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 / Winter 2009 / Issue 57(originally published by Booz & Company)


Capturing the Asian Opportunity

China is already home to many of the world’s largest firms. For example, in August 2009, Air China Ltd. had the largest market capitalization of any airline. Some Chinese and Indian companies are coming out of the recession with stronger cash flows and market positions than they had in the past — and are now in stronger positions than their Western competitors. Combined with the profound troubles of many established institutions, particularly in automobiles and financial ser­vices, along with greater uncertainty in every global industry, the result is a new set of opportunities for M&A that would have been hard to imagine before the crisis.

Examples include the acquisition of the assets of Australia’s Oz Minerals by China’s Minmetals for $1.2 billion. (China Nonferrous Metal Mining Group similarly attempted to purchase a majority stake in the Australian rare earths company Lynas Corp. for about $400 million, but the Australian government did not approve the deal.) China’s particularly strong business interest in Africa, the Middle East, and Latin America, is evidenced by the Industrial and Commercial Bank of China’s purchase of a minority stake in South Africa’s Standard Bank; the acquisition by Chinese chemical company Sinopec of the oil and gas company Addax, which has significant assets in Africa and Iraq; and PetroChina’s stated interest in acquiring the Latin American assets of Spanish oil company Repsol.

In pursuing these deals, some prospective acquirers are looking for short-term financial returns; others have a longer time horizon. Bank of China and automaker Geely, for example, are concentrating on ac­quiring capabilities (for businesses in aircraft leasing and engine drive transmissions, respectively).

Success in international mergers and acquisitions always requires a high level of market and cultural understanding. British retailer Marks & Spencer had problems with its store opening in Shanghai in 2008; management had underestimated the impact of variations in shop-ping habits between consumers in Shanghai and those in Hong Kong, where the company’s stores had traditionally done well. The retailer also experienced unexpected supply chain delays involving Chinese customs. Asian companies moving into Africa, Latin America, and other parts of the world are experiencing similar difficulties.

But that won’t stop the movement toward Asian mergers. In Japan, for example — a country that has often resisted consolidation — companies with excess capacity, such as those in the paper and computer storage device industries, are reducing factory capacity through mergers. The Lawson convenience store chain recently acquired its insolvent rival am/pm; it can now compete more effectively against market leader 7-Eleven in Japanese metropolitan areas.

In short, the Asian recovery will not represent a return to business as usual. It will lead both to more consolidated industries at home and to a far greater global presence for companies from India, China, and elsewhere on the continent.

The companies that best capture the resulting opportunities will be those with a coherent, focused approach to their markets, combined with a distinctive set of capabilities that give them an edge in reaching those markets. (See “How to Win by Changing the Game,” by Cesare Mainardi, Paul Leinwand, and Steffen Lauster, s+b, Winter 2008.) For Asian companies, the conventional strategy of moving abroad by acquiring assets will not work. For Western companies, moving established operations into Asia will be equally fruitless. There’s only one way for both types of companies to succeed: By determining the capabilities they need to drive operations and investing in those exclusively. If companies’ capabilities match their strategic plans, Asia’s growth can provide a powerful counterweight to the worldwide recession — and a platform for global expansion afterward.

Reprint No. 09401

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