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Firms in fight to shake off 'China Inc' image

By Chang Ailing (China Daily)
Updated: 2009-06-19 11:48

Many industry analysts, when talking about the failed Chinalco deal, have referred to a similar scenario in 2005, when political obstacles blocked China National Offshore Oil Company's (CNOOC) $18.5-billion attempt to buy Unocal, at the time a major petroleum enterprise based in the United States.

After a vote in the US House of Representatives, the bid was referred to then-president George W Bush on the grounds it had implications to national security.

CNOOC withdrew its offer shortly after, while Unocal was instead merged with the Chevron Corp later that year.

"The Chinalco debacle followed the same pattern as the aborted CNOOC-Unocal deal four years ago," said Yao Shujie, an economics professor who heads the school of contemporary Chinese studies at Nottingham University. "It not only marked the collapse of a strategic partnership between two independent transnational corporations, but also reflected the competition and compatibility between Western powers and a rapidly growing China in politics, culture and economy."

The breakdown of the Chinalco-Rio Tinto deal has been met with anger and disappointment in China, with many of the country's experts blaming a prejudice against State-owned companies.

However, Yao argued that a notable factor was the lack of experience in foreign investment among many of China's business leaders. He said: "The speed of global expansion has given Chinese companies little practice of the pitiless realities of Western-style acquisitions."

Xiong Weiping, chairman of Chinalco, said his firm worked hard to respond constructively and engage with Rio Tinto to amend the transaction terms announced four months ago, but the result was completely out of its control.

But Yao disagreed and blamed the company's management for their insufficient understanding of the concerns of big Western resource companies, as well as the possibility of a stock price resurgence and its consequences.

"Chinalco should have pressed its negotiating advantage harder and not given Rio time to seek alternatives," he said. "Besides, a 1-percent break fee for a $19.5-billion deal makes breach of contract too easy."

Yao's colleague in England, Dr Sutherland, added: "The complicated deal Chinalco proposed created a long gestation period and opened up possibilities for market corrections and greater political scrutiny.

"The major lesson is to keep trying. The markets moved against Chinalco. It may have opted for a simpler equity deal and acted faster, but it is not clear then this would have given it exactly what it wanted."

In the deal with OZ Minerals, a last-minute decision by Minmetals to sweeten its offer with an extra $180 million proved decisive in winning over the Australian miner's shareholders. It also helped Minmetals see off two rival bidders.

Minmetals was given the green light to take over OZ Minerals with a revised offer in April. The Australian government rejected a previous bid over national security concerns, while the improved terms simply excluded a flagship mine located near a military installation.

China began to encourage domestic enterprises to invest abroad in 2000. Figures from the Ministry of Commerce last year showed direct outbound investment by Chinese firms had reached $52.1 billion, up 96.7 percent year-on-year.

In April, the government launched a guidebook to help domestic companies invest overseas and, in May, the State Administration of Foreign Exchange unveiled a draft regulation aiming to simplify examination and approval procedures for investing abroad to solicit public opinion.

However, Yao noted: "But China should realize that even with the support of the State banking sector, even with the damage the global financial crisis has inflicted on Western business, China cannot expect to implement its investment strategy unopposed."

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