Private equity advantageous in addressing Chinese investor outbound M&A challenges

In recent years, the international business community has witnessed a steady increase in outbound investment by Chinese companies into a wide array of industries and sectors worldwide. China has now shifted from an export-led economy whose primary source of profits was the manufacture and export of mostly consumer goods towards an economy investing in high-value and high-return processes and products, including retail and distribution in overseas markets.

Due to a number of economic factors resulting from China’s rapid growth, including constantly fluctuating domestic consumption behaviour, excessive competition, thinning margins and overcapacity within industries, enterprises have an economic imperative to gain access to more advanced economies to source strategic assets. In particular, the focus is on securing access to scarce natural resources and raw materials while acquiring advanced technology, intellectual property, production know-how, and customers and consumer-focused companies with a strong brand. This can be achieved through outbound mergers and acquisitions, especially in the consumer market and capital goods sector.

Domestic economies of scale have already been maximized, so Chinese investors seek a new growth model to capture a greater share of the value chain both upstream and downstream. By establishing an overseas entity, Chinese outbound investors hope to gain market shares within the Chinese and international markets and realize competitive advantages through distribution and production cost efficiencies.

Simon Luk is partner and chairman of Asian practice at Winston & Strawn. He can be contacted on +852 2292 2222 or by email at sluk@winston.com. Jasamine Yung assisted in writing the article.