more for the firm's public (and government) relations than actual research and development. Although this skeptical view is overstated, it does capture an important point: in a world of global production and virtually-linked R&D efforts, it is not always easy to force a multinational firm to locate R&D in any particular location. It is a game of cat-and-mouse.
But a strange thing happened during this game of cat-and-mouse: somewhere along the way, the mouse stopped running away. In certain strategic sectors (e.g. aeronautics, new energy vehicles, high-speed rail), the traditional view continues to be correct - the Chinese government exerts leverage where it can and foreign firms do what they can to limit the loss of their core technologies - but in other sectors, R&D centers in China have become a normal part of a multinational's portfolio of activities in China and the activities they undertake are far more substantial than in the past.
This shift is largely a result of self-interest as multinational firms find it difficult to compete in the Chinese market without an R&D operation to support the effort.
First, the Chinese market often demands products that are significantly different from global products. Whether due to the particular features of the product or the cost of the product, it is no longer possible to assume that slight adaptations of a global product will be sufficient.
Second, the Chinese market changes rapidly, and it is difficult to keep up with the change without having a design center in China. This is partly organizational - a global design center that is located on the other side of the world has many demands on its resources - but it is also the "feel" for the market. A European engineer working on the design of construction equipment such as a wheel-loader, for example, will instinctually add more features to the machine if it will improve quality and performance even if this comes at a higher cost. A Chinese engineer will think about the balance between cost and performance very differently. Engineering is more "frugal" as a result.
Third, controlling cost in China requires aggressive localization, and localization necessitates extensive coordination and cooperation with low-cost Chinese suppliers. The engineers in an R&D center will adapt component designs so that they are more readily manufactured by local suppliers and their supplier development teams will go into the field to ensure that suppliers are able to meet the quality standards.
Although the domestic market in China usually drives the growth of R&D centers, they often will quickly become integrated in global R&D efforts and support activities outside of China.
In the longer-term, the knowledge that is gained about "frugal engineering" will be more important. In a global economy in which the primary engines of growth are in developing countries, China provides an opportunity to re-think design and innovation. Ironically, rather than fearing the loss of technology from China-based R&D centers, global firms may end up utilizing these centers as critical listening posts in a new world of innovation.
The author is a lecturer in Chinese business studies at the Said Business School, Oxford University.
Wednesday, November 16, 2011
COFCO to expand overseas M&A
Food giant looking for takeover and merger deals in foreign countries.
COFCO Ltd grain products on display at the 11th China International Exhibition for Grain and Oil Products, Equipment and Technology held in Ningbo, Zhejiang province. Zhang Peijian / for China Daily
BEIJING - China National Cereals, Oils and Foodstuffs Corp Limited (COFCO), the country's largest trader of grains, said it is seeking overseas acquisitions. Any purchases would help to secure supplies of commodities including soybeans, wheat and sugar as rising domestic incomes spur faster food demand growth.
The State-owned COFCO is looking for investments in the United States, South America, Australia and Russia, said Frank Ning, the company chairman, in an interview in Beijing. He did not identify which companies were under consideration.
"I'm trying to connect the Chinese consumer market with outside sources," Ning said on Thursday. "Whatever the Chinese consume more of, need greater supplies of from outside, this is our area," he said. The company may become engaged in farming, logistics, processing, and trading ventures in supplier countries, he said.
Securing external food supplies is becoming increasingly important after urban household incomes in China more than tripled in the past decade, fueling consumption of meat, poultry and dairy products. China, which last year became a net importer of corn for the first time in more than 10 years, may have bought as much as 3.5 million metric tons in the first half, according to the researcher Grain.gov.cn on Oct 13.
China may have to increase imports because its dependence on the use of ground water for grain production "isn't going to be sustainable indefinitely", said Arthur Kroeber, managing director of Beijing-based GaveKal Dragonomics Research, a financial advisory firm.
Corn imports may surge to as much as 20 million tons annually by 2015, while rice imports may total 8 million tons, said Sunny Verghese, CEO of Olam International Ltd on Tuesday.
"Today China will have to look at global sources to balance its demand," Ning said. Corn has become particularly "tight" because of its wider application outside the livestock industry, such as paper-making and pharmaceutical use, he said.
China may be putting off "inevitable" large grain imports for 10 to 20 years to enable the opportunity to "develop companies like COFCO as domestic alternatives to Cargill (Inc) and give them some sense of security of supply", said Kroeber.
While the government has limited the expansion of corn-based industry to ensure a priority for livestock, "it's difficult to control demand for starch" and other corn-derived products because there's a strong demand for them, he said. So "either we produce here, or buy from outside", he said.
China has become more transparent in the past five years by disclosing grain reserves and by signaling that it wants to boost imports of corn and pork, Ning said.
Still, the world's biggest grower of grain will probably remain mostly self-sufficient in wheat and rice, Ning said. China's 1.3 billion people consume 160 million tons of rice annually, so no country can "fill the gap, if China produces a gap", he said. Thailand, the biggest exporter, only exports 8 million tons, said Ning.
Bloomberg News
COFCO Ltd grain products on display at the 11th China International Exhibition for Grain and Oil Products, Equipment and Technology held in Ningbo, Zhejiang province. Zhang Peijian / for China Daily
BEIJING - China National Cereals, Oils and Foodstuffs Corp Limited (COFCO), the country's largest trader of grains, said it is seeking overseas acquisitions. Any purchases would help to secure supplies of commodities including soybeans, wheat and sugar as rising domestic incomes spur faster food demand growth.
The State-owned COFCO is looking for investments in the United States, South America, Australia and Russia, said Frank Ning, the company chairman, in an interview in Beijing. He did not identify which companies were under consideration.
"I'm trying to connect the Chinese consumer market with outside sources," Ning said on Thursday. "Whatever the Chinese consume more of, need greater supplies of from outside, this is our area," he said. The company may become engaged in farming, logistics, processing, and trading ventures in supplier countries, he said.
Securing external food supplies is becoming increasingly important after urban household incomes in China more than tripled in the past decade, fueling consumption of meat, poultry and dairy products. China, which last year became a net importer of corn for the first time in more than 10 years, may have bought as much as 3.5 million metric tons in the first half, according to the researcher Grain.gov.cn on Oct 13.
China may have to increase imports because its dependence on the use of ground water for grain production "isn't going to be sustainable indefinitely", said Arthur Kroeber, managing director of Beijing-based GaveKal Dragonomics Research, a financial advisory firm.
Corn imports may surge to as much as 20 million tons annually by 2015, while rice imports may total 8 million tons, said Sunny Verghese, CEO of Olam International Ltd on Tuesday.
"Today China will have to look at global sources to balance its demand," Ning said. Corn has become particularly "tight" because of its wider application outside the livestock industry, such as paper-making and pharmaceutical use, he said.
China may be putting off "inevitable" large grain imports for 10 to 20 years to enable the opportunity to "develop companies like COFCO as domestic alternatives to Cargill (Inc) and give them some sense of security of supply", said Kroeber.
While the government has limited the expansion of corn-based industry to ensure a priority for livestock, "it's difficult to control demand for starch" and other corn-derived products because there's a strong demand for them, he said. So "either we produce here, or buy from outside", he said.
China has become more transparent in the past five years by disclosing grain reserves and by signaling that it wants to boost imports of corn and pork, Ning said.
Still, the world's biggest grower of grain will probably remain mostly self-sufficient in wheat and rice, Ning said. China's 1.3 billion people consume 160 million tons of rice annually, so no country can "fill the gap, if China produces a gap", he said. Thailand, the biggest exporter, only exports 8 million tons, said Ning.
Bloomberg News
(China Daily 10/22/2011 page9)
Monday, November 7, 2011
For many Chinese startups, IPOs' are the exit strategy
(iChinaStock News) There are still too few billion-dollar Chinese Internet companies to make acquisition a viable exit strategy for startups, shared Hurst Lin, a general partner at venture capital firm DCM. China’s market today does not have serial acquirers like Cisco, HP, Oracle, Apple, or Google, which means the exit strategy for Chinese startups is an IPO, usually in the US.
To move the needle for institutional investors requires $300-400 million to start, said Lin in an interview at the TechCrunch Disrupt Beijing conference. At present, there are simply to few Chinese Internet firms who can swallow an investment of that size.
Even the Chinese companies who could make acquisitions don’t often do so. Hurst Lin, who was also on the founding team of Sina (NASDAQ: SINA) said there were two psychological barriers for Chinese companies, most of whom are still run by their original founders:
First, founders, because they start off scrappy, tend to be very cheap in how they pay. Professional managers are willing to pay far higher because they’re building their ‘strategic track record’… It’s much easier for a person who’s playing with other people’s money–meaning a hired CEO–than a person who actually started the company with just three people. When I was at Sina, it was very very difficult for all of us–the founding team–to really be willing to pay a lot for a company.
And second, we [the founders] have the lion’s share of the company. And then we have a bunch of early employees who have been with us 5-10 years–and if you look at their stock options, it doesn’t work out. Here’s a guy who followed me for the last 5 years and the most he’ll make is about one or two million bucks… and if a company you want to acquire is going for $300 million, then there’s this other guy, who just started his company 3-4 years ago, and he’ll become a division of SINA. His take-home pay, with the acquisition, will be a minimum of $70 million.
What does that do to the morale of your rank-and-file employees? You basically force the rank-and-file out of your company. So that psychology works in reverse because we don’t want them to leave.
An alternative explanation, commonly heard in the industry, is that Chinese Internet giants don’t acquire because they would rather hire away an engineer and copy the service themselves.
One promising sign for the industry is that Chinese Internet companies like Tencent and Baidu are now making more strategic investments, although acquisitions are still rare.
Hurst Lin also shared that there are currently at least 10 Chinese Internet companies who have made confidential filings with the SEC and are waiting to IPO in the US.
By Kai Lukoff, iChinaStock.com
To move the needle for institutional investors requires $300-400 million to start, said Lin in an interview at the TechCrunch Disrupt Beijing conference. At present, there are simply to few Chinese Internet firms who can swallow an investment of that size.
Even the Chinese companies who could make acquisitions don’t often do so. Hurst Lin, who was also on the founding team of Sina (NASDAQ: SINA) said there were two psychological barriers for Chinese companies, most of whom are still run by their original founders:
First, founders, because they start off scrappy, tend to be very cheap in how they pay. Professional managers are willing to pay far higher because they’re building their ‘strategic track record’… It’s much easier for a person who’s playing with other people’s money–meaning a hired CEO–than a person who actually started the company with just three people. When I was at Sina, it was very very difficult for all of us–the founding team–to really be willing to pay a lot for a company.
And second, we [the founders] have the lion’s share of the company. And then we have a bunch of early employees who have been with us 5-10 years–and if you look at their stock options, it doesn’t work out. Here’s a guy who followed me for the last 5 years and the most he’ll make is about one or two million bucks… and if a company you want to acquire is going for $300 million, then there’s this other guy, who just started his company 3-4 years ago, and he’ll become a division of SINA. His take-home pay, with the acquisition, will be a minimum of $70 million.
What does that do to the morale of your rank-and-file employees? You basically force the rank-and-file out of your company. So that psychology works in reverse because we don’t want them to leave.
An alternative explanation, commonly heard in the industry, is that Chinese Internet giants don’t acquire because they would rather hire away an engineer and copy the service themselves.
One promising sign for the industry is that Chinese Internet companies like Tencent and Baidu are now making more strategic investments, although acquisitions are still rare.
Hurst Lin also shared that there are currently at least 10 Chinese Internet companies who have made confidential filings with the SEC and are waiting to IPO in the US.
By Kai Lukoff, iChinaStock.com
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