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Chinese Buyers Targeting Europe

August 2019
Bing Xie Frigerio
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Unpacking Management and Leadership Challenges

In 2013, the business world watched with bated breath as Chinese company Baoshida took over Swissmetal. This unprecedented investment of a Chinese company in Europe both surprised and inspired businesses around the world. Since then, the company has experienced leadership changes and turmoil, ultimately ending in the return of company ownership to two private Swiss investors in 2019.

The story of Baoshida Swissmetal is a lesson for all stakeholders, including the Chinese buyer company Baoshida, the local Swiss management, the Chinese creditor (China Development Bank), and the 160 local employees in Switzerland. All players experienced significant leadership and cultural changes over the years; fortunately, the company remains intact, but it is back in the hands of domestic European owners.

People management is, as always, the most complex and treacherous area of integration for a M&A deal. It is even more challenging for a Chinese buyer taking over a European company due to drastically different cultures and organizational behaviors. Often, senior management and key employees are part of the key assets that a buyer seeks to acquire. However, mismanagement of people or lack of leadership strategy can lead to failure of post-deal integration and eventually failure of business expansion in a foreign market.

Chinese investors have been entering the European market and establishing their presence in Europe more and more over the last decade. It is a good time to draw lessons and share experiences with the European-Chinese business community, especially with those Chinese investors who are present in Europe and those who are targeting Europe for their next investment outside China.

Domestic Market vs. International Expansion

Companies having solid performance and success in their domestic market are more likely to succeed in foreign markets. Statistics show that the fast-growing interest of Chinese business in international markets, to a certain extent, is a result of expansive and super loose credit booming and injection in the aftermath of the financial crisis in 2008. However, when domestic funding, often supported by the Chinese state-owned commercial banks, became constrained, those companies become immediately exposed to external credit risks. This is particularly true for Chinese private companies who grew extremely fast with a huge balance sheet over the past ten years. In the case of Baoshida Swissmetal, the Chinese owner’s unlawful financial practices judged by the Swiss Commercial Court, took place against the backdrop of domestic de-leverage environment, which primarily affected the private sector in China.

 

Corporate Governance

Chinese investors, especially private investors, cannot be ignorant of corporate governance. Taking the Board of Directors as an example, it is critical to look at the composition of the Board, the communication style of the Board, the leadership of the Board, and the delegation principles of the Board. Generally, our advice is to include Board Members from the local market who are highly experienced in the industry and who have the capability to oversee the management.

In cross-border M&A cases, buyers usually do not lay off the seller executives during the integration process because the sale of a business is a traumatic event and it is in the buyer’s interest to keep a certain level of stability in operations. However, most Chinese buyers immediately replace the CFO with a Chinese-speaking candidate, with whom a direct and no-barrier language communication channel is built up. Some Chinese buyers establish an additional role called Assistant to the Chinese Chairman in an attempt to ensure a second controlling channel in addition to the CFO.

The advantage of such a double reporting structure (CFO and Assistant) to the Chinese buyer is evident: to ensure a checks-and-balances control between the CFO and the Assistant while keeping the HR cost relatively low because the Assistant role is often filled by a junior professional with local educational background and a few years of working experience in Europe. However, such a structure can be questionable since the Assistant is either not authorized or not able to question the management. In fact, the information flow between management and the Board is often jeopardized. Hence, a more experienced and senior role of Secretary is advisable for a Chinese buyer when considering setting up their local management team in Europe.

Another significant difference in doing business in China and in Europe is the importance of personal signature. Chinese investors must be aware that personal signature in the West is most widely used for all legal and official documents, especially when the Board of Directors delegates its independent signature right to management.

Optimal Profile of Senior Management

There have been different opinions about what kind of executive profile best suits the interests of a Chinese invested European company. Many believe Chinese language or past professional exposure with Asia is a must. Based on our experiences and observations, the key to business success is neither the Chinese language capacity nor professional exposure to the Chinese or Asian business society, but rather solid industry expertise and managerial capability, plus genuine openness to non-European culture and business mindset.

The Use of Professional Services

Chinese companies are quite experienced in working with professional services providers. In comparison to state-owned companies, Chinese private companies tend to work less with management consulting firms when they need a search for executive or senior positions, mostly due to an insufficient network in the target market and sometimes the lack of awareness of the importance and necessity to turn to a consulting firm. From a long-term perspective, we recommend a more close-to-the-market strategy for Chinese investors.

About the Author:

Bing Xie is a Partner in the Stanton Chase Zurich office.

Yang Shuai, former employee at Baoshida Swissmetal, also contributed to this article.

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