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UPDATED: April 23, 2012 NO. 17 APRIL 26, 2012
Joining the Yacht Club
Chinese SOEs make forays into the luxury brand market but may be all too eager to scoop up big names in foreign markets
By Lan Xinzhen

Chinese enterprises have recently been actively engaged in overseas M&As in mining, manufacturing, electricity production and supply, professional technological service and finance.

China has been predominantly interested in investing in energy and mineral resources sectors alongside its soaring demand in those areas. Now that attention is shifting to consumer goods and hi-tech products, said Wang Hongtao, Vice President of China International Economic Cooperation Society under the Ministry of Commerce and Executive Secretary General of China Overseas Investment Fair.

China's overseas direct investment now accounts for 5.2 percent of the global total, ranking fifth in the world. There are 16,000 Chinese-funded companies scattered in 178 countries and regions, with their overseas investment coverage surging to 72.7 percent globally, and 90 percent in Asia and 85 percent in Africa, according to the Ministry of Commerce.

China's overseas direct investment covers almost all aspects of the economy, with $280.16 billion, or 88.3 percent of the total, going to business service, finance, wholesale and retail, mining, transportation and manufacturing.


China does have worries about the proliferation of M&As in the luxury sector as its SOEs look to spend their money abroad.

"Weichai doesn't have the same experience in luxury goods as Ferretti," said Ma Guangyuan, a doctor in economics at the Chinese Academy of Social Sciences. "Besides the possibility of providing engines and some yacht components, Weichai has basically nothing to do with the yachting industry. The two are hardly connected with each other."

"Too little information has been unveiled in this case and the public have a vague knowledge of it. The 374 million euros investment embraces two parts: 178 euros direct investment for the stock ownership and 196 euros loan credit. But Ferretti is deeply indebted, around $800 million according to public information. How should Weichai deal with the debt after the deal? Has it done some acquisition deals with Ferretti's lenders to lower its financial risks in Ferretti? " said Ma.

"Besides, it's a key whether the 374 million euros will bring over Ferretti's brands and core technology. Whether Weichai can have Ferretti's core assets, is not known" said Ma.

Weichai doesn't have specific arrangements in debt management, core asset ownership, integration with Ferretti and Ferretti's localization plans in China. Besides serving as a model for future ventures, Weichai's case is also a warning for Chinese enterprises that want to merge or acquire international luxury brands.

Former Vice Minister of Commerce Wei Jianguo offered several tips for Chinese enterprises.

"After the euro debt crisis, European countries have welcomed Chinese enterprises' investment, offering a good opportunity for their overseas M&As," said Wei. "But, Chinese enterprises must be highly cautious in overseas investment. They should have a specific goal and shouldn't be blind. Before closing a deal, they should do thorough market research and get to know their European counterparts very well. Also, they should know whether they have potential for sustainable development abroad."

Without the above-mentioned information, even if Chinese enterprises manage to acquire sales channels, the core technology and even research and development power after the deal, they will end up with a bitter fruit because of the large amount of debt they can not shoulder, said Wei.

Email us at: lanxinzhen@bjreview.com

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