China’s Growing Appetite

Failed bids haven't dampened the country's hunger for U.S. acquisitions.

Chinese companies are looking overseas to acquire specific technologies. “The U.S., Europe, and Japan still have a technological edge over China at this point,” says Merrill Lynch’s Desai. “Although Chinese companies are catching up very rapidly, they would still be buying technology.” Desai believes that Chinese telecoms are surveying potential targets in California’s Silicon Valley. There is precedent, though small. Huawei has acquired two optical-transmission equipment companies since 2002. Last year, the company spent $2 million for a small stake in a third, LightPointe Technologies, a manufacturer of wireless optical devices based in San Diego. “Although we’re spending 10 percent of our revenues on research and development, we’re not ruling out small acquisitions if they offer technologies that will enhance our product portfolio,” says Johnson Hu, executive vice president at Huawei.

Car Talk

China is making bold moves into the automotive sector in the United States, Europe, and elsewhere in Asia. Last July, Nanjing Automobile paid around $93 million for bankrupt British carmaker MG Rover. Shanghai Automotive, China’s biggest automaker, acquired South Korea’s Ssangyong Motors for $523 million last year. (Shanghai Auto also makes passenger cars in joint ventures with General Motors Corp. and Volkswagen AG in China.) In August, Asimco, a small auto-parts maker in Beijing, bought NVH Concepts, in Livonia, Michigan, to enhance its capability in noise-, vibration-, and harshness-reduction technologies for automobiles. Two years earlier, Asimco paid $28 million to buy the camshaft division of Federal Mogul, a century-old auto-parts maker in Southfield, Michigan.

The Federal Mogul unit opened up the U.S. market to Asimco. Michael Cronin, Asimco’s finance chief, says one-third of the company’s sales are generated in the United States. (Some 70 percent of sales are in China.) Its 2006 goal is to acquire new technologies in the United States and Europe. “Most Chinese companies are make-to-print, meaning they can make a product according to a customer’s print specification,” explains Cronin. “What we want to do is move up the value chain and become a solutions provider—to work with the customers, understand what their issues are, and then make the products for them. Most Chinese companies lack that ability.”

Asimco is establishing a center in Beijing to transfer technology from its newly acquired units among its factories in China. Ultimately, the company aims to redefine itself as multinational rather than Chinese. “To our U.S. or European customers, we want to appear as an American or European company with substantial operations in China,” he says. “To our Chinese customers, we want to appear as a Chinese company with access to global technology, management, and quality standards.”

Cronin says some of Federal Mogul’s manufacturing was transferred from Detroit to China to save money. Labor costs $18.50 an hour in the United States compared with 36 cents in China. Because of the cost savings, Asimco lowered prices, which increased sales. Workers whose jobs were eliminated as a result of moving some manufacturing overseas were retrained to do more-skilled jobs such as testing and inspecting parts. This year, the company’s revenues from its U.S. unit should top $70 million, up from $60 million in 2004, says Cronin, and the unit, which had been losing money, should be profitable.

But the Chinese can be demanding of their new units, too. Asimco installed “visual aids” to encourage higher productivity at its factory in Detroit. “There are a lot of charts on the walls that show the things that get measured, such as production, service record, and machine tolerance,” says Cronin. “Knowing how you compare with others, your efficiency improves.”

And Lenovo has issued an ultimatum to its new PC unit. Among other things, the former IBMers are under pressure to achieve better-than-market-average sales growth in emerging markets, boost sales of laptops, and win a bigger stake in the small-and-midsize-business market in the United States. In the past, “IBM didn’t put a lot of emphasis on these three areas,” says Ma. Lenovo intends to boost sales in part by opening more sales channels and offering customers better maintenance service on their computers.

In any case, says Ma, the Chinese are going to teach the Americans a thing or two about the new entrepreneurial spirit of competition. In the past, she says, when faced with a problem in the PC division, IBM would build a team of people to analyze it, a time-consuming process that kept the unit from being nimble. “At Lenovo,” says Ma, “we put the problem on the table and make decisions right away.”

Abe De Ramos is executive editor of CFO Asia.

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