I have been prompted to return to this theme because Canada has decided – obviously with great reluctance – to approve the take-over of Nexen by CNOOC. The depth of this reluctance has been made clear by the limitations it has placed on such transactions in the future, and surely in cognizance of the warning issued by its own intelligence agency about the risks inherent in acquisitions of significant Canadian assets by companies “with close ties to their home governments.”
The deal, however, is not yet done. The EU and the UK, territories where Nexen has few assets, have both approved the deal. The company, however, has substantial assets in the Gulf of Mexico and the relevant US regulatory agency – the Committee on Foreign Investment in the United States (CFIUS) – has not, at the time of writing, made its position known.
In the meanwhile there has been a lively debate in Canadian political circles, in its press and blogosphere about the pros and cons of the deal. Edy Wong in the The Financial Post, for example, saw it as part of the wider “struggle between economic realism and libertarian idealism.” Another commentator, Mark Milke, tackling the issue from another direction wrote:
“State-owned enterprises are a bad idea. Even if takeovers by such entities are permitted in the short term on the grounds of realpolitik, or the need for foreign capital in Canada’s energy patch, or the rights of shareholders to sell to the highest bidder…, such ‘enterprises’ are ultimately not in anyone’s medium and long-term interest: not in Canada’s, but especially not in China’s.”
Another angle might be to ask whether or not Chinese companies currently have the attitudes and skills needed to succeed outside their home market at all. This question is prompted by a Boston Consulting Group study entitled The 2012 BCG 50 Chinese Global Challengers: End of Easy Growth which suggests that that days of easy growth for Chinese companies are over and that they need to overcome a series of challenges including a home market that is growing more slowly, and therefore offering them fewer scale advantages, rising labor costs, thereby eroding their price advantage, and more agile responses from foreign competitors.
It then goes on to ask whether or not the 50 companies it has chosen as representing China’s leading-edge international operators can or will be able to raise their game sufficiently to make it into the top-level of global corporations. It makes the point that “…while state support is a well-ingrained feature of many national economies, China goes to great lengths to encourage and fortify strategic industries through standard setting, industry consolidation, export support, and financial incentives” but that if these companies are to become truly international they must – in effect – cut these apron strings (or unscrew the training wheels or whichever metaphor is preferred) and develop the ability to trust the people who work for them overseas, regardless of whether they are Chinese or foreign nationals.
After hammering away at the usual points about cost control and lean organization forms, the need to acquire M&A abilities including more widespread use of English, and the need to invest in R&D, two lessons appear to stand-out. The first is the need for greater transparency, which is essential to building the trust without which Chinese companies will not be accepted as partners by governments or potential commercial stakeholders.
It is this point, of course, that brings us back to the statement about oil rigs as ‘strategic weapons’ because CNOOC is one of the companies BCG lists in its Chinese top 50. As the report’s authors put it “a lack of transparency…creates uncertainty among potential partners and targets in mature markets and leads to increased government scrutiny of large-scale transactions” and feeds off “the inability of Chinese companies to build respected global brands, the limited trust that policymakers and executives have in Chinese companies, and the failure of Chinese companies to build strong ties with global stakeholders.” A small number of Chinese companies, recognizing these issues, have begun to manage overseas acquisitions such as Volvo and OZ Minerals at arms-length. CNOOC has stated that it will retain Nexen’s Canadian head-quarters and set up a separate CNOOC office near-by which suggests that it has least understood it is important to be seen to be doing the right thing. Evidence that it is capable to going beyond this and shaking off Beijing’s shackles will be vital if it is to make its potential acquisition of Nexen work.
The second challenge facing Chinese companies must overcome is building global organizations capable of implementing global and local policies with equal sensitivity, ones that can walk the fine line between over-centralization and over-delegation. These aptitudes – which have taken the great global companies such as Unilever and GE decades to get right and which demand constant adjustment – is likely to come hard to any company that shapes its policies to Beijing’s political will. Talk of business assets as ‘strategic weapons’ does nothing to build international confidence nor does it serve China’s economic well-being. On current evidence the Nexen take-over will, as Mark Milke suggests for other reasons, be bad for Canada, bad for the US and bad for China.
