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UPDATED: September 9, 2013 NO. 37 SEPTEMBER 12, 2013
What's to Be Learned From Microsoft's Nokia Dea

Microsoft Corp. will buy Nokia's phone business and license its patents for 5.44 billion euros ($7.2 billion). The deal is expected to be finalized in the first quarter of 2014. This is another legendary acquisition of a hardware company by a software giant, after Google swallowed Motorola's handset business in 2012.

Nokia, which began life as a paper mill in 1865, was once the dominant force in the telecom market before it collapsed in the face of nimbler rivals Apple Inc. and Samsung Electronics in the fiercely competitive smartphone wars.

In June, Chinese telecom equipment maker Huawei expressed its interest in acquiring Nokia but was refused because of opposition from the Finnish company's shareholders. Mistrust of the Chinese company wasn't derived from concerns over financial issues or competence, but from a lack of global brand recognition. Therefore, facing acquisition bids made by Microsoft and Huawei, Nokia naturally chose the former, which is widely recognized as one of the greatest IT firms in the world.

Recently, "made-in-China" companies are striving to go global and acquire foreign companies to move up the value chain of goods produced. But due to a low-end position in the global value chain and a lack of brand recognition, it's very difficult for them to arouse the interest of foreign companies.

The fact is Chinese companies are well behind their foreign rivals when it comes to management and technology innovation. Despite Nokia's collapse in the hotly contested mobile phone market, the brand itself is still associated with producing goods of durable quality, while Huawei made its name by selling cheap and low-quality phones.

The competitiveness of Chinese companies lies in their capacity to produce goods at a low cost. Any company with a lack of technology innovation will only be stuck at the low end of the value chain.

Huawei's failure is a lesson for Chinese companies. They must abandon the tradition of undercutting rivals by ambitiously producing goods at a lower cost and shift to a paradigm of product innovation. That way, companies can transform their products from merely being "made in China" to "created in China."

China is the world's second largest economy, it needs an array of great companies to back up its global economic status. "Going global" is a must for Chinese companies. Microsoft's Nokia deal reminds Chinese companies that when it comes to global mergers and acquisitions (M&As) they should have the knowledge and ability to comply with international rules, the innovation and management competence to run an acquired business, and most importantly, a brand recognized by the world. To this end, Chinese companies have obvious flaws.

The key to "going global" and participating in large overseas M&As lies in creating big brands with global influence and ensuring companies are up to date with the latest in international management practices.

This is an edited excerpt of an article published in Securities Times

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