Americans Buy Chinese Companies & Start Out With High Hopes

This story I’m about to tell you is short and its vis a vis of nothing. But it’s important in the context of a 2016 when Chinese M&A is in the news.

If we step out of the realm of SMEs and completely into the realm of large multinational corporations, one of the favored ways to make a splash in the China market is to buy up promising emerging companies that do what the acquiring company does, but with local clients.

In this sort of acquisition-based expansion strategy one of the most critical things the buying company does is bring over experienced executives, many of them GMs from neighboring regional markets. The purpose of this foreign delegation is to determine if the leadership of the company being required is competent. Lip service is paid to cultural fit during these vetting visits, but given the cultural barriers and language barriers that are inherent to the transaction, any sort of cultural fit considerations are minimal.

But Culture Fit is Critical, And Its Not Paid Enough Attention To

Usually, if the leadership team of the target company is liked well enough then the next step is that all of the foreign GMs go home, some of them to company headquarters, wherever that is, and they start looking for a candidate to become the China manager. The ideal China manager candidate is bilingual, and is a cultural fit with the parent company. Lip service is paid to cultural fit with the newly acquired Chinese company, but again, given the cultural barriers and language barriers that are inherent to the transaction, any sort of cultural fit considerations with the acquired company are minimal.

What I’m foreshadowing is that this sort of company building strategy starts to backfire almost as soon as the critical hires are made. The acquired company and the part of the in-country China team that report directly to headquarters back in the home country never really come together. Culture fit is usually just not there in the beginning, and so it is not addressed early on. As time passes the lack of cultural fit and the failure to address it creates a cultural split. The two companies act as separate entities.

So There’s Often Trouble

Pretty soon, but not soon enough, the original executives from company headquarters in the home country come back to China to investigate reports of culture clash and inefficiency. Clients are being lost and contracts aren’t being won.

But, it’s too late. The Chinese company that was acquired now has itself acquired the brand patina of the foreign company. It likely has the client lists. It has the protection of Chinese labor laws, which make it very hard to fire people. Most importantly, it has the company chop. The Chinese company gets bought out, because it forces the sale.

It Can and Does Happen in the Other Direction (With Chinese M&A) As Well

Although the end part of this scenario is very China specific – it’s hard to see this playing out in the reverse situation in the US – the cultural break that happens is not just an in-China problem. It could very well happen if the Chinese company is the buyer, an American company is the target, and the same lack of cultural fit is not identified and then is not acted upon.

I have started to hear more and more reports of American workers, in American offices owned by Chinese companies, waking up to the fact that the company culture inside of Chinese company is very different. It feels odd because everything else about the company, from the street address to the inside of the office, feels very American. Even the SEC filings of some of these companies look American.

But inside, often, a very different corporate culture, often one that works parallel to the American corporate culture its acquired, is operating. Bridging that is not a matter of cultural sensitivity, but one of operational necessity, and a new skill set is going to be needed to close the gap. If Chinese companies keeping buying up American ones, we can probably expect a new industry of consultants to thrive at the edges of the culture clash.

If you would like more information please email me, Laurie O’Donnell at laurie-odonnell@cornerstone-group.com or call me at 86 10 6518 3126

Laurie O’Donnell

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