Sunday, June 12, 2005

Financial Times on China: A long wait for the “Chinese century”

From FT: A long wait for the “Chinese century”

"Every few months seem to bring fresh news of a Chinese company buying up a piece of some famous European or American manufacturing firm. Last year, it was television maker TCL acquiring control of France-based Thomson SA’s TV business, and later the mobile-phone handset unit of Alcatel. Then, Chinese computer group Lenovo bought IBM’s iconic personal-computer business."

"What these transactions really show, however, is how far off the “Chinese century” lies. When they take over moribund western manufacturers, Chinese firms do so on far less favourable terms than their Taiwanese cousins. This reflects serious weaknesses in Chinese companies that will take many years to overcome."

"In the two major Chinese takeovers announced last year, Lenovo and TCL acquired established — if unprofitable — foreign brands and distribution channels by selling their equity very cheaply. While TCL bought Thomson’s TV assets for virtually no cash, Thomson retained a one-third stake in the TV business, with an option to convert that stake into TCL shares. Lenovo not only paid IBM US$1.75bn in a combination of cash and debt assumption, but also gave IBM a hefty 19 per cent stake in Lenovo."

"In both deals, the western companies exited an unprofitable business line at no cost — and in IBM’s case, for a nice consideration — and gained a low-cost option enabling them to profit if the Chinese companies managed to turn the businesses around. Both deals were an excellent bargain for the western companies. For the Chinese, they have the air of a desperate gamble."


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