Chinese merger and acquisition activity offshore is likely to continue to intensify for the remainder of 2010 as the authorities direct the country’s massive foreign exchange reserves away from low-yielding US dollar-denominated government securities towards aggressively secure long-term energy security requirements. Global acquisitions are the quickest way for Chinese companies to achieve scale, integrate their supply chains, expand into large foreign markets like the U.S., boost their technological skills and globalise their brand.
Typically Chinese acquirers are heavily focused on assets in the Americas, although Australia, Africa and Latin America are attractive as a source of oil, gas and natural resources. Recent changes to China’s regulatory regime are encouraging Chinese businesses to believe that their business policies are now comparable to those in the EU or North America.
The truth is that while ambitious
Chinese companies pursuing offshore targets believe these regulatory changes make them more competitive, they still face an uphill struggle. As many Chinese acquirers have discovered, they face tremendous regulatory and political obstacles offshore as well as other barriers as they start operating in an unfamiliar legal and social environment.
China has environmental protection-related laws and regulations. However many Chinese companies lack full comprehension of compliance and enforcement requirements in managing environmental and pollution risks abroad. While several marquee Chinese companies have successfully acquired assets, implemented an effective post-merger integration and extracted value from offshore investments, they sometimes fall short of the mark in terms of risk management, says Paul Wilkins, Greater China CEO for Marsh.
China Inc.
The speed and vigour with which Chinese outbound investment is occurring underscores the sheer number of risk management challenges companies face when bidding for offshore assets says Gary Ding, Senior Vice President and Head of China Global Client Services, Marsh China. “Suddenly Chinese companies are exposed to the same liabilities that faced Japanese and Korean companies that strategically invested in the U.S. 30 years ago.”
One of the biggest misconceptions was the underestimation of numerous forms of liability exposures that existed outside of Asia, such as Workers Compensation, Products Liability and multimillion dollar Punitive Liability Awards. “Chinese companies may face large exposures because of their approach to risk management,” says Wilkins. “They cannot simply bring Chinese practices to their overseas investment, they need to learn how to manage risk in the local context and local culture rather than just leverage their experience in China.”
In particular, foreign acquirers of U.S.-based firms face a number of risks unique to the United States, ranging from statutory requirements for workers’ compensation and auto liability to environmental liability and self-insurance obligations with surety and collateral requirements. Chinese firms may be unfamiliar with liability risks such as product liability and recall, class actions and punitive damages. These risk issues pose major challenges to their brands and business model. Many risks arise out of government-imposed regulations, that if not properly addressed can have serious financial consequences.
- Workers Compensation: This is often the second highest expense next to employee health retirement benefits. The US in particular has exceedingly aggressive and liberal workers’ compensation regulations which are set by law in each state or province.
- Obscure worker entitlements: For example, in the US, there are regulations governing the payment of overtime to certain classes of workers if they work more than a certain number of hours per day or per week. Other classes of workers are exempt from these regulations. Companies are responsible for classifying workers into one category (i.e., subject to overtime regulations) or the other (i.e., exempt from the overtime regulations).
- Class action lawsuits: These have been initiated by groups of workers who believe that they have been improperly classified as exempt from the regulations; the lawsuits typically seek compensation for the overtime worked by these employees historically and seek to have the employees re-classified as subject to overtime regulations so that they will be paid overtime in the future
2012, Feb 09 
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