The Bottom Line.
We recently interviewed Daniël de Blocq van Scheltinga, a Hong Kong-based M&A advisor and Circle Contributor who provided some personal insights on the Chinese M&A markets. As the first Western CEO to a Chinese State-Owned Enterprise (SOE), Daniël has a unique perspective on how large Chinese companies think and operate. Hence, his interview provides very exclusive food for thought on how to do business in China, on the reasons and consequences of current US-China relations, on China’s technology ambitions, and more generally on the Belt and Road Initiative (BRI) and its long-term impacts.
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Daniël de Blocq van Scheltinga: insights on the Chinese M&A markets.
Daniël, would you please start with a few words on your activity as a strategic advisor?
Daniel de Blocq van Scheltinga: I am a strategic advisor based in Hong Kong, and my core function is to act as a liaison between the East and the West. I am typically given mandates to help clients develop their outward business strategy, from East to West but also from West to East. More practically, I am an advisor on cross-border M&A usually ranging from USD 25 to 150 million, and that involves accompanying my clients in their projects.
The complexity of cross-regional business is a big topic…
DBvS: Yes, it is, and people simply cannot avoid it. Westerners often think that they can apply their own mindsets and methods to Asian markets, but this is not the way things work around here. In a similar way, my Asian clients usually struggle to adapt to the Western way. Private investors face this problem, but so, for example, do State-Owned Enterprises (SOEs).
How did you become a strategic advisor on this type of projects?
DBvS: I’ve experienced the cross-border M&A adventure from a very practical perspective. I used to be an investment banker for large institutions and after that I was one of the very few Western business executives involved in managing the financial and outbound investment operations of a Chinese SOE. This means that I have personally managed the strategic aspect and the financial aspect of those deals. In 2008 I then decided to work for myself, so becoming a strategic liaison between investors and their potential targets had a lot of sense.
There is much more than the financial aspect, though.
DBvS: Yes, of course. Finding financial and strategic partners is one aspect of my activity but helping the clients to understand how different business mentalities work is a major part of what I do. The financial aspect of things is the tip of the iceberg, in reality.
What really matters when you plan a deal is the insights you can obtain on the market beforehand. You need to know about the local politics and about the local customs, but in many cases, businesses ignore that stage and pay for it dearly afterward. Typically, Western companies aim to get access to Asia with what they already have, whereas Chinese investors would rather make sure they know from which direction the wind blows before they get into any type of negotiation. And that gives them an edge.
Would you have an example to provide?
Daniël de Blocq van Scheltinga: The luxury market is an example I use a lot because it really shows the difference in mentalities I just mentioned.
A few years ago, the Chinese economy was booming and the demand for luxury products was rocketing.
>> Read also: ConchSociety CEO Bertrand Ternat says China is the luxury market in Asia.
The Chinese consumers have a cultural taste for ostentation, so Western luxury brands saw an opportunity and invested heavily in luxurious flagship stores and expensive shops all around the place. Except that, one day, the music stopped, and they suffered enormous losses.
Any reason for that?
DBvS: Of course. In the meantime, President Xi had arrived in power, and his first initiative was to tackle corruption through his now famous anti-corruption campaign. Corrupt officials were tracked-down and put in jail, and the demand for luxury products shrank dramatically. Yet, these losses could have been prevented if those brands had invested in obtaining insights in the first place.
China is a peculiar country with a peculiar system, and when you know about it you can see things coming one way or another. Ostentation is only one of the reasons why the Chinese love luxury. The other driver for demand was that luxury was a business facilitator at various levels, so the industry was closely tied to the issue of corruption.
And this is something luxury strategists could have anticipated?
DBvS: It is always easier to condemn afterward, obviously, but yes. Xi Jinping wrote consistently on the danger of corruption before he was President.
To him, corruption was a weak leg which threatened the stability and the longevity of the country. The issue was therefore very important, and it was set as a priority from the beginning. Hence, when Xi became President Xi, he basically implemented a policy he had long established. There were no real surprises there, but you had to either know about it or ask for strategic insights before moving ahead. Which is something the brands didn’t do, apparently.
Upfront business strategy is not just about business, then.
Daniël de Blocq van Scheltinga: Definitely not. Business strategy around here is about business and everything else that surrounds business. It’s a combination of factors.
Did those brands have advisors? Yes, of course, but my take is that they probably missed an opportunity to look at where the wind was blowing from. There is a lot of information available, what you need to do is look for the right insights. Of course, these insights rarely come from very exciting reading, and you actually need to learn how to read between the lines. But those who know where to look and what to look for can identify the right focus points and make forecasts because things that happen around here are usually part of a trend.
Interesting insights in terms of investment indeed.
DBvS: This way of looking at things is important for business strategists, both in terms of identifying no-goes and go-laters.
The luxury example was obviously a no-go case, but the same logic applies in terms of identifying the industries of the future. For instance, medical waste management in China is a promising market because the activity is so far very limited, and the potential is enormous. But medical waste management is not a concern here and there is as yet no political orientation on the matter. That means no awareness so far, and no real market to explore either.
Can you explain this dynamic?
DBvS: The field reality is simple to grasp. China is a country where things don’t happen unexpectedly. The leadership weights the options and then decides to invest in priorities, which ultimately become business oceans.
There is a saying in China which says that the mountains are high and that the emperor is far away. In other words, it sometimes takes time to get things done, but there is definitely a captain in the boat and things always happen, sooner or later.
What are the priorities at the moment, with what impacts in terms of business strategy?
Daniël de Blocq van Scheltinga: There are several priorities. Some are based on what is visible to the people because happy people means political stability and durability. Others are based on the ‘Made in China 2025‘ plan which clearly tells us from which direction the wind blows.
On the visible side of things, one priority is to fight corruption and serious efforts have been made to that extent already. The other priority is clearly environment-related, and the government is investing heavily in environmental clean-up. China is usually pictured as the big polluter, but in reality, their clean energy investments are huge. Again, the trend doesn’t come out of nowhere, it is a political decision which translates into changes in the constitution, with an emphasis on developing a “beautiful China”. And I have no doubt that the economics will follow in ways no Westerner will anticipate.
The third priority is that China wants to free itself from its dependence on the West. The Chinese have long been the factory of the world, so the world depends on them to produce. But that means that China also depends a lot on other countries to sustain its economy, so the plan is to progressively reshuffle the cards.
The fourth priority flows from there, China needs to become a technology leader.
So China’s technological progress is also a political project.
DBvS: Of course. Governments in the West refuse to take a strong political stand, therefore, there is no real incentive for businesses to invest in change. But when the Chinese leadership says something is on the go then the incentive is there.
Environmental policies mean investment in R&D, and they create a huge investment playground for Chinese investors. The next step is simple to understand, once the technology is there, the West will become a client. Actually, if you ask me, I would say that in ten years China will be the most advanced country in terms of environmental technologies.
Does this represent an opportunity for Westerners at the moment?
DBvS: Yes. The political message is coming out, so the dynamic is just being initiated. Environment policies are wide, and the needs are also very wide, so there are opportunities for companies with an expertise in water and soil preservation of clean-up for instance.
With what strategy?
Daniël de Blocq van Scheltinga: That is the real question, however the answer depends on what expectations investors have. The Chinese have an economic independence objective so they invest large amounts for technology acquisition. That leaves two options.
One is to come to China and invest to do business, with the hope to develop a market with long-term perspectives. The other is to make your technology visible so it can be acquired sooner or later as part of the larger policy goals. In both cases, you would depend on insights and local partners, so strategy is extremely important.
How do you see China’s technology developments?
DBvS: Technology is clearly a strategic priority here, as just mentioned, so the market for technology is enormous. Artificial Intelligence and robotics will be a big thing because the country has important ‘Smart Society’ projects.
Again, this is a strategic move for Beijing, which is based on a demographic reality. The working force is shrinking progressively and therefore China will not be able to remain the factory of the world. There won’t be enough people to produce and to take care of the aging population at the same time, therefore investing in technology now is vital.
Since there is a political move to support the need, my take is that the Chinese will rely on more and more automation whilst developing clean energies and reducing pollution and waste. That all fits nicely, don’t you think?
Any thoughts on the current trade war issues between Beijing and Washington?
DBvS: China-US relations are a big topic these days, but to be very straightforward what happens makes me smile. It looks like the China 2025 plan was just discovered by President Trump, but it has already been there for some time now. Plus, the plan was inspired by a German model so the Chinese haven’t invented anything.
I think the trade war is not about a trade war, and it is certainly not about reshaping the U.S. Balance of payment. China has offered solutions to the issues raised, they even offered to import shale gas but this has been turned down. The balance of payments argument is just a facade.
What is your analysis of this?
Daniël de Blocq van Scheltinga: The Trade war is more like a form of leadership rivalry in my opinion, and this rivalry is based on the move-forward policy that China has put into place over the past few years.
China is becoming a large competitor to the United States. They have a growing influence from a political and trade perspective, but their potential in terms of technology and development regionally and globally is something Westerners have underestimated.
Washington needs to counter this shift. They tried to ban ZTE products, for instance, but then they realized that American firms would be penalized in the process so they moved backward. The reality is, to some extent Trump is giving China more ways to move on! One of the policy priorities I mentioned previously was China’s self-sufficiency, and Trump’s isolationist policy is helping a lot. Fewer ties with the U.S. means more reasons to invest and move on.
The war’s economic impact could be limited, then?
DBvS: Difficult question, I think looking for impacts and solutions to this trend is wishful thinking. What we have here is more like an economic cold war in reality, with deep roots that very few people understand. I would say, however, that the impact will be limited on China’s side of things.
For starters, people here know that Trump’s ambition is to slow China’s economy down, and the international community increasingly realizes it. Knowing what the goal is, the Chinese are therefore adapting. Manufacturing is moving to other countries in Asia such as Myanmar, Vietnam or Cambodia. Yes, of course. But Chinese capital is moving there too, so chances are that business will pretty much continue as usual. It will just happen from elsewhere.
More importantly, the Belt and Road Initiative (BRI) is a strategy that has a real counter-balancing potential, even if no-one in the West takes it seriously.
Can you elaborate on the BRI strategy?
DBvS: The BRI is probably one of the most important long-span strategies ever put into place, and it is vastly misunderstood in the West. To say things simply, President Trump tries to reduce China’s growth by applying tariffs, but he does not realize that China is already operating a plan B.
For instance, imagine a shipment moving from Shanghai to the United States by sea, in about six to seven weeks. Now, imagine a rail, road and air network linking Shanghai to Rotterdam in less than two weeks, and then the United States in two more weeks. The difference is enormous, and the Chinese are currently working on building the infrastructure to make it happen. Infrastructure is key to economic development and the Chinese know it very well.
Very long term then?
Daniël de Blocq van Scheltinga: Beijing is developing a three-generation project here. Infrastructure is the basis, but when it is there the potential for development will be unparalleled. Trump tries to hurt China with tariffs, but clearly their China-to-West strategy is much more advanced than that…
So the BRI goes beyond building the Chinese political influence.
DBvS: What is happening is that Beijing is building markets, with a very long-term perspective. People think that BRI is simply about solving the steel and cement overcapacity issue, but the Chinese are too good at doing business to let the trains, trucks, and planes come back empty. Investors build networks and markets along the way. They find new demand and provide an adequate offer. And the West doesn’t see it.
What does the BRI mean in terms of business and M&A?
DBvS: The impact on business is already there, but again you need to look around and ask the right questions. Most people say that the BRI is just bla bla, but from an M&A perspective, the reality is that Chinese investors increasingly ask for investment opportunities situated on the Belt and Road pathway.
Said differently, while a biotech in South-East Asia could be a great investment on paper, in reality these days reaching an agreement will be easier if the same investment takes place on the BRI route instead of being in Vietnam.
We are back to the ability of China to build strategies and to make them work here. And following the public orientation means more funding, a better reputation, so forth and so on.
What does the BRI mean for Hong Kong?
Daniël de Blocq van Scheltinga: This is one of the billion dollar questions, really. Beijing did not plan any role for Hong Kong and expects the local government to find their own way to contribute. Considering Hong Kong’s strength in terms of financing and legal stability, chances are that the city will become a gateway to the BRI. When people realize the potential, that is.
Last but not least, what would be the success and failure advice you would like to give to our readers?
Doing business in the region is more complicated than what people think, and it is certainly not something you can do on your own, from a computer, far from here. The best way to fail would be to ignore this reality. The best way to succeed is to take the time to gain insights on what happens in your target market and to find serious advisers capable of understanding the politics and the mentality.
Daniël de Blocq van Scheltinga | China Expert Contributor, Polarwide Managing Director.
Daniël de Blocq van Scheltinga is the Founder and Managing Partner of Polarwide, a Hong Kong-based corporate advisory firm specializing in cross-border corporate strategy and the execution thereof. Polarwide has built op over a decade of experience acting as the liaison between Asia and Europe, advising senior decision makers in both private and public sectors, most notably with regard to their strategy and in cross-border mergers and acquisitions.
As an example, Polarwide was mandated by one of China’s largest State Owned Enterprises, ChemChina, to establish their Finance Company, whereby Van Scheltinga became the first foreigner ever approved by the Chinese authorities to be the CEO of an SOE Finance Company, assisting in developing and executing the Group’s outbound investment strategy.
Disclaimer: The views expressed are those of their author(s) only and do not reflect those of The Asia-Pacific Circle or of its editors unless otherwise stated.
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