China in 2018: Expect a rebound in global M&A

Every January, Gordon Orr publishes a widely watched list of predictions for the Chinese economy. I sat down with Gordon recently to discuss his annual predictions in a series of short video clips. In this first of four videos, we discussed why Gordon believes Chinese companies will step-up their global M&A activity in 2018. 

Gordon was a Senior Partner and was also Asia Chairman of McKinsey & Company for several years. Now a Senior Advisor to McKinsey, Gordon is a Board member of both Lenovo Corporation and Swire Group.

Please follow me so you can be notified of the next installments in this video series. You can also read Gordon’s entire list of predictions on our website here.

Watch our conversation here:

The following is an edited transcript of our conversation:

Joe Ngai: Today, we're delighted to have Gordon, our former Chairman of McKinsey Asia with us. Gordon, every year you put out a list of what can we expect in China for the year. So this is 2018. You have an interesting article here and I just want to talk about it today.

Gordon Orr: Terrific. Well, thanks for finding it interesting, Joe.

Joe: The first topic that you mention here is around China's continued international expansion. As we all know, in 2017 it was a bit bumpy. Deals got pulled. People are talking about whether China will continue to expand internationally. Whether its deals are actually making money. What's your prediction?

Gordon: I think we'll see quite a strong rebound this year, Joe. Last year deals got pulled because of China: HNA, Anbang, Wanda being told not to make such aggressive expansions and bids for trophy assets.

And also, externally, in the US in particular, there’s much more aggressive push back. The US approval process really turned down probably nine out of 10 potential Chinese acquisitions last year.

This year's going to be, I think, much more strategic-focused acquisitions. There will tend to be more acquisitions, but of mid-size rather than mega-size. And then, in particular, I think you'll see a lot of investments in startups, companies looking to acquire really interesting international technologies to bring back and exploit in China.

Joe: So what are the sectors that you're particularly optimistic about?

Gordon: Well I think a lot of these things that have a hyphen tech. You know, MedTech, FinTech, those particularly in the startup areas. But then there are the sectors in the space around what China's emphasizing as a priority for development, such as Made in China 2025. If you take the UK, in particular, graphene-type advanced materials. Then there's medical equipment and automotive.With China's emphasis on electric vehicles, there's a real passion for technologies that could be relevant for advancing that quickly.

Joe: We know that when the Chinese companies go and make these investments or acquire them outright, the deals have a 50/50 chance of going through. So if I were a company in Europe having a Chinese investor interested, how do I know it's real? What can I expect from the Chinese investor?

Gordon: Well, I think, first up, I’d do my due diligence on the Chinese company that's just walked in the door. Have they made other acquisitions outside China? If they have, go talk to the leadership team in those companies and get a sense what's worked, what hasn't worked.

Have the Chinese leadership learned from making those investments? It's really tough to be on the receiving end of a Chinese company making its first international move because you're really educating the leadership very often on how to operate internationally. That would be the most important thing.

And then the second would be, if you were in the Chinese company's shoes, would investing in me make sense? Is it strategic? If it's a strategic target, I'd say the odds of the deal going through are much, much higher.

Joe: And, lastly, do you think Chinese companies are getting better at investing overseas, meaning that they are understanding markets better, they now have more capabilities in terms of negotiation and all that. Do you see that happening?

Gordon: There's no question, Joe. I mean, many of them have dedicated international M&A teams based here in Hong Kong and London, some of them in the US. And those guys, they've done eight, ten transactions. They know what they're doing. Some of them have come from international professional services firms and, yes, there's real experience there.

And the second thing that they do, in particular, is they're much more effective at working with bankers and their lawyers and their other advisors at this point in time.

We're moving out of the era of DIY M&A, which is what we saw historically.