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By Josephine Chow
Chinese companies looking for deals abroad face five main challenges when globalizing through M&A —including the often overlooked human capital.
Recently, Germany, Japan and the United States have seen a spate of inbound M&A transactions initiated by Chinese manufacturers. The reason is clear: the Chinese manufacturing industry is in desperate need of advancement. This phenomenon tells us a few things: that global industrial transformation has reached its peak; many industries are still hard-pressed for capital as a long-term consequence of the 2008 financial crisis; and the value of the renminbi has empowered Chinese enterprises to expand.
Challenge 1: Underestimating the importance of HR due diligence and the human aspect of a deal
In the majority of cases, M&A is based on human interactions. HR functions should be involved early to avoid disruptions and ensure a smooth transition. The importance of HR is often underestimated by Asian organizations, and Chinese companies are no different. Assessing possible human risk is often thought of as “soft,” but a failure to do so could result in significant “hard” financial losses.
When a Chinese electronics company acquired a French electronics firm, leadership planned to selectively retain employees according to their M&A goals. However, in France, the law protects the disadvantaged so companies cannot easily lay off old, sick, or disabled employees. The company would have had to let go mostly young workers. Instead, they let go all employees and rehired those they wanted to retain. The company paid a total of €270 million in various fees, a majority of which were settlement payments for dismissed employees.
Other areas that HR can help to shine a light on in the early stages of a deal include:
Involve HR in due diligence covering five risk areas:
Challenge 2: Retaining key talent
Whatever the goal of a merger or acquisition — whether to tap into global markets or gain access to advanced technologies and management know-how — the success of the deal will largely depend on experienced leaders who understand, support, and guide the organization’s new vision. In most cases, the target company will have an existing culture and processes that need to be integrated into the acquiring entity.
One crucial challenge is how to retain the employees of the acquired company. Keeping some continuity in leadership can be the key to beginning normal operations as soon as possible.
Research has found that the earlier key talent is identified, the more likely retention will succeed (Figure 2).
It is troubling to note that Asian employers identify talent to retain later in the life cycle of a deal than do their global counterparts (Figure 3). Given the importance of key talent retention to the success of a deal, this could have the potential to put Asian employers at a significant disadvantage.
In March 2011, China-based Australia Dairy Corporation announced it would acquire stakes in Hyproca Dairy, marking the first M&A deal between a Chinese dairy company and a foreign milk powder enterprise. Learning that many employees at Hyproca Dairy intended to resign, Chen Yuanrong, CEO of Australia Dairy, promised not to change the management model, transfer Chinese employees over, or close the factory — the “three nos” approach. With the rollout of an incentive program to provide employees with stock options, the Chinese company successfully retained key employees, which helped to smooth over the often turbulent transitional M&A stage.
After key employees have been identified, the six-step process can retain talent.
It’s always important to understand what factors have been driving the deal. If the deal’s goal is to acquire advanced technology, then retaining R&D staff will be critical, and if acquiring the brand is the goal, then retaining marketing, customer services, and a sales force will be key.
Challenge 3: Differences in organizational and national cultures
Culture is a hot topic when it comes to Asian multinationals expanding globally. In China, cultural differences are strongly felt at the organizational level: Chinese leaders tend to manage companies through a comparatively rigid, top-down approach.
For example, when making decisions at the middle-management level, Chinese managers take into account senior management’s interests where Western managers tend to focus on financial results.Western companies base hiring decisions on individual performance and new job requirements, while Chinese companies also take the employee’s age and years of service into account.
In addition, Chinese employees’ relationships with their companies can be different than in the West. In China, employees tend to identify their relationship with the company from a moral perspective and are likely to develop a sense of commitment and loyalty toward the company. This is particularly noticeable in state-run enterprises.
Cultural gaps can be felt during acquisitions. A China automobile manufacturing group’s acquisition of a Swedish manufacturing company sparked worry among the Swedes who had strong national pride about the company and the brand. They were worried the alliance would diminish its brand image. The head of the engineers’ union at the Swedish company even cooperated with a local syndicate in Sweden to bid for the sale of the firm, although it eventually failed to raise enough funds to compete with the Chinese firm.
In order to be effective, cultural alignment should incorporate the following steps:
Maintaining and strengthening employees’ engagement during change and uncertainty can be a long-term effort, but it can be very rewarding if it succeeds. Specific strategies will depend on the new organization’s goals and culture.
Challenge 4: Global mobility
The success of a merger or acquisition will depend largely on the expertise of leadership in guiding the new firm forward. While one part of this equation is to retain employees of the acquired company, Chinese organizations often have difficulties establishing a cadre of leaders with global expertise within their own ranks.
For example, when the Chinese electronic manufacturing company entered into a joint venture with a French firm in 2004, the company chairman launched a global recruitment drive to find an international assistant. However, this position could not be filled suitably, paving the way for the failure of the joint venture. In another example, when acquiring a Korean automotive manufacturer in 2005, the Chinese acquirer did not have any Korean-speaking personnel. Although the company retained the original management team from the Korean firm, a gap in cultural communication existed between the two sides.
For many Chinese companies, mobility difficulties generally fall into three areas:
Many multinationals have adopted some best practices to overcome the challenges of global Mobility; Danone, Rakuten, and Uniqlo made English a second official language. While difficult, but Chinese companies can move in this direction by asking top management to work in two languages. In doing so, they may avoid problems associated with ineffective communication during an overseas labor dispute or other conflict.
Other steps to consider to enhance in-house talent include:
It is also advisable to have a mobility mechanism that works through the cycle of an international assignment and includes the following aspects:
Challenge 5: Difficulties integrating core resources
One of the primary purposes of Chinese enterprises’ overseas M&A transactions is to obtain advanced technology and global brand management experience. To retain core personnel, Chinese enterprises often adopt the “three nos” policy: no change of management team, no Chinese expatriate onsite, and no factory shutdown.
Technological integration must be carried out through the close cooperation of acquirer and acquiree. If the buyer does not lend a hand in the management of the target firm, it will never attain the desired technological advantages. In the end, M&A transactions would merely provide the bought-out company with domestic markets and sales channels.
It is suggested that Chinese companies develop post-merger programs that match the current-state integration capability and degree of mutual trust. At the beginning of an acquisition to reassure the seller’s employees, a non-intervention management policy may be adopted. After a period of time, the Chinese buyer could arrange for business leaders and technical staff to interact through rotation, training, special project assignments, and site visits.
About the author: Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 39,000 employees in more than 120 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com.