In recent years, foreign direct investment by Chinese companies has been rising sharply, backed by the policy support of the Chinese government, in addition to their newly gained clout. Although the acquisition of resources by state-owned firms accounts for the majority of investments made, private companies in other areas such as manufacturing and services are also beginning to invest. Among them, investments in Japan mainly through mergers and acquisitions (M&As) have become noticeable. According to a survey by Teikoku Databank, the number of Japanese companies in which Chinese companies have taken a stake amounted to 611 as of June 2010, 2.5 times the level seen five years ago ("Survey on Actual Conditions of Investments by Chinese Companies in Japanese Companies," July 8, 2010).
M&As can be broadly divided into two types: vertical integration and horizontal integration. Vertical integration is conducted to establish a supply chain in which, for example, products are manufactured based on an alliance between a producer and an R&D company and distributed based on an alliance with a distributor firm. Horizontal integration, on the other hand, aims to expand market share by forming an alliance between companies in the same business domain. Reflecting the complementary relationship between Japan and China, the vertical integration approach has become the most common form of M&As conducted by Chinese firms targeting Japanese companies.
The complementary relationship between Japan and China mentioned here means that Japan is weak in areas where China is strong, and vice versa. This relationship can be recognized along the supply chain. In one typical pattern called a "smiling curve," value added is high in upstream processes such as R&D, technology and the production of key parts, low in midstream manufacturing processes centering on assembly, and rises again in downstream processes such as branding, sales, and after-sales services (Figure 1). At present, China's strengths are limited to midstream processes where value added is the lowest, while developed countries such as Japan have a firm hold on both ends.
| Figure 1: Smiling Curve Showing Value Added in Each Stage of the Supply Chain | |
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| (Source) | Prepared by Chi Hung KWAN |
Entering into an alliance with external entities through M&As is an effective way for companies to complement the management resources they lack and quickly make advances into new markets. Although many Japanese companies have been moving into China, utilizing this complementary relationship, some Chinese companies which have gained strength are now beginning to bolster their supply chains by advancing into Japan on their own. To penetrate new areas where they lack experience and knowhow, these Chinese firms focus more on acquiring existing companies than on green field investment, i.e., starting up new companies. The following cases are some typical examples:
- Acquisition of Akiyama Printing Machinery Manufacturing Corp. and Ikegai by Shanghai Electric Group aiming to obtain technologies
Shanghai Electric Group Co., Ltd., a leading Chinese electronics manufacturer, acquired Akiyama Printing Machinery Manufacturing Corp. (now Akiyama International) in 2002 and Ikegai Corp., a machine tool manufacturer, in 2004. Both acquired companies had filed for bankruptcy protection under the Civil Rehabilitation Act. Shanghai Electric Group is the largest corporate group in China, which designs, manufactures, and sells electric power facilities and large machinery. Its aim in acquiring Akiyama Printing Machinery Manufacturing is to obtain unique technologies, such as those for manufacturing special printing systems. Shanghai Electric Group Printing and Packaging Machinery Co., Ltd., a subsidiary of Shanghai Electric Group, succeeded in developing a one-sided multicolor offset printing machine in 2005 by introducing Akiyama International's technology, and significantly closed the technological gap with overseas manufacturers. Meanwhile, Ikegai boasts some of the most sophisticated technologies in Japan in the area of large machine tools, and Shanghai Electric Group aims to access these as well. After the acquisition, Shanghai Electric Group trained its employees at the head office plant of Ikegai and transferred Ikegai technologies to China. - Acquisition of Ogihara's plant by BYD Auto to obtain key parts
BYD Auto, a Chinese automaker, acquired the Tatebayashi Plant of Ogihara Corporation, a leading Japanese die manufacturer, in April 2010 and took over the land, buildings, equipment, and approximately 80 employees. Ogihara mainly produces large dies for manufacturing auto bodies and is the world's largest company in this area. Meanwhile, BYD is a young company established in 1995, which started as a battery manufacturer and began making automobiles in 2003. By 2009, it was selling 448,000 units. BYD's aim of acquiring the Tatebayashi Plant of Ogihara is to bring dies manufactured at this plant to China for use in the production lines there, increasing its international competitiveness while promoting the transfer of technologies to Chinese employees. - Acquisition of Renown by Shandong Ruyi Group to obtain brands
On July 30, 2010, Shandong Ruyi Group, a leading Chinese textile and apparel maker, acquired a 41.18% stake in Renown Incorporated, a venerable apparel maker that was under restructuring, increasing capital through a private placement of approximately four billion yen to become the largest shareholder. Renown, which was established in 1902, has a number of well-known brands, including Durban, Aquascutum, and Arnold Parmer. The main aim of Shandong Ruyi Group is to acquire these famous brands. In addition, Renown's know-how in quality control in manufacturing process and sales services is also very attractive to the Shandong Ruyi Group. - Acquisition of MSK by Suntech Power aiming to gain the market
Suntech Power, the largest Chinese photovoltaic solar cell and photovoltaic power system manufacturer, acquired shares in MSK, a leading Japanese company that manufactures and sells photovoltaic power modules and systems, twice in August 2006 and June 2008, to effect a merger. MSK is also a major manufacturer of solar cell modules and building-integrated photovoltaics (BIPV). The main objective of acquiring MSK for Suntech Power is to enter the fast-growing BIPV market and strengthen its management and sales using the special technologies of MSK and its global sales network, which includes Japan and other countries. - Acquisition of Laox by Suning aiming to strengthen its overall supply chain
In 2009, Suning Corporation, a leading Chinese electric retail store, acquired Laox Co. Ltd., which was under the control of a turnaround fund, in cooperation with the Nihon Kanko Menzei Co., Ltd. On the face of it, this acquisition appears to be a horizontal integration, as both the acquirer and the acquiree belong to the same industry. However, the main aim of Suning is to expand purchasing routes for products to sell in China by recognizing trends in the Japanese home electronics manufacturing and distribution industries and deepening its alliance with Japanese home electronics manufacturers, absorbing the retail service know-how (merchandise display and the selection of products) of Laox, rather than introducing Chinese products to Japan using Laox's sales network. As this effect will have implications for the overall supply chain, the acquisition of Laox by Suning should be categorized as a vertical integration in that context.
Obviously, it is not only Chinese companies that benefit from these acquisitions. Advantages are also great for their Japanese counterparts, such as obtaining financial support and a foothold to operate in the fast-growing Chinese market. In fact, the above firms have been achieving steady growth since becoming affiliated with the aforementioned Chinese companies.
At present, Chinese companies are eager to acquire Japanese companies, but Japanese companies remain resistant to acquisitions by foreign companies, particularly Chinese firms, reflecting concerns about the outflow of technologies and cultural differences in employment practices and other areas. Accordingly, although the number of Chinese companies entering Japan continues to rise, it still remains modest overall. As the above examples show, many Japanese companies subject to M&As by Chinese firms tend to be those that have been forced to sell or face bankruptcy. However, if the number of successful examples increases in the years to come, Japanese anxiety will ease, and M&As between Japanese and Chinese firms, including major deals, are likely to become more common.
