The recent announcement of a bid for a British-Dutch steel company (Corus) by India’s Tata group has passed without raising much hue and cry in the United Kingdom or the Netherlands. The tempered reaction contrasts with the noise raised by French and Belgian lawmakers against a proposed takeover of Arcelor by Mittal earlier this year, which resulted in a transaction despite their objections – in other words, Mittal impressed shareholders enough to override political objections.

These successes by Indian businessmen are in contrast with the more labored path that Chinese companies find themselves exposed to when trying to buy foreign companies. US Congress members raised a ruckus when the China National Offshore Oil Corp (CNOOC) attempted to take over Unocal last year, and when Haier attempted to buy Maytag. In both cases political opposition culminated in the bids being withdrawn by the Chinese companies.

There have been other notable failures around the world, which put in perspective limited successes such as Lenovo acquiring the personal-computer business of IBM and Nanjing Auto buying the UK’s bankrupt Rover Group. Across both Asia and Africa, newspapers have castigated the business practices of Chinese companies and often used nationalist arguments against their participation. To be sure, it isn’t only Chinese companies that receive xenophobic treatment from Americans and Europeans; Dubai Ports World of the United Arab Emirates also faced stiff opposition when it attempted to buy Britain’s P&O, manager of several US ports, last year.

Of valuations and brands

Before addressing the actual story of India vs China in the markets, it is pertinent to examine the context. Why do companies need foreign acquisitions in the first place? From the perspective of expected returns, the question appears daft in that both countries have growth rates that outstrip anything that can be seen across North America, Europe and Japan. In addition, equity-market valuations are stretched thanks to the strong market rally in recent years. The answer is to be found in structural factors, detailed below.

As I wrote before, [1] the primary focus for sustainable economic growth in India and China has to be the banking systems of the two countries. Neither possesses sufficient strength to guarantee future economic stability, so this calls for continued structural reforms. In that context, I wrote previously [2] that while Chinese reforms have stalled recently under President Hu Jintao, Indian structural reforms are in essence moribund for the foreseeable future. [3]

The broadening base of domestic demand in China has pushed more local manufacturers to build their brand values. A number produce goods at cheap rates for Japanese, Korean or North American brands that are then sold in the local market at prices much higher than what Chinese manufacturers are paid. While some Chinese manufacturers have built strong brands domestically (eg Lenovo, Haier), brand extensions to the rest of the world are proving more difficult.

Thus even though Lenovo may build the same laptops as IBM did, a lack of brand recognition has allowed other manufacturers to steal market share. Similar examples are to be found in other areas, ranging from cars to washing machines. Strategically, brand improvement is important for China given the lack of profitability across many manufacturing operations, [1] which calls for vertical integration upward, ie, to the finished product. With no-brand products in essence commoditized, Chinese manufacturers need strong brands to produce profits going forward.

Indian manufacturers have a different problem, which is the lack of scale domestically thanks to halting reforms. The lack of broad-based industrial growth means that increases in per capita income are not well-distributed. Rather than urbanizing the rural population, the current government has initiated positively daft programs such as the Rural Employment Guarantee scheme, which is a colossal waste of taxpayers’ money. [4] In this environment, demand for consumer durables is unlikely to increase at the same pace that Chinese and other Asian markets have enjoyed, leaving Indian manufacturers with no choice but to expand overseas.

Management and governance

Having established that both Chinese and Indian manufacturers need access to global brands, it is interesting to note that the former, despite their higher access to capital, find the latter stealing a march. Both Chinese and Indian companies excel at execution, therefore I will not attribute deal successes to this factor. To some, the main reason is the apparent cultural awareness of Indian entrepreneurs compared with their Chinese counterparts.

Armed with strong language skills and possessing marketing skills that Europeans and North Americans appreciate, Indian business people find it easier to open doors. Culturally, many Indian companies making the leap have strong centralized authority, usually from owner-managers, with professional management that is similar in construct to big North American companies.

In contrast, many Chinese state-owned companies have a more consultative style of leadership, which mirrors Japanese management style. [5] In most state-owned companies, progress to senior management is achieved because of one’s position in the Communist Party, rather than proven technical and management skills. Down the line from senior management, most Chinese state-owned companies appear to have weak, bureaucratic management. Given these factors, slower responses to global consolidation are not surprising.

In terms of corporate governance, Chinese companies lag their Indian counterparts by a wide margin. With a relatively small pool of lawyers, auditors and accountants at their disposal, [6] Chinese companies simply have less transparency as against their Indian counterparts. With a longer history of listing on stock markets, Indian companies have a better infrastructure to deal with a wide array of stakeholders, including bankers, market regulators, tax authorities and pension trustees. This experience has proved invaluable when venturing overseas as the Indian firms encounter very similar requests for information and disclosures.

Economic orientation

Another major difference between the two giants is corporate attitude toward shareholders. All proposals for mergers and acquisitions (M&A) need to be accretive for shareholders in Indian companies, which puts positive economic incentives in place and also means that such transactions will not proceed if counter-bidding renders such returns negative. In contrast, the top-down culture of Chinese companies provides situations where policy mavens, usually working with the government, determine that strategic expansion is a priority. This in turn causes expansion to occur at any cost, and usually well outside the range of economic returns.

In Western capitalist societies, the arrival of such Chinese money is greeted in much the same way that Japanese acquisitions were viewed in the 1980s and ’90s. Top-down decision-making on media convergence, for example, pushed some Japanese hardware manufacturers to acquire Hollywood studios. While I have no comment on the quality of movies subsequently made, results for shareholders were nothing short of disastrous.

When such opposing economic interests court companies, it would be logical to sell to the highest bidder (ie, Japanese, but in the current situation, Chinese) – what is the objection? There is none economically, but politicians in Europe and the US aren’t known for being logical. The key suspicion in many cases arises from the apparently bottomless pits of money that Chinese state-owned companies have access to, which would bring into sharp focus the strategic rather than economic rationale.

This means that, once establishing that proposed transactions are not economic, politicians have a field day assigning motives according to pet conspiracy theories. This has been the biggest factor in derailing various transactions proposed by Chinese companies and, in any event, attracting excessive political and media attention for mundane M&A proposals.

Confronted with capitalist Indian business people, the same interests find themselves with less room for such shenanigans because deal logic is usually more persuasive and economically appealing. This then is the biggest lesson for China – to accelerate the pace of structural reforms, allowing its largest companies to become publicly owned, with little state involvement. That would help open doors globally.

1. Indian, Chinese banks plunge at different rates, August 3.
2. Chinese reforms: The dog didn’t bark, August 5.
3. Indian reform: All bark and no bite, August 16.
4. Demo-crazy, September 23, wherein I pointed that the pliable Indian middle classes are unlikely to protest much.
5. This is ironic, given the supposed conflict in cultures. If it is any consolation for Chinese managers, Korean companies aren’t very different.
6. I would attribute this to the Cultural Revolution, wherein a number of such professionals were purged. The situation has improved drastically now, but it will take a few years for any impact on corporate governance to come through.