An important question that confronts managers and researchers... is this: If Chinese and Indian firms are beginning to behave like Western multinationals, what are the implications of this development for managers? We discern three broad approaches:
1. Treat the development as a revolutionary break in the history of global business and hail the acquiring firms as bringing unheralded changes to the world of commerce. This perspective views the overseas acquisitions by emerging market firms as a natural trajectory of their internationalisation. Researchers writing in this vein carefully document and celebrate the growth of MNCs from emerging markets but leave unexplored the implications of the phenomenon.
2. Acknowledge that acquisitions by C&I firms are indeed rising but question whether they are indeed value creating. Taking the cue from traditional finance and strategy literature, this approach asks questions such as these: Have the buyers from newly industrializing countries overpaid for these acquisitions? Do such buyers have the wherewithal to add to or extract value from their overseas acquisitions? If the answer to these questions are in the negative, then incumbents in global industries have little to fear from or worry about such acquisitions.
3. This final approach, which we adopt, is to acknowledge that acquisitions by firms from China and India are indeed rising. But we then ask a different set of questions, primarily from a competitive perspective. Taking the cue from strategy literature, this approach asks questions such as: How do these overseas acquisitions by firms from newly industrializing countries change the competitive landscape in global industries? How do they influence the strategic options open to incumbents in these industries? In what ways do different responses to the questions influence how incumbents react, or should react, to these overseas acquisitions by Chinese and Indian companies in their industries?
The first approach is exemplified by writers who praise the growth of multinationals from China and India but stop there.
A recent book on emerging Indian multinationals cites a number of Indian firms, such as Tata Motors, Tata Steel, Godrej, Suzlon, Bharat Forge, and Hindalco that have made acquisitions abroad and indicates that it is part of the companies’ strategy to globalize. The authors do not, however, ask why it should matter to their global rivals. Witness their description of Suzlon’s acquisitions: “Suzlon acquired Hansen Transmissions of Belgium in 2006 . . . [which] cemented Suzlon’s position ... as a top-tier global manufacturer.” The authors then go on to describe how Suzlon is trying to overcome challenges associated with globalization such as managing cultural diversity, maintaining financial performance, and growth. There is no discussion about what challenges Suzlon’s rise poses for its global rivals and how they could and should respond to them. Many commentators in newly industrializing countries have taken to writing paeans of praise for globalizing firms. For our purpose, though, such pronouncements of greatness of globalizing firms from India or China are not of much help.
The second approach acknowledges the rising trend in overseas acquisitions by Chinese and Indian firms but then goes on to question the value of such acquisitions. This approach takes a firmly financial perspective. The literature suggests that a large proportion of acquisitions does not, in general, create value for the acquiring firm. Some researchers have concluded that between half and three-fourths of acquiring firms have actually cost their shareholders by destroying shareholder value. One researcher has used this value creation perspective to question the usefulness of Indian firms’ overseas acquisitions. He argues that Indian firms’ recent overseas acquisitions have not been value creating but value destroying. Using detailed case studies of acquisitions in the steel industry (Tata Steel’s acquisition of Corus), aluminum industry (Hindalco’s acquisition of Novelis), and automotive industry (Tata Motors’ acquisition of Jaguar and Land Rover), he argues that these acquisitions fail the test of value creation. He hypothesizes that management hubris and nationalistic cheerleading have led to poor strategic assessments, followed by overpayment and poorly conceived integration efforts. These have combined to make these acquisitions poor strategic moves. His conclusion is that Indian firms’ acquisitions have destroyed shareholder value and are more of an albatross around the necks of Indian companies rather than opportunities for enhancing long-term advantage. Presumably similar arguments can be made of Chinese acquisitions abroad.
| 'Asian firms need to learn from Tata and Lenovo' AUTHORS SPEAK Authors Anil K Gupta and U Srinivasa Rangan tell Ankita Rai that Asian companies need to think creatively to deal with global competition What sort of challenges do global acquisitions by Chinese and Indian firms pose to incumbent MNCs from Europe and the US? Gupta: With some exceptions, such as the big Indian IT companies TCS, Infosys, Wipro, and Tata Motors and M&M in tractors, Chinese and Indian globalisers are still in the early stages of spreading their wings abroad. Thus, not a major threat to their much larger Western peers. However, other than Tata Motors acquisition of JLR, the global expansion of the other companies has been largely organic rather than through acquisitions. From China, Huawei and ZTE in telecom equipment, Lenovo in PCs, and Alibaba Group in internet services, are very successful. However, the growth of Huawei and ZTE have been organic. Lenovo has grown through acquisitions — the biggest being the acquisition of IBM’s PC business. Chinese companies have made several large investments abroad in the resources sector but the majority have been for partial stakes along with Western MNCs. The picture is likely to be quite different by 2025. Benefiting from the growth of their home economies, and the combination of scale and experience, will make Chinese and Indian companies formidable challengers to Western MNCs. Western MNCs have about 10 more years to establish themselves as big players in emerging markets such as China and India. By 2020, those Western companies, which have still not done so, would find themselves in trouble. Rangan: To pose a strategic challenge to incumbent MNCs from Europe and the US, Chinese and Indian acquisitions abroad should be significant in two ways. One, these acquisitions should be large and consequential. Two, these acquisitions should change the nature of competition. Both of these conditions are true now. In the last decade, global acquisitions by Asian firms have grown dramatically, both in terms of number and value. These acquisitions have also provided strong market positions for the acquirers in several global industries. These acquisitions have allowed the Asian firms to leapfrog over entry and mobility barriers into global markets. What lessons can managers learn from the surge in M&A activities by Asian companies? Can you offer some strategies these companies can adopt to compete with the MNCs globally? Gupta: Any company going global, whether from China, India, Europe, or the US, must never forget the following three points: first, home country advantages or disadvantages matter. Second, global success will always require that while leveraging home country advantages, the company also develop complementary advantages in the new markets. Third, the company must learn how to manage globally distributed operations and a global organisation. Most companies from China and India are used to managing domestically through hierarchy-based command and control. In contrast, a global organisation requires much greater skills at managing a horizontal network. Asian companies are often not as strong as their developed country counterparts so unless the government tilts the scale in favour of domestic companies, it is not always the case that even within their home markets, Chinese and Indian companies will emerge as the market leaders. Rangan: Acquisitions can help Indian and Chinese managers in following ways: first, these firms have to globalise in mature markets with substantial entry barriers and competitors. Acquisitions can provide a convenient way to vault these barriers to entry. Two, it can provide access to specialised resources, such as technology. Three, cross-border acquisitions permit firms to gain economies of scale. Asian managers need to creatively rethink the way global competition can be dealt with. Here are some examples from which managers can learn. Bharti Airtel, for instance, has adopted a different configuration of value chain activities than any of its global rivals, such as Vodafone. It decided to focus on the marketing of its services, collaborating with different players such as IBM, Nokia, Ericsson, Tech Mahindra, and Spanco to manage its IT systems and support, and management of its cellular network infrastructure in various markets. For its part, Bharat Forge reconfigured its manufacturing value activities, performing only part of the activity in the developed economy while doing the part in its domestic operations. Post IBM’s PC division acquisition, Lenovo maintained its manufacturing unit in China, which helped it strengthen its position with products that were better and priced attractively. |
Excerpted with permission from the publisher. Copyright Wiley India. All rights reserved.
GLOBAL STRATEGIES FOR EMERGING ASIA
AUTHOR: Anil K Gupta, Toshiro Wakayama, U Srinivasa Rangan
PUBLISHER: Wiley
ISBN: 9781118217979.
