One of our themes for 2010 here at the China Business Blog and Podcast is “acquisitions”.  A typical market sector in China is very fragmented and very crowded – there are many players working in their own local areas.  From automotive, to healthcare to consumer products … they are all this way.  Both foreign and local companies will be looking to strengthen their positions in these markets by acquiring smaller players, bringing products, brands and distribution together to gain scale and more power in the market.

In early 2009, the global economic crisis knocked the wind out of the M&A market all over the world, and here in China, it was no exception.  Transaction volume fell off significantly as companies hunkered down to wait out the storm.  Well, though for many individuals around the world, the storm is still blowing, for companies and investors here in China, it is prime time to move … they have motivation to grow and cash to invest.  The challenge, as we will explore today, is managing risk.

Here at Technomic Asia, we have strengthened our M&A practice to include end-to-end transaction services and have brought in to the Technomic family one of the preeminent deal guys in China, Dr. Kim Woodard.  When Kim joined us late last year, we started a Podcast series on M&A in China.  Today we are going to continue that series as Kim and I talk about managing risk in China M&A.  And we start off discussing a very shocking statistic …

My mother told me that its not polite to say “I told you so”, but I can’t help it.  From the start of the global economic crisis last year, we’ve been blogging and Podcasting like maniacs saying, “Yea … I know it is rough out there.  But China could be a shining light at the end of the tunnel for companies going through the rough stuff.  If the rest of your world is crumbling, now might be the time to really look at China.”

And now, no less an august body than the U.S.-China Business Council is saying just this.  In their recent survey, released on October 7^th and highlighted in this article from Industry Week, they say, and I quote, “Most U.S. companies doing business in China are profitable and many want to step up investments despite fears on the economy, protectionism and intellectual property rights.”

Yep, I told you so.

The USCBC survey is quite revealing.  51% of the 100 respondents projected that their revenues in China will grow in 2009, and 84% said their China operations remain profitable.  How many of you can say that about your U.S. operations?

A year ago, when the nasty stuff hit the fan, the one question we asked was “Where are you going to look for growth?”  We received a number of comments using words that my mother would never approve of … but all of them were along the lines of, “Are you nuts???  Growth?? Who can look for growth?  We are only interested in survival at this point!”  Yea, I get it … when you are shedding employees and operations faster than an Eskimo stripping on a Miami beach, its tough – maybe even unnatural – to ask about growth opportunities.  But that’s what separates the men from the goats, isn’t it … asking questions and using different words from what your competition is asking.  They say “tomato”, you say “kumquat”.

So I am going to go out on a limb here and repeat what I said a year ago … in 2010, companies should be looking to China for new growth opportunities.  I’m talking blue ocean, limited competition, boldly-going-where-no-person-has-gone-before stuff.  Seriously, most market sectors are still doing double-digit growth in China, more than the existing suppliers can supply.

Yes, the signs in the U.S. and Europe seem better … capital markets are improving a bit, money is starting to flow and buyers are starting to buy.  But recovery is going to be slow … slow like glacial slow … slow like the speed of mammal evolution slow.  Dollars to donuts, you are not going to be able to sustain your company waiting for your domestic markets to come back.  China could be part of your answer.

Now I know my smarmy tone is probably not appropriate … going after China is NOT easy.  We’ve never said it was … in fact, this blog and Podcast is dedicated to exploring just what a royal pain in the backside China is to succeed in.  But the difficulty of success here should not be confused with the importance of the pursuit.

Everyone is deep into planning for 2010 so you are setting priorities and budgets.  If China is not among your top priorities, then it probably should be.  Almost 90% of USCBC’s members surveyed indicated that China remains the top or among the top five priorities for their global investment plans.  Is it yours?

Now, my momma done raised me right.  I try to keep my elbows off the table when I eat, say “excuse me” when I sneeze and open doors for people when I can.  Mom also told me its not right to say “I told you so.”  So do it right this year … listen to what everyone is saying and get things in gear for China.  Get your team together Monday and ask yourself a simple question: “What are we going to do in 2010 to grow in China?”  Don’t make me have to say “I told you so” again next year.  I am already in enough hot water with Mom over missing holidays, birthdays and not writing as often as I should … and I don’t want to make it worse.

However, even if the task for “universal coverage” seems more daunting in China than the U.S., I wouldn’t bet against China to actually get there before the U.S. does.  Why?  Simply put, the Chinese government is starting to see that universal healthcare is a responsibility of the government to provide to all its citizens.  In other words, China seems to be looking at healthcare first as a right, and then as a business  This means that, while companies are invited to participate in healthcare and private companies can expect to make a profit, at the end of the day, healthcare is a right and it is a moral responsibility of the government to provide it, at the expense of business, if necessary.

Don’t get me wrong … the Chinese government is being pretty self-serving in considering healthcare as a right.  They know that, in order to maintain the support of the people, they need to provide for their basic needs.  The Party and the government (one in the same in China) knows that healthcare is an issue of national security, not just the health of its people.

But the U.S. is different.  Healthcare is not a right in the U.S., it is a “benefit” that only the employed (most of them) receive from their employer and many (but not all) elderly receive from the government.  If it were assumed to be a right – as it is in most of the rest of the developed world and much of the developing world (like China) – I think we would have a VERY different discussion on our hands.

In a country this big there are plenty of sick people. Combine hundreds of millions of sick people, with less than 1,200 hospitals capable of providing comprehensive care, by that I mean best physicians, technicians, and staffing, which are called Grade 3 hosptials, and you have the world’s largest waiting room.

Allow me to describe this potential process. Man has pain in groin and suspects it’s a hernia. He travels a couple of hours to nearest Grade 3 hospital in Shanghai, primarily because he has little faith in a Grade 2 hospital nearby and there are no real places that a Westerner would recognize as a primary care clinic in China. He waits a day in Shanghai to see a physician, if he is lucky, who confirms his suspicions and recommends surgery. Unfortunately no beds are available which means waiting in a nearby hotel – that’s right, hotel stays and hernias go together here in China’s health care system, until a bed opens up.

Can you feel his pain? Yes I believe you can. My friends, pain like that can only produce opportunities for business here in China’s vast and emerging health care market. But where exactly do you say are those opportunities? Let’s start at a level down from that Grade 3 facility where the bulk of patients can be served.

We have seen most of the opportunity in the 6,500 Grade 2 hospitals across the country. That is where many of those people in waiting rooms in Grade 3 hospitals will find their cures by improving the quality of care at hospitals usually closer to their homes and with greater distribution across the country. After extensive research, we have found that this level of hospital will receive more government funds for improvement and greater flexibility to incorporate private sector principles in their operations.

The specific opportunity is for medical device and IT companies to provide equipment and software, for better trained physician groups to practice, and for investors to add to the infusion of Chinese investment in healthcare, nearly $125 billion government funds over the next 3 years. That’s an opportunity. The full transcript of this podcast which includes a greater description of the hospital structure in China is available here.

I have been living and/or working in China for over 20 years and have been witness to one of the world’s most amazing phenomena … the aging of the population. Why is that so amazing in China? Well, just 50 years ago the life expectancy of the average Chinese person was 35 years old; today it is 72. In the past 10 years, life expectancy has been raised over 2 years. And why are people living longer? There are a number of reasons, but the major factor is is that people are getting better healthcare. But the cure to the Chinese people’s improved lifestyles is also the disease. Do the math: more than a billion population living nearly twice as long as their great-grandparents, equals some very, very large health care needs.
The attached Podcast is starting a series on Chinese healthcare but I will just highlight some of the issues here.
It is common knowledge that the low levels of consumer spending here and high savings rates compared to more developed economies – the average Chinese citizen saves 35-40% of their total income – is due largely to the fact that the Chinese social safety net has huge holes in it. In the old days of the planned economy in China, healthcare – such as it was – was a given, part of the so-called “iron rice bowl” of guaranteed supports which included housing, schooling and healthcare along with a basic (and low) salary. Well, as the economy has opened up and more capitalistic structures and systems have been allowed to bloom in China, this iron rice bowl has started to crack and, for most people, disintegrate completely. And the economic planners in China, giddy from the incredible wealth and its associated global power, focused more on the exo-structure rather than the infrastructure in China’s development.
There is a running joke among some of my China-phile friends that, if you hear a so-called expert start his or her speech with the phrase, “China is a big country”, you should immediately discount anything you hear from that point on … pointing out the obvious is not a good way to begin.
Still, this must be the foundation for any discussion on the social welfare system in China, that this is just a MASSIVE country, both in terms of geography (the physical size of the U.S.) and population (1.3 billion people, more than triple the U.S.) and this scale has a lot to do with how things do or don’t get done. Comparisons are often made between China and Japan or the “Four Tigers” of Asia (Taiwan, Singapore, Hong Kong and Korea), looking at how these early Asian economies developed versus what and how China is doing today. While certainly some comparisons can (and should be) made, the fact remains that China’s scale sets it apart from the others – its like the difference between driving a Jet-ski and a super tanker – both are navigating some of the same waters, both have somewhat similar methods of propulsion and steering, but the simple differences in volume and mass make for VERY different sailing experiences!
Let’s look at some age breakdowns … in 2000, it was estimated that 7% of the population was 65 and older. If current trends continue, by the year 2040 that group of 65 and older will have increased to almost 20% of the population. And a population skewed older will have greater need for healthcare of all kinds. The aging of the population alone is predicted to produce a 200% increase in deaths from cardiovascular disease in China between the years 2000 and 2040.
Now, where are these people all living? A majority of China’s population – albeit a shrinking one – lives in rural areas, in small towns and villages, far from the infrastructure of the cities. In 2010, about 55% of China’s population will live in rural areas.
However, this is rapidly changing and China will add about 150 million people to its urban areas over the next ten years, making for about a 50/50 urban/rural split by 2020. That means that China’s cities, many already bursting at the seams, will be additionally challenged to provide for their populations. We’ve talked before in these Podcasts about the growth in consumer activity in China’s so-called Tier 3 and 4 cities … but these cities still have between 1 and 3 million people in them! This is NOT what we in the West are used to. My own hometown – the Twin Cities of Minneapolis and St. Paul in Minnesota – has about 2.85 million people and is estimated to be the 16th largest metropolitan area in the U.S. (and notice that it takes us combining TWO cities together to do this!). But in China, that population would barely get us into the top 100 cities! Granted, we Minnesotans – with our German and Scandinavian ethnic heritages and our great bread, beer and cheese – are an order of magnitude larger than the average Chinese person so it feels more crowded in Minnesota. But for sheer measurements of “people per square meter”, China is the clear leader, if not necessarily the winner.
One of the benefits of improved lifestyles is better food … and “better” often means “more fattening.” In 1982, Chinese citizens consumed, on average, about 48 grams of fat per day … in 2002, that figure was up to 76 grams for urban dwellers. This exceeds the World Health Organization’s recommended level by over 30%. Some statistics put the number of the overweight and obese in China at over 200 million people. These new diets are leading to an increase in the so-called “modern” chronic diseases such as hypertension, diabetes and heart disease. In the past couple of years, diet programs from Jenny Craig, Weight Watchers and hundreds of China look-alikes have sprouted up all over China, pursuing, particularly, the young female population by telling them that they won’t be happy until they look like this retouched photo of a movie-star who has 7 personal trainers, the God-given metabolism of a wolverine and several liposuctions under her ever-tightening belt. I have even seen adds aimed at parents of chubby kids … you can bring them to fast food during the week and to a “fat camp” on the weekend.
A running joke among some of my friends in China is to walk into a restaurant and ask for a non-smoking table. “Non-smoking” just means that there is not an ashtray on the table and that YOU should not smoke there … but everyone around you, at all points of the compass, will be belching smoke like an iron smelter. Needless to say, smoking is VERY prevalent in China … an estimated 1/3 of the world’s 1.3 billion smokers are in China.
The prevalence of smoking has actually dropped in China … it was 63% among men in 1996 but then fell to “only” 48% in 2002. Culturally speaking, smoking among women is not very popular … only an estimated 3% of Chinese women smoke, but that is changing as well as younger, more “modern” women are taking up the habit.
And when you see smoke, you think “cancer” … and that is certainly happening in China. Reliable statistics here are MUCH more difficult to come by (given that the biggest supporter and supplier of tobacco products in China are state-owned enterprises), but some random data points (and the experience of smoking deaths in the West) can lead us to some pretty clear conclusions.
Lung cancer is expected to increase by nearly 2 times, resulting in over 100 million lung cancer patients in China by the year 2015. Cancers of all kinds are growing in China. Today, about 300,000 patients die each year of primary liver cancer in China … this is a rate 24 times higher than the United States. Cardiovascular disease, chronic respiratory disease and cancer are, by far, the leading causes of death in China.
Stay tuned to these pages as we explore more about the Chinese healthcare system. And check out today’s Podcast which goes into this subject in much more detail.

Download this podcast
Download audio file (20090403_deep_thoughts.mp3)

Sheesh … can’t a guy get away for holiday without the world falling apart??  I go for 10 days of sun, sand and minimal Internet and come back to find the world upside down.  AIG needs more money (to fund bonuses? foreign banks? Liddy’s baseball card collection?) and President Obama is firing CEOs (not that many others have wanted to do the same in the past but lacked the political will and cajones).  China dope-slapping Coke in its attempted acquisition of Huiyuan is counter-slapped by Australia for Minmetals attempted investment in OZ Minerals.  An apt description from Dr. Venkman in Ghostbusters: “Cats and dogs living together!  Real wrath-of-God stuff!!”

Not that the situation would be any different if I would have been on the frontlines last week, bravely Podcasting and blogging about the world from my 5th floor Shanghai office … but I do have a bit of a Rip VanWinkle feeling about it all.  To have so much happen in the space of just over a week makes my head spin (causing the too-small brain inside my rather large cranial capacity sound like some Cinco de Mayo maraca jam session).

The suddenness of all this – and too much free time on a beach – has led me to think of three deep thoughts:

Deep Thought Number One: the age of dominance of the western multinational company (MNC) is over. Actually, I think this dominance has been over for some time but we’ve been so busy kicking the body and yelling “Look!  Its moving!” that we’ve not realized its dead.  Certainly this is true in manufacturing … that happened some time ago when we started worshiping at the alter of the god Wal-Mart to receive the deity’s blessings that came from cheap products manufactured in low-cost countries.  I am not saying we would/could/should have done anything differently, but we are where we are.

So maybe the proper way to say this is that we Westerners need to lose the illusion that we are in total control of the world.  We are not.  And the last stand where at least Americans could claim dominance – the financial sector – has completely lost its mojo (and most of its money).  The title “Bank Manager” has become the new oxymoron replacing “student-athlete” and “country-music”.

Practically speaking, this means that Western companies will now be the seller as often (or even MORE often) than they are the buyer.  For every Coke-Huiyuan situation we will find Chinese companies buying medical companies (ala Mindray), mining rights (ala Minmetals) or car companies (ala a billion rumors in the market about various GM divisions being schlepped to the Chinese ).  Certainly, there are massive financial and cultural hurdles to overcome for Chinese companies and institutions to become major buyers, but there is definitely the motivation here and there are certainly enough Western assets – distressed and otherwise – for them to pursue.

Deep Thought Number Two: China WILL become a stronger global player in several sectors. This is a natural result of the first … if there is a leadership vacuum created by the decline of Western firms, someone will step into their place.  And the Chinese seem to be the most likely to come off the bench and make the winning basket.  I see three sectors to keep our eyes on – two are no-brainers and one might be a long-shot.

The first sector where China will begin to gain global leadership is, obviously, automotive.  Already the second-largest auto market in the world, China is also the leading supplier of auto parts and components to the world.  China will begin to leverage this supply chain dominance into actually creating cars to sell into other markets.  It is already happening in southeast Asia where a number of Chinese suppliers are exporting cars.  And Chery attempted a distribution agreement for small cars with Chrysler in the U.S. before the U.S. auto world turned upside down.  Finally, China has declared that they WILL be the global leaders in electric cars and technology – in the next three years.  That is very aggressive but it seems the entire economic and political system is focused on doing this.  Look for the leading China auto companies – SAIC, FAW, Dongfang, Changan, Chery and the cheeky BYD – to flex their muscles internationally.

The second sector is medical device.  Again, China is a leading player in the supply chain of components to the global medical industry but strict regulatory requirements have kept them largely from being very strong in Western medical markets.  The Mindray acquisition of Datascope last year was their attempt to change that – Mindray is the biggest Chinese medical device company, competing against the big boys of GE, Philips, Toshiba and Siemens.  Their acquisition of Datascope, a mid-sized U.S. player in the patient monitoring device sector, was Mindray’s first entry point into the U.S. market.  Look for them and others to follow. But look particularly at China becoming an even stronger growth market for medical companies of all kinds.  China will be investing a big chunk of their economic stimulus package in their medical sector in an attempt to rapidly upgrade the penetration and quality level of medical care for their 1.3 billion population.  As they do this, there is going to be a lot of money out there to purchase medical devices, pharmaceuticals, lab equipment and even healthcare management solutions.  Any medical company of any size should be looking at China as their key growth market in the mid-term.

The third sector to keep your eyes on – and I know I am out on a limb here – is the financial sector.  What?, you say.  A centrally-controlled, socialist system with a partially convertible currency is going to become a leader in global finance??  Yes, that is exactly what I am saying.  I am not saying “tomorrow” or even “in the next 20 years”, but all you have to do is follow the money and the motivation.  China certainly has the money – both in cash and U.S. T-bills – and their motivation is repeatedly being articulated – the latest has China’s leadership saying that they hope to build Shanghai into a major financial sector by 2020 and that “the Chinese Yuan will become a new world-favored currency by then”.  Gutsy?  Sure.  Possible?  Maybe.  But are they going to work on it?  You can bet on it!

This all leads us to my Third Deep Thought:  When it comes to the future, we don’t know JACK!! I know … as the proprietor of a leading market strategy consulting company in China whose very JOB it is to predict market futures for our clients, it is counter productive to admit this.  But c’mon … consider the situation.  If, 18 months ago, you would have told anyone with half a brain and a cable TV subscription that Lehman Brothers, Bear Sterns and AIG would be toast at the start of 2009, we would have assumed you had only a quarter of a brain.  Two years ago – even in the midst of big changes already happening in the automotive market – if you would have said that the U.S. Big Three would be on the edge of global collapse and that BYD (hitherto known as a battery maker) would make the biggest splash at the Detroit Auto Show, we would have taken away the last 25% and made you ride the little bus.

The truth of the matter is that we – meaning pundits, consultants, politicians, TV news anchors, banking regulators (if there are any left) – have NO idea what is going to happen next.  Sure, we know that “down” is still the trend and that “flat” is the new “growth”, but the details of which movers and shakers will actually be the ones shaking and moving is a complete mystery.  So let’s give up trying to predict where things are going and start act like they are going to go somewhere.

This means that we – and by “we” I mean “we Westerners” – get it through our neatly coiffed (but thick) skulls that we are not going to be returning to “normal”.  This economic crisis is not just a speed bump on the journey that we’ve been on since the dawn of the industrial age … it is a fork in the road with a car-swallowing pothole in it, at the bottom of which is a pack of very hungry lions who have been subsisting only on lettuce and Fruit Roll-ups.  OK … that metaphor needs a bit more work, but the bottom line is that EVERYTHING has changed!  The products, pricing, distribution, supply chain, competitors and even regulatory environments of your business are changing radically.  New players – many of them Chinese – are not just playing in the shallow end of the business pool; they are swimming in the deep end and, frankly, many of them look pretty good.

What has not changed is the advice for Western companies regarding China – we have been saying this for a LONG time and, in fact, we can maybe put a sharper point on that advice which is: your company’s future WILL be involved somehow with China so find out what it is now and start working on it.  In the midst of the global economic meltdown, China is still one of the best places for pure growth in most sectors.  You are probably not going to find growth in your home markets in the U.S. or Europe so why keep banging your head against that wall?  Net-net: if China is not at the top of your list of “Ways to save your corporate ass and position yourself for the future”, then you are missing the boat.  That is a fact that I feel 100% confident in predicting.

At the very top of the Party’s honey-do list is to insure that China’s growth continues on through the airsickness bag that is the global economy.  But in order to do that, they need to assure their people that they are on the job and have the situation well under control.  Like every politician worth their earmarks, there is a certain amount of sounds-good-if-you-say-it-fast in the Party’s communication about the economic state of things and the plans they have to fix it.  Premier Wen Jia-bao’s Congress-opening speech – of Castro-like duration minus the spiffy fatigues – was pretty much simply a restatement of what we have heard before: that China plans to invest RMB 4,000,000,000,000 (that’s “trillion” for those of you still counting zeros) back into the Chinese economy and it will go to both physical infrastructure (bridges, roads, obscenely tall buildings) as well as social infrastructure (hospitals, clinics, schools that won’t fall down in an earthquake).  Bully for them.

Mr. Wen did take an extended solo around the riff that the Chinese people should spend more to support their own economy, but it seems that such exonerations are going to fall short of their goal.  He might want to take a page from G.W. Bush when he encouraged Americans to continue spending at the onset of the Iraq War, for fear that the terrorists might win … the fact that it worked and, eventually the economy tanked, might seem to beg the question of who really won, but those are issues for other blogs.  Seriously, as we’ve said before in these pages, consumer spending in China won’t move much until the social safety network is repaired – once Chinese citizens feel that there is help for their parents and themselves in their old age, they will start to spend in their youth.

Two points are worth mentioning, however, regarding the 4 trillion RMB stimulus package.  First of all, that is not going to be the total sum of relief spending in China; it is likely to be far more.  The rumor on the street and among my staff is that the final tally could be double that amount.  In fact, the rest of Asia seemed to think so too because the Japanese and Korean stock markets went up significantly following Wen’s speech.  Their economies – like all of ours – are tied so closely to China’s that, when the dragon looks like it will flap its wings, we all try to get aerodynamic for the expected blast of air.  Of course, as the U.S. is proving with its multi-squillion dollar relief package, “more” is not necessarily “better” so just because China is going to spend more doesn’t mean it is going to be better.

What DOES make China’s relief plan potentially more effective than the U.S. plan is because of how the money will be applied in China.  In the U.S., so much of the relief money will go to relieving pressure on companies’ balance sheets … many U.S. companies are so far in a hole that they need significant help just to get back to ground level (most U.S. banks and car companies are in this condition).  In China – where most companies are not so deeply in debt – any relief is going to go directly to benefitting the P&L … juicing the topline and/or helping companies invest in improving their bottom lines.  Therefore, if the China relief program works at all, we can expect to see a more rapid uplift here than in the U.S. (where the key measurement of impact immediacy is in calculating the number of “shovel ready” projects available).

Where are we going to see the biggest hits?  Our money is on anything in the medical sector – medical devices, pharmaceuticals and healthcare – and in higher value-added manufacturing (systems integration, design engineering, etc.).  Listen for the Perotvian “giant sucking sound” as money and resources are poured into these sectors (and look particularly for consolidation of smaller players to form larger ones).  And remember, RMB-for-RMB, the lift in China should be more immediate and more – perish the use of the word – “impactful” than anywhere else in the world.  Chinese companies are, in many cases, well-positioned to take advantage of the boost and will be quick to respond.  The question remains is whether the rest of us will be too.