Looking back at 2023, we saw a historic dip in outbound M&A activities from China due to factors such as GDP growth slowdown, supply chain realignment, and the real estate crisis. Whilst a rebound was observed in Q4 2023, the Q1 2024 performance remained disappointing. Despite an unprecedented level of pro-market monetary, fiscal, and regulatory policies introduced by Beijing in 2023 and 2024, it is expected that the Chinese economy will remain sluggish for the foreseeable future with slowed GDP growth and low business and consumer confidence. On the flip side, despite the gloomy economic outlook, there are many dynamics that are expected to encourage midmarket cross-border M&A deals.
Why is China important for mid-market M&A?
Large Chinese corporates and SMEs with cash on the balance sheet are actively screening for attractive overseas opportunities. This is because many overseas assets are now expected to generate more favourable returns compared to domestic opportunities. This is an opportunity for foreign targets to widen their search for buyers to include Chinese companies. Sectors of special interest include “sunrise” industries: renewable energy, EV, e-commerce, and technology. These sectors leverage international expansion as part of their growth strategy. This trend is driving cross border M&A activities whereby Chinese investors are seeking to acquire technology, secure a new client base and increase global market share via strategic growth internationally.
The “China +1” model and why it’s important
The “China+1” model refers to the strategy adopted by Chinese companies to diversify manufacturing operations beyond China. This approach aims to both enhance profit margins and mitigate export challenges faced by Chinese companies due to geopolitical risks and trade tensions between China and the West.
Many Chinese manufacturing businesses are implementing the “China+1” model by relocating or expanding their operations to geographies with lower operational and labour costs, such as Indonesia, Vietnam, and Malaysia. This strategy increases profitability by reducing production expenses. The “China + 1” model is also an effective way to work around the ever-increasing tariffs and import restrictions imposed on China-made products by Western countries. In this context, the geography extends beyond SEA and includes countries such as Hungary, Poland and Serbia as well as Mexico.
Whilst this model is more relevant to manufacturing businesses that wish to set up factories overseas, it is also creating M&A opportunities. Some businesses prefer to leverage existing ‘know-how’ and on the ground experience by acquiring an established business rather than starting from scratch in a new geography.
What’s happening with foreign companies in China?
Foreign companies in China are undertaking significant restructuring and portfolio optimisation initiatives. The investment appeal in the 1990s and 2000s of cheap materials and labour costs, high GDP growth, and a rapidly increasing population has diminished. As a result, many foreign firms are now looking to divest from their existing Chinese operations and relocate the operations either onshore or nearshore. This generates deal opportunities for both sides of the border.
China M&A – how we can help
InterFinancial Associate Director, Jenny Zeng, leads Clairfield’s Global China Desk locally from Brisbane. Jenny works closely with Clairfield’s ASEAN partner Yamada to support Clairfield partner firms globally with deals involving Chinese businesses, from SOE’s and listed entities to sizeable private enterprises. Jenny supports with sourcing and qualifying Chinese investors, buyers, or sellers and works closely with China-based M&A firms and investment banks to provide clients with comprehensive coverage of Chinese investors across all industries. If you are looking at M&A opportunities with a China angle, we are here to help.
