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The Search for Value “Outside” of China
2011/8/1 0:00:00  From:China Entrepreneur Magazine

The Search for Value “Outside” of China

By Amir Gal-Or

A large part of the talk with regard to Chinese companies in the PE industry is usually about how to compete and “win” foreign companies which have entered into the Chinese market or the various ways which Chinese companies can upgrade to become leaders at home and compete well internationally. In the last year, however, Infinity Group has witnessed a growing

trend. It is a theme which we have dealt with in previous years, but not as the growing “trend” we are experiencing this year. Chinese companies are now not only looking for innovative technology outside of China, but also for the right model to acquire such technology, the appropriate business channels to do so and the possibilities of opening corresponding R&D centers, also outside of China. More and more companies are coming to me and my team for advice on such matters, as we are we known for our access to technological innovation, our know-how and of course, our global network.

From our understanding, the reasons for reaching “outward” vary. Companies are looking to create a differentiation in the global market; they are also responding to encouragement by the Chinese government documented in the 12th five year plan; these certain companies have a drive to position their “product” as global technology; technology innovation from outside of China is viewed as a source for new thinking and ideas; by reaching outside of China, these companies believe they may reduce the “China risk”; most of the companies are attracted to the concept of a new market and taking advantage of the low prices now available in western markets and finally – quite simply, they are curious about the possibilities of venturing outside of China. Of course, “outside” could mean any hub of technological innovation, be it the U.S., Israel, Europe or elsewhere.

All of the aforementioned reasons for searching for value “outside of China” make good sense. But like the saying goes, timing is everything. The reasoning may be sound, but the timing must be right for the initiative to be successful. So, the next question is, not only “how” to embark on such an initiative but also “when” to do so in order to increase your chances of success.

Several recent experiences come to mind to illustrate these points. On January 9, 2011, China National Chemical Corporation (ChemChina ) bought Makteshim Agam Industries (Israel), one of the world’s leading generic agrochemical companies, for US$3.4 billion, one of the largest transactions in the agrochemicals sector, and one of the largest cross‑border acquisitions by a Chinese State‑Owned Enterprise since 2006. In this deal ChemChina has gained both R&D centers and business channels. We built this deal in a way that would align interests. As such technology transfer is anticipated to go smoothly, taking place over a period of time, as is needed in such cases. The seller in this case maintains 40 percent ownership alongside a “put option” to the buyer, in this case ChemChina, which controls the company and its operation. This means that if the company will have an independent, good future, the value of the 40 precent will be higher through a new IPO process. Such a structure keeps the motivation of all sides high, while also protecting both sides.

Another example: In 2010 Infinity completed a deal it started in 2005 – the acquisition of an Israeli R&D company named Nanomotion by Chinese motion company Johnson Electric(JE). The first step of the deal was to sell 51 percent of Nanomotion to JE, while the remaining 49 percent was sold five years later based on a formula related to sales performance. During these five years the Israeli and Chinese teams worked very well together based on a joint HR program. The technology of Nanomotion also supported other areas within JE, such as learning how to exercise the technology transfer process. The Board of the company worked very well together; everyone helped each other out and because of this, it was able to overcome most of the culture gaps between the Israeli and Chinese partners.

Another interesting story that is currently playing out is in the area of one of my greatest loves- aviation. (As you may recall, I served as a pilot and was a member of the acrobatic team in the Israeli Air Force for many years.) On March 2011 a unit of China Aviation Industry Corp. announced plans to acquire Minnesota-based private-aircraft maker Cirrus Industries Inc.—a small deal, but which according to the Wall Street Journal, highlights the expanding ambition of China's aerospace industry. The WSJ went on to note: “even though the use of such aircraft is limited in China and most of its airports lack facilities to handle small, privately owned planes, the country is considered one of the world's most promising markets for growth. China's Civil Aviation Administration recently proposed relaxing restrictions for low-altitude airspace in five to 10 years to open up flight lanes for small planes.”

A couple of interesting points: first the deal needs to be approved, by among others, the Committee on Foreign Investment in the U.S. (CFIUS); secondly, this same committee recently denied the May 2010, $2 million acquisition of Bay Area start-up 3Leaf Systemsby the well known telecommunications company Huawei Technologies Co. In short: Huawei was recently told by the U.S. Security Review panel that it has to sell 3Leaf Systems or they will recommend to the Obama Administration to cancel the deal.

Why is all of this important? It goes to the point that timing could be everything. As suggested in the WSJ, the fate of the Huawei deal could work in the favor of the China Aviation deal. For one, CFIUS has approved the transfer of aerospace technology in the past. Secondly, in the words of James Lewis, of the Center for Strategic and International Studies, “The U.S. might want to give this one to balance previous cases .” So, all in all, the China Aviation Industry and Cirrus deal may well be in good shape, in the short and long term, as among other elements, the timing seems to be in China’s favor.

It should also be considered, however, that although pitfalls do exist from time to time, most Chinese companies would not bear witness to the same experience as that of Huawei Technologies. In the words of China-U.S. Trade blogger John J. Burke, “the reality is that the United States remains one of the world’s economies most open to foreign investment, including from China.” Moreover, I believe that Israel too falls into this category and is well positioned alongside the U.S. in this respect – Israel is a hot spot for technological innovation and R&D centers and is very much open to foreign investment, especially from China.

In general, I believe that Chinese companies are well tuned into the realities of the existing environment and their ambition to venture out of China is yet the latest evidence of the increasing confidence of Chinese businesses. The next step is to combine this confidence with the right channels and the proper timing to achieve the desired success.

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