Painful lessons on global expansion for Chinese firms

PUBLISHED : Saturday, 06 June, 2009, 12:00am
UPDATED : Saturday, 06 June, 2009, 12:00am

The soured US$19.5 billion bid by Aluminum Corp of China (Chinalco) for a bigger slice of Rio Tinto provides some hard lessons for resources-hungry state-owned companies and the political powers backing their ambitious global expansion plans.

It may signal a broader rethink on how China structures the deals to gain access to much-needed natural resources. A pressing problem for Beijing is that bargain opportunities are diminishing at a quick clip.

'Rising commodity prices will make it more difficult for Chinese firms to purchase commodity companies, especially in developed countries where the financial crisis has limited the availability of credit and depressed equity markets,' said a Hong Kong-based economist at a western bank.

Rio Tinto's choice of a rights offer to raise US$15.2 billion as a funding alternative to the Chinalco deal underlined the winds of change, market observers said.

Winson Fong, a fund manager at SG Asset Management, said the need for mainland cash was diminishing.

'It's like: 'So if I can manage to stand on my own feet, I don't need your help',' he said.

The perceived threat posed by state-owned companies such as Chinalco touched a raw nerve in Australia. On one hand, the mainland's demand for raw materials and energy has helped fuel a nearly decade-long boom Down Under. On the other, the growing heft of China as a regional military power stoked jitters, particularly when it tried to tap into strategic assets such as minerals.

'It makes matters worse when so many mainland companies are knocking on the door almost simultaneously,' said Xu Zhongbo, chairman of the consultancy Beijing Meitake. 'That generated a sense of insecurity for the Aussies, which in turn increased the political sensitivity.'

Resources-rich Australia has been the nation most targeted by Chinese investors, with US$3.4 billion worth of deals announced so far this year, representing 32 per cent of total mainland merger and acquisition activity overseas. But some of the most sought-after deals have gone awry.

Before Chinalco, another big-ticket proposal by Minmetals to acquire OZ Minerals was blocked by Canberra over security concerns.

Given the growing sensitivity of acquiring overseas assets, Wang Zhile, a researcher with the Ministry of Commerce, suggested more flexibility on the part of Chinese firms.

'Maybe things would have improved if Chinalco had teamed up with a foreign partner in making the offer, yanking the rug from the argument that the acquisition is politically motivated and a pure extension of state will,' said Mr Wang.

That was exactly what Chinalco did last year when its US$14 billion joint bid with US firm Alcoa for an initial 9 per cent stake in Rio succeeded.

The call for a change in the mainland's 'go global' strategy was echoed by Antony Dapiran, a partner in international law firm Freshfields Bruckhaus Deringer.

'For outbound Chinese investors, outright takeovers, equity investment and control positions may be out, and asset deals, supply contracts and soft loans may be in,' he said.