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Nestle Group, the world’s largest food manufacturer, announced on July 11 it had entered a partnership agreement with Chinese candy and pastry producer Hsu Fu Chi International Ltd. Nestle intends to acquire a 60-percent stake in the Chinese company, a deal valued at $1.7 billion.
This has been the 35th instance of foreign companies acquiring Chinese brands since the year began. It’s also the second time this year Nestle has made a move to acquire a share of a Chinese company. In April, Nestle purchased 60 percent of Yinlu Foods Group, famous for its canned food and drinks.
Industrial insiders believe Nestle intends to gain a competitive edge in the candy and pastry market through the purchase. The acquisition is already causing concern among the Chinese public, which believes the Hsu Fu Chi brand may disappear altogether after the sale.
These fears are not unwarranted. Domestic brands such as Dabao (cosmetics), Robust (mineral water), Supor (cooker), Nanfu (battery) and Mini Nurse (cosmetics), used to stand out in their respective markets until being bought by multinationals. Many of them have since vanished from the market.
Lu Renbo, Deputy Secretary-General of the China Electronics Chamber of Commerce, said most Chinese companies are not aware of brand protection. Once they are acquired by foreign companies, their brands disappear. Many foreign companies simply covet sales channels and marketing resources established by domestic brands by various hardships, instead of the value of domestic brands.
Fortune or misfortune?
According to a Hsu Fu Chi statement, in 2010, the company reported sales revenue of 4.31 billion yuan ($669.25 million) and net after-tax profit of 602.2 million yuan ($93.51 million), up 14 percent and 31 percent, respectively, year on year, ranking first among all Chinese candy companies. Hsu Fu Chi hasn’t provided an explanation behind the decision to sell, despite the appearance that the company is in its prime.
Other experts side with the sale. Hsu Fu Chi’s product line is limited to candy and pastries, a market that is already overly competitive. To drive development, Hsu Fu Chi must strengthen research and development of new products, a weak point for the company. Hsu Fu Chi’s past efforts include development of high-quality chocolate products to boost sales, but the results were less than satisfactory.
Nestle, on the other hand, has a solid R&D base. An acquisition by Nestle would mean access to new opportunities for Hsu Fu Chi. Moreover, since the acquired price represents a premium of 24.7 percent over the volumeweighted average share price over the last 180 days, shareholders of Hsu Fu Chi can also reap handsome benefits from the acquisition.
Wang Wei, Chairman of the China Mergers and Acquisitions Association, said the brand influence of Hsu Fu Chi is priceless, and it is now hard to estimate the industrial influence of foreign companies acquiring domestic brands.
On the positive side, Wang said the acquisition can speed up industrial integration and hasten industrial development. But a significant negative impact is that it is likely for foreign companies to monopolize the industry, impairing the power of control over the market by domestic companies.
Statistics from the Ministry of Commerce(MOFCOM) show that among China’s 39 industries, foreign companies have stakes in a growing number of Chinese brands. Wang said in the next two years and on, the Chinese capital market will see the frequency of foreign acquisitions increase. If foreign capitals
gain a leading position or a monopolized market share by mergers and acquisitions, or acquire competitors and leading companies in the market, market shares of foreign companies will grow rapidly, which will eventually monopolize the market.
Wang is concerned that if multinationals’portfolios of Chinese acquisitions become too thick, it will inevitably restrain the growth and development of China’s domestic brands and affect China’s economic independence.
If domestic brands are not protected against foreign companies, China could lose these brands forever, Wang said.
Protecting domestic brands
Peng Guangyi, General Manager of Beijing Tea Corp., remembers a time-honored tea brand called Jinghua. At its height, the Jinghua brand held an 80-percent market share in Beijing with annual sales of 300 million yuan ($46.58 million).
In 1999, the tea brand was purchased by Unilever. After eight years, the brand has almost disappeared. In 2007, after negotiation with Unilever, Beijing Tea Corp. bought back the brand and re-established it in China.
“We believed foreign companies were capable of developing the Jinghua brand. But in the end, this is not what happened,” Peng said.
Among all domestic brands purchased by foreign ventures, time-honored brands face the biggest challenge, Peng said. Under
public pressure, MOFCOM has become prudent in approving cases where well-known Chinese brands are being purchased by foreign companies.
According to assessments by the China General Chamber of Commerce (CGCC), only those enterprises with a history of more than 50 years, strong Chinese characteristics and distinct regional cultures, high commercial and cultural values and good reputations are qualified as time-honored enterprises.
MOFCOM’s latest figures show that in China there are 1,600 of these companies. They are not only engaged in market behaviors, but also carry on rich cultures, widely accepted by Chinese consumers.
These time-honored brands are the kind that foreign companies sniff out when entering new markets, and China has been no exceptions. Since China has no established norms for evaluating famous brands, some of these brands are sold at low prices or even acquired by hostile purchasers.
The Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by MOFCOM on August 9, 2006 requires that all mergers and acquisitions of famous brands be subject to MOFCOM approval.
In the past three years, nearly one fifth of the acquisitions of time-honored brands have been approved. Besides the recent Nestle case, a dozen acquisition cases by foreign companies await MOFCOM approval, such as Yum! Brands purchasing Little Sheep. Yum! Brands is the world’s largest restaurant company whose famous restaurant brands include KFC, Pizza Hut and Taco Bell, and Little Sheep is a famous hot pot restaurant chain in China.
Tough decision
The development outlook for many domestic brands is not optimistic. Among
the country’s 1,600 time-honored brands, 70 percent are struggling for survival, 20 percent are losing money or are close to bankruptcy, and only 10 percent are making profits.
The main culprit of this problem is capital inadequacy, which goes to explain why domestic companies are easily acquired by their much richer international counterparts.
“Changes have taken place in the financing of many time-honored brands. They no longer wait for injection of foreign capital, but make themselves listed for financing,”said An Huimin, Vice Chairman of CGCC.
Today, 41 Chinese time-honored enterprises have been listed. “Nestle, with a history of 114 years, is an international time-honored brand, while Chinese time-honored brands can make the same achievements as Nestle does,” An said.
Beijing has over 80 time-honored enterprises in the catering industry, the most among all Chinese cities. After restructuring and integration, many of these enterprises have been listed and transformed.
An said many time-honored brands are facing the problem of renovating their development ideas. When carrying on traditional Chinese cultural heritage, timehonored enterprises must absorb advanced management expertise and experience from foreign countries and renovate their ideas and mechanism.
Successful listing cases of time-honored enterprises bring new direction for the development of all time-honored enterprises. Suzhou Songhelou Restaurant, a 200-year-old restaurant chain, has abandoned acquisition negotiations with foreign companies and plans to get listed within two years. If successfully listed, Songhelou Restaurant will set a model for other traditional brands across the country.
However, there are some concerns about listing traditional enterprises. Jiang Junxian, former president of China Quanjude (Group) Co. Ltd., said listing is risky for these enterprises. For some, survival is the main task.
Jiang said to some enterprises, unique and secret formulas determine their survival, but if listed, these formulas must be made public. After being listed, the shareholders structure may be changed, likely to reverse the old management strategies, a decision these companies should not take lightly.
This has been the 35th instance of foreign companies acquiring Chinese brands since the year began. It’s also the second time this year Nestle has made a move to acquire a share of a Chinese company. In April, Nestle purchased 60 percent of Yinlu Foods Group, famous for its canned food and drinks.
Industrial insiders believe Nestle intends to gain a competitive edge in the candy and pastry market through the purchase. The acquisition is already causing concern among the Chinese public, which believes the Hsu Fu Chi brand may disappear altogether after the sale.
These fears are not unwarranted. Domestic brands such as Dabao (cosmetics), Robust (mineral water), Supor (cooker), Nanfu (battery) and Mini Nurse (cosmetics), used to stand out in their respective markets until being bought by multinationals. Many of them have since vanished from the market.
Lu Renbo, Deputy Secretary-General of the China Electronics Chamber of Commerce, said most Chinese companies are not aware of brand protection. Once they are acquired by foreign companies, their brands disappear. Many foreign companies simply covet sales channels and marketing resources established by domestic brands by various hardships, instead of the value of domestic brands.
Fortune or misfortune?
According to a Hsu Fu Chi statement, in 2010, the company reported sales revenue of 4.31 billion yuan ($669.25 million) and net after-tax profit of 602.2 million yuan ($93.51 million), up 14 percent and 31 percent, respectively, year on year, ranking first among all Chinese candy companies. Hsu Fu Chi hasn’t provided an explanation behind the decision to sell, despite the appearance that the company is in its prime.
Other experts side with the sale. Hsu Fu Chi’s product line is limited to candy and pastries, a market that is already overly competitive. To drive development, Hsu Fu Chi must strengthen research and development of new products, a weak point for the company. Hsu Fu Chi’s past efforts include development of high-quality chocolate products to boost sales, but the results were less than satisfactory.
Nestle, on the other hand, has a solid R&D base. An acquisition by Nestle would mean access to new opportunities for Hsu Fu Chi. Moreover, since the acquired price represents a premium of 24.7 percent over the volumeweighted average share price over the last 180 days, shareholders of Hsu Fu Chi can also reap handsome benefits from the acquisition.
Wang Wei, Chairman of the China Mergers and Acquisitions Association, said the brand influence of Hsu Fu Chi is priceless, and it is now hard to estimate the industrial influence of foreign companies acquiring domestic brands.
On the positive side, Wang said the acquisition can speed up industrial integration and hasten industrial development. But a significant negative impact is that it is likely for foreign companies to monopolize the industry, impairing the power of control over the market by domestic companies.
Statistics from the Ministry of Commerce(MOFCOM) show that among China’s 39 industries, foreign companies have stakes in a growing number of Chinese brands. Wang said in the next two years and on, the Chinese capital market will see the frequency of foreign acquisitions increase. If foreign capitals
gain a leading position or a monopolized market share by mergers and acquisitions, or acquire competitors and leading companies in the market, market shares of foreign companies will grow rapidly, which will eventually monopolize the market.
Wang is concerned that if multinationals’portfolios of Chinese acquisitions become too thick, it will inevitably restrain the growth and development of China’s domestic brands and affect China’s economic independence.
If domestic brands are not protected against foreign companies, China could lose these brands forever, Wang said.
Protecting domestic brands
Peng Guangyi, General Manager of Beijing Tea Corp., remembers a time-honored tea brand called Jinghua. At its height, the Jinghua brand held an 80-percent market share in Beijing with annual sales of 300 million yuan ($46.58 million).
In 1999, the tea brand was purchased by Unilever. After eight years, the brand has almost disappeared. In 2007, after negotiation with Unilever, Beijing Tea Corp. bought back the brand and re-established it in China.
“We believed foreign companies were capable of developing the Jinghua brand. But in the end, this is not what happened,” Peng said.
Among all domestic brands purchased by foreign ventures, time-honored brands face the biggest challenge, Peng said. Under
public pressure, MOFCOM has become prudent in approving cases where well-known Chinese brands are being purchased by foreign companies.
According to assessments by the China General Chamber of Commerce (CGCC), only those enterprises with a history of more than 50 years, strong Chinese characteristics and distinct regional cultures, high commercial and cultural values and good reputations are qualified as time-honored enterprises.
MOFCOM’s latest figures show that in China there are 1,600 of these companies. They are not only engaged in market behaviors, but also carry on rich cultures, widely accepted by Chinese consumers.
These time-honored brands are the kind that foreign companies sniff out when entering new markets, and China has been no exceptions. Since China has no established norms for evaluating famous brands, some of these brands are sold at low prices or even acquired by hostile purchasers.
The Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by MOFCOM on August 9, 2006 requires that all mergers and acquisitions of famous brands be subject to MOFCOM approval.
In the past three years, nearly one fifth of the acquisitions of time-honored brands have been approved. Besides the recent Nestle case, a dozen acquisition cases by foreign companies await MOFCOM approval, such as Yum! Brands purchasing Little Sheep. Yum! Brands is the world’s largest restaurant company whose famous restaurant brands include KFC, Pizza Hut and Taco Bell, and Little Sheep is a famous hot pot restaurant chain in China.
Tough decision
The development outlook for many domestic brands is not optimistic. Among
the country’s 1,600 time-honored brands, 70 percent are struggling for survival, 20 percent are losing money or are close to bankruptcy, and only 10 percent are making profits.
The main culprit of this problem is capital inadequacy, which goes to explain why domestic companies are easily acquired by their much richer international counterparts.
“Changes have taken place in the financing of many time-honored brands. They no longer wait for injection of foreign capital, but make themselves listed for financing,”said An Huimin, Vice Chairman of CGCC.
Today, 41 Chinese time-honored enterprises have been listed. “Nestle, with a history of 114 years, is an international time-honored brand, while Chinese time-honored brands can make the same achievements as Nestle does,” An said.
Beijing has over 80 time-honored enterprises in the catering industry, the most among all Chinese cities. After restructuring and integration, many of these enterprises have been listed and transformed.
An said many time-honored brands are facing the problem of renovating their development ideas. When carrying on traditional Chinese cultural heritage, timehonored enterprises must absorb advanced management expertise and experience from foreign countries and renovate their ideas and mechanism.
Successful listing cases of time-honored enterprises bring new direction for the development of all time-honored enterprises. Suzhou Songhelou Restaurant, a 200-year-old restaurant chain, has abandoned acquisition negotiations with foreign companies and plans to get listed within two years. If successfully listed, Songhelou Restaurant will set a model for other traditional brands across the country.
However, there are some concerns about listing traditional enterprises. Jiang Junxian, former president of China Quanjude (Group) Co. Ltd., said listing is risky for these enterprises. For some, survival is the main task.
Jiang said to some enterprises, unique and secret formulas determine their survival, but if listed, these formulas must be made public. After being listed, the shareholders structure may be changed, likely to reverse the old management strategies, a decision these companies should not take lightly.