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International Expansion of Chinese Emerging Market Multinational

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DOI: 10.1007/978-3-030-04251-6_3

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International Expansion of Chinese
Emerging Market Multinational
Corporations to Developed
Markets: A Qualitative Analysis
of Post-acquisition and Integration
Strategies

Daniel Rottig and Rui Torres de Oliveira

Abstract Since the end of Great Recession about a decade ago, the 20 biggest
emerging market economies have become the drivers for global outward foreign
direct investments (OFDI) (Casanova and Miroux in Emerging Market
Multinational Report, 2017), and these capital outflows are increasingly directed
toward developed countries in form of international mergers and acquisitions
(Thomson Reuters in Mergers and acquisition review, 2018; UNCTAD in World
investment report: investment and new industrial policies. United Nations 646
Publications, New York, 2018). Particularly China has become a key player in the
global market for corporate takeovers since the turn of the century. The country
already constitutes the world’s second largest economy (and largest emerging
economy) for OFDI through international mergers and acquisitions, second only to
the United States. In fact, the total transaction value of outbound international
mergers and acquisitions of emerging market multinational corporations (EMNCs)
from China amounted to nearly US$256 billion in 2016, with particular focus on
target companies in developed economies (Casanova and Miroux in Emerging
Market Multinational Report, 2017). Due to the significant capabilities gap between
EMNCs from China and developed market companies, however, international
acquisitions of the latter by the former require a unique post-acquisition integration
approach that differs from those prescribed by extant research. In addition, due to
the unique institutional environment of China, which is characterized by a con-
siderable oversight and influence of the central government on the foreign market
entry and location decisions by Chinese companies that are conducting outward

D. Rottig (&)
Department of Management, Lutgert College of Business, Florida Gulf Coast University,
10501 FGCU Boulevard South, Fort Myers, FL 33965, USA
e-mail: [email protected]
R. Torres de Oliveira
Queensland University of Technology, St Lucia South, Brisbane, QLD, Australia
e-mail: [email protected]

© Springer Nature Switzerland AG 2019 37

A. Vecchi (ed.), Chinese Acquisitions in Developed Countries, Measuring
Operations Performance, https://doi.org/10.1007/978-3-030-04251-6_3
38 D. Rottig and R. Torres de Oliveira

foreign direct investments, a better understanding about the specific institutional

demands and legitimacy pressures is needed for this context. This chapter aims to
address these issues by examining the unique institutional environment of China in
the context of the internationalization strategies of indigenous firms through
acquisitions in developed markets, and the related, context-specific integration
approaches Chinese EMNCs employ for these transactions.

Keywords Mergers and acquisitions
Chinese emerging market MNCs

Institutional complexity

1 China’s Institutional Profile and Institutional

Complexity

The rapid domestic economic growth in China over the past three decades, which was
fueled by the Chinese government’s focus on inward foreign direct investments by
foreign MNCs, has provided the Chinese government and local emerging MNCs
with the necessary confidence to embrace outward foreign direct investments
(OFDI). In 2016 alone, the value of Chinese OFDI amounted to US$256 billion (US
$196 for mainland China only, excluding Hong Kong), making Chinese multina-
tional corporations the largest overseas investors among developing and transitioning
economies (UNCTAD 2018). This recent focus on OFDI by Chinese multinationals
is a direct result of the local institutional environment and China’s government policy
titled ‘Opinion on the Encouragement of Enterprises in the Development of Foreign
Processing and Assembly of Materials’ that was passed in 1999 and adopted in 2000.
More recently, China’s strategic political focus on OFDI was emphasized in its ‘Go
Out’ (zou chuqu) policy, which was an integral component of its ‘12th and 13th Five-
Year Development Plans 2011–2020’. In the view of its political leaders, a combi-
nation of targeted strategic inward FDI along with outward FDI is essential to propel
China forward from its status as a developing economy to a developed one. The
Chinese government continues to emphasize its support of this new OFDI-oriented
policy, which can be illustrated by a remark of Zhong Shan, China’s International
Trade Representative and Vice-minister of Commerce at the State Council: “Going
forward, we will focus on implementing the strategy of ‘One Belt, One Road’ as we
further step up outbound investment and encourage the relocation of advantageous
industries and excess capacity of countries along ‘One Belt, One Road’” (MOFCOM
2015). The recent proliferation of Chinese MNCs that are embracing OFDI is
therefore not surprising (The Economist 2013) and the result of a direct effect by the
local institutional environment.
Prior to the aforementioned 1999/2000 political shift by the Chinese govern-
ment, most OFDI by Chinese companies was undertaken for resource-seeking
reasons. Yet, these new political directives impelled Chinese MNCs’ to change
their motives for OFDI to primarily focus on capability-seeking reasons.
International Expansion of Chinese Emerging Market … 39

Chinese firms, therefore, begun to shift their regional focus for OFDI from devel-
oping, resource rich countries to developed countries in order to tap into the most
advanced capabilities as directed by China’s government policy (MOFCOM 2015).
Furthermore, this new focus on capability-seeking impelled Chinese firms to
conduct foreign direct investments through equity-based entry modes (i.e.
ownership-based modes), and M&As were the most frequently adopted equity-based
entry mode (MOFCOM 2014; Schüler-Zhou and Schüler 2009) in order to preempt
competitors (Child and Rodrigues 2005) and to gain full control of, and thus to fully
internalize, the acquired capabilities. Since then, two distinct waves of international
mergers and acquisitions by Chinese firms occurred: a post-dot-com wave from
2000 to 2008 and a post-Recession wave from 2009 to present.

1.1 Post-dot-com Wave from 2000 to 2008

In this wave, the growth of Chinese OFDI occurred due to two reasons. First, the
Chinese government and authorities passed new legislation and procedures that
impelled Chinese firms to invest abroad in a more efficient and supported way.
While the Chinese government did not force companies (particularly private ones
that are not controlled by the government as are local state-owned enterprises) to
enter specific foreign markets or use specific entry modes from a formal institu-
tional perspective (such as coercive pressures through regulation and legislation), it
imposed informal institutional pressures and related legitimacy demands on their
firms. The process by which this was accomplished is a Chinese government
publication called “opinion” (or “recommendation”) regarding which countries the
Chinese government believes its companies should invest in and for what reason.
These “recommendations” specified particularly developed economies and
capability-seeking reasons for OFDI, and companies in China were impelled
(though not coerced) to follow suit in order to gain and maintain legitimacy (i.e. the
acceptance, approval and support) by the Chinese government. These “recom-
mendations” resemble formal institutions given their explicit nature, yet are
enforced through processes that resemble those that are commonly used by an
institutional environment to motivate firms to adhere to informal institutions (such
as normative legitimacy pressures). We therefore refer to these “opinions” or
“recommendations” by the Chinese government as semi-formal institutions (Torres
de Oliveira and Rottig 2018) that constitute an additional type of institutions and,
thus, illustrate the complexity of the Chinese institutional environment.
For one, the Chinese government has the authority to approve or disapprove
OFDI by its private companies, and those companies which follow the “recom-
mendations” are known to receive ready and favorable approval for their OFDI
proposals, whereas those which deviate from the official government recommen-
dation and decide to invest in alternative international markets are frowned upon by
the local institutional environment and thus typically have to go through a lengthy
and tedious approval process with an uncertain outcome. These informal
40 D. Rottig and R. Torres de Oliveira

institutional legitimacy pressures, therefore, impelled Chinese companies to invest

in developed markets that have been “recommended” by the Chinese government,
and so constitute an institutional direct effect by the home country. For another,
given the “recommendation” to conduct OFDI for capability-seeking reasons,
acquisitions were the only choice for private firms given that alternative
equity-based entry modes would either not have allowed them to obtain ready
access to capabilities (such as Greenfield ventures, which involve the establishment
of foreign subsidiaries from scratch rather than taking ownership of existing
companies with existing capabilities the Chinese government was seeking) or not
have allowed them to fully control, and thus fully internalize capabilities (such as
international joint ventures, that involve a foreign partner and thus, shared control).
Hence, the capability-seeking “recommendation” by the Chinese government
imposed another informal institutional legitimacy pressure on companies to conduct
OFDI through acquisitions, and so constitutes another institutional direct effect by
the home country.
This first wave of Chinese OFDI in developed economies, which was stimulated
by the aforementioned institutional changes (and “recommendations”) enacted by
the Chinese government, can be characterized based on four distinct features: first,
it became apparent in this wave that Chinese firms lacked the experience and
managerial capabilities to implement these investments, particularly international
M&As in developed economies. Second, Chinese firms were trying to integrate
acquired companies in order to fully internalize acquired capabilities, which was to
be expected from an institutional theory perspective given the informal institutional
legitimacy pressures by the Chinese government as well as the isomorphic pres-
sures to imitate firms (and their foreign market entry strategies and approaches) in
the same industry (DiMaggio and Powell 1983). Third, the primary motives by
Chinese firms for their acquisitions in developed economies were (a) lowering costs
(selling their own products globally by using their low-cost production capabilities
and, at the same time, producing the acquired firm products in China but continuing
to sell them under the target’s brand) and (b) transferring capabilities from the
newly-acquired firms to the acquirer (Williamson and Raman 2011). Fourth, it
became apparent that Chinese firms lacked expertise in the due diligence process
when acquiring firms in developed economies (Williamson and Raman 2011), not
only regarding the evaluation of tangible assets such as financial due diligence, but
more importantly in the intangible dimensions that are critical in value creation,
such as cultural due diligence (Ahammad and Glaister 2013; Rottig 2007, 2013;
Rottig et al. 2017).
All these features resulted in the fact that the majority of Chinese firms’
acquisitions in developed economies during this wave were unsuccessful and led to
considerable financial losses which, in turn, entailed a traumatic psychological
feeling among Chinese managers that their internationalization efforts directed
toward developed markets were condemned to fail. Even the Chinese central
government was concerned about the difficulties its firms were experiencing in their
foreign direct investment efforts in developed economies, and initially was trying to
control the losses of these firms in their overseas ventures. Despite occasional
International Expansion of Chinese Emerging Market … 41

successful acquisitions of Chinese companies in developed countries, such as

Lenovo’s acquisition of IBM’s PC division for US$1.75 billion in 2004, the
Chinese central government’s concerns about the internationalization efforts of its
firms remained, and the government was particularly wary of Chinese firms’
acquisitions in developed economies.
Due to these continuing worries, in 2007, the Chinese central government
enacted new legislation and started regulating OFDI more stringently by such
approval processes as the State Administration of Foreign Exchange (SAFE), which
tended to authorize (through informal, subjective rather than transparent, objective
processes) Chinese firms to conduct M&As in developed economies only if they
had a well-developed business plan leading to profitability, and if they possessed
“adequate managerial capabilities and M&A integration skills” (Williamson and
Raman 2011: 112). This policy can be illustrated by the Chinese central govern-
ment’s disapproval of the planned acquisition of General Motors’ Hummer division
by Sichuan Tengzhong Heavy Industrial Machinery in 2010, which was based on
the Chinese company’s lack of knowledge regarding strategic and investment plans
(Anand 2010).
Despite these more stringent local regulations toward OFDI by Chinese firms in
developed economies, the large amount of foreign exchange reserves the central
government had amassed during the first decade of the 2000s, market liquidity,
inflationary pressures and the discount price that companies in developed countries
were traded at during the Great Recession, Chinese authorities started again to
incentivize and encourage Chinese firms to invest in developed economies through
M&As. This new institutional pressure on local firms by the Chinese government to
conduct OFDI led to the second wave of Chinese M&As of developed market
firms.

1.2 Post-recession Wave from 2009 to Present

This ongoing post-recession OFDI wave of Chinese M&As of developed market

firms that started in 2009 has been characterized by three distinct features. First,
local firms were directed by a new set of “recommendations” by the Chinese
government to focus on specific regions and countries when acquiring developed
market firms, particularly the European Union (which received the most invest-
ments from Chinese firms) and the United States (which received the second most
investments from Chinese firms) (MOFCOM 2014). Second, Chinese firms were
impelled to target specific industries with firms that possess capabilities Chinese
firms were lacking, such as high precision manufacturing. In 2014, for example,
Germany has been the most important recipient of Chinese OFDI in the European
Union (Hanemann and Huotari 2015; MOFCOM 2014), not only because it is the
largest and most important economy in the EU, but because it is home to a large
number of firms that are well-known for their highly developed industrial capa-
bilities, such as high performance product development, high precision
42 D. Rottig and R. Torres de Oliveira

manufacturing processes, and outstanding quality control processes. Following the

“recommendations” by the local government in order to gain and maintain local
legitimacy, much of Chinese firms’ OFDI has therefore been directed toward
Germany’s industrial sector when compared with other European countries, most
notably toward the automotive sector. The automotive industry constitutes the
largest industry in Germany, with an annual turnover of €384 billion (about US$
420 billion at the end of 2015), representing about 20% of the total German
industry revenue in 2015 (GTAI 2017).
The third distinct feature of this ongoing second wave of Chinese M&As in
developed markets is that these transactions were increasingly successful
(Hanemann and Huotari 2015). As a result of a more targeted regional, country and
industry foci of Chinese firms when acquiring developed market firms, an
increasing number of these transactions were successful compared to the first wave,
such as the Sany–Putzmeister; AVIC–FACC; Geely–Volvo; Lingyun–Kiekert, and
Joyson–Preh acquisitions. Fueled by these successful transactions and ongoing
government “recommendations” that encouraged these transactions, this second
wave has led to the most notable growth of Chinese M&As directed toward
developed countries. As a result of this trend, an emerging body of literature has
surfaced examining Chinese OFDI (Amighini et al. 2013; Blomkvist and
Drogendijk 2013; Buckley et al. 2007; Cui et al. 2014; Deng 2004, 2009; Gao et al.
2015; Hu and Cui 2014; Kolstad and Wiig 2012; Marinova et al. 2011; Morck et al.
2008; Rui and Yip 2008; Wei et al. 2014). While this growing body of research has
provided valuable initial insights into Chinese OFDI in general, several questions
remain unanswered regarding the determinants of successful Chinese M&As in
developed countries (Knoerich 2010) and how a lack of managerial capabilities of
Chinese multinationals may still allow them to manage more competent developed
country firms after gaining ownership of these companies through acquisitions.

2 A Qualitative Analysis of Post-acquisition

and Integration Strategies

We attempt to gain a better understanding about these questions based on a qual-

itative analysis of the successful acquisition of the German Preh GmbH by the
Chinese Joyson Company, Ltd. and by particularly focusing our analysis on the
post-acquisition implementation approach employed by the involved companies.
Rather than being characterized by a lack or underdevelopment of institutions as
captured in the institutional voids literature (Khanna and Palepu 1997, 2005, 2010),
the Chinese institutional environment toward their emerging MNCs’ outward
M&As is characterized by institutional complexity (given formal, informal as well
as semi-formal institutions and related legitimacy pressures). Based on the data and
information gathered through our qualitative research approach, we found that, by
being able to successfully navigate such a complex local institutional environment,
International Expansion of Chinese Emerging Market … 43

Chinese MNCs have built valuable capabilities that enable them to employ more
complex post-M&A integration approaches and thus, effectively integrate acqui-
sitions of more competent developed market firms.
We used a qualitative research design to gather rich data and information based
on executive interviews and secondary data sources (Eisenhardt 1989; Eisenhardt
and Graebner 2007; Ghauri 2004; Yin 2013). We interviewed a number of exec-
utives of both the Chinese acquirer Joyson Group and the German target Preh
GmbH, including high-level executives and mid-level managers. On the acquirer
side, we interviewed the CEO, the Chairman and the VP for Human Resources of
Joyson Group and Joyson Automotive as well as the VP for Sales and Marketing,
and the Heads of Stock-Market Operations, Research and Development and
Communication of Joyson Group. On the target side, we interviewed the CEO, the
CFO, the VPs for Research and Development, Sales and Marketing, Purchases and
Supply Chain Management and the Head of Sales of Preh GmbH in Germany as
well as the CEO, CFO and the Heads of Human Resources and Research and
Development at Preh’s China subsidiary. We also interviewed the Head of the
China subsidiaries of transnational assemblers (i.e. customers of Joyson and Preh)
and senior industry researchers at the China Automotive Technology and Research
Center. We conducted a total of 27 interviews in China and Germany in 2013 and
2014 as well as follow-up interviews between 2015 and 2017 to learn about the
transaction and post-acquisition integration process. Interviews were conducted in
English and Chinese and we ensured verbatim translations from Chinese into
English in order to keep the meaning of the conveyed explanations, and the pro-
fessional translators of the interviews and the transcripts were different individuals
in order to increase the reliability and accuracy of the findings (Rottig 2009; Torres
de Oliveira and Figueira 2018). In addition to the interviews, we collected sec-
ondary data and information through company reports, company websites, news
media and stock-exchange information.

2.1 Company Background

Formerly known as Ningbo Joyson Company Ltd., Joyson was established in 2004
in the Chinese city of Ningbo, in the Zhejiang Province. This province has the
largest concentration of non-government owned firms in China, and Joyson is one
of these firms located in Ningbo’s high-tech zone. It was founded by Wang Jiafeng
(Jeff Wang), who is the major shareholder and the company’s CEO. Joyson was
incorporated in September 2001 and formally begun operating as a company in the
beginning of 2004. From the start, Joyson was focused on two different businesses:
real estate and automotive manufacturing.
At the end of 2005, the company built a small factory in Ningbo and started to
produce its first industrial products: automotive components. These components
were developed for the Chinese automotive assemblers Huacheng and Chery. With
its new customers, Joyson targeted transnational assemblers across China to secure
44 D. Rottig and R. Torres de Oliveira

orders. At the end of 2006, the company started receiving its first international
orders from GM and VW for the same products that were being produced for local
automotive companies. From 2007 to 2008, the company decided to focus on
orders from these transnational assemblers and tried to make internal improvements
in R&D, quality control, and HR. At the end of 2008, the company qualified as a
local first-tier supplier for VW and as a global supplier for GM for the Chinese
market, having passed the assemblers’ quality tests during 2007–08. Despite these
successful internal improvement efforts during that time, especially in R&D,
Joyson’s CEO knew since founding the company that the products it produced
could be easily copied, and as such, dilute the company’s value in the future due to
the low entry barriers into this industry.
The first step the company took toward diminishing this threat was to increase
production and so build economies of scale. In so doing, Joyson purchased a site in
Ningbo for its headquarters and a new adjacent factory, and built another factory in
Changchun that opened in 2009. The location choice for Joyson’s production
facilities was based on the necessity to be near to two of their key accounts in China
—VW and GM—and so create a considerable growth in production that would
shield the company from the threat of new entrants to the industry given the low
entry barrier. Yet, Joyson’s CEO also knew that organic growth by itself would not
be sufficient to achieve his vision of building a transnational supply company in the
industry and defeating potential competitors in the long-run. In one of our inter-
views, the CEO stated that: “…in the automotive business … there is a very strong
competition. If you want to a very quick grow it is not easy … Our first step was
horizontal development through mergers and acquisitions to save time and to make
the resources integration and allocation all over China…”.
Looking for ways to achieve this since the beginning of 2008, the right
opportunity arose for Joyson in the form of a public auction, in which it placed a bid
to acquire Huade Plastic Corporation, Ltd (Huade). Huade was producing similar
automotive components, but was more recognized in the industry. As Joyson’s
CEO explained in one of our interviews: “It (Huade and their products) was very
similar with our components parts… But this company was very famous on the
local OEM base, like the VW in Shanghai and Changchun as well. It had a big
market share at that time. They also had very similar products lines as we did.
I talked to our management and we thought that was a good chance for us. Then we
sold some real estate… and used the money (to acquire Huade)”. In fact, the
founder had considered the idea of building a global, upper-scale automotive
supplier since starting the company, and the acquisition of Huade and other com-
panies in the sector therefore came natural.

2.2 M&A Background

In the beginning of 2007, during a trip to Germany, Joyson’s CEO visited an

automotive electronic supplier called Preh GmbH (Preh), and considered investing
International Expansion of Chinese Emerging Market … 45

in the company given his belief that Preh would be a perfect match for Joyson. Preh
is a global first-tier automotive supplier located in Bad Neustadt an der Saale, about
145 km (90 miles) east of Frankfurt. The company has three main business units:
man machine interface (MMI), which is its core business and produces products
related to the interactions between humans and machines; e-mobility, a very recent
area the company entered that develops products related to the management of
batteries in electric or hybrid vehicles; and automation, which is also a new area
related to the creation and installation of automatic production lines. It took
Joyson’s board three years to convince Preh’s management and its shareholders of
the potential benefits of selling their company to Joyson. In August of 2010, both
companies decided to build a partnership in the form of an international joint
venture (IJV) that was exclusively targeted toward the Chinese market. This IJV
had the objective of not only production, but also product development in order to
adapt to the requirements of local transnational assemblers. In April of 2011,
Joyson finally reached an agreement to acquire 74.9% of Preh and negotiated the
right to acquire the remaining 25.1% later on. By the end of 2012, after being listed
on the Shanghai stock exchange, Joyson acquired the remaining 25.1% of Preh.

2.3 Strategic Objectives of the Acquisition

Joyson’s board member in charge of HR reflected on the Preh acquisition by noting

that: “if compared with Preh, whatever the management or technical R&D or
engineering production, Preh is much better than Joyson. Why can we acquire
Preh? We have a strong financial capability. We have tremendous opportunities in
China market.” Preh’s strategic motives for being acquired comprised Joyson’s
knowledge of the Chinese automotive industry, its connections to local suppliers,
and the value of Joyson as a local partner to navigate the complex institutional
environment when entering the Chinese market. Preh had attempted to enter the
Chinese market to sell its products prior to being acquired by Joyson, through a
local representative office, yet faced considerable liabilities of foreignness and
significant related costs. With Joyson’s support and being part of the company, Preh
was able to build a local production facility and start selling its products, now made
in China, locally in less than a year and at much lower costs. Preh’s CEO perceived
the potential benefits of combining Joyson and Preh not only in China, however,
but also outside the country. In an interview, he stated that “Joyson has no locations
outside China. We are in the US and Europe. So we can assist them.” Preh’s board
member for sales and marketing affirmed this notion by noting that: “I think he
(Preh’s CEO) also sees the possibilities to grow Joyson’s business internationally.
And I can tell you we are working together with Joyson to expand their business not
only in Europe but also in North America. So probably he thought in both ways
(international development of Joyson components in different markets and the
potential value of helping Preh gain ready access to the Chinese market).”
46 D. Rottig and R. Torres de Oliveira

Joyson’s strategic motives for the acquisition of Preh were related to the fact that
the company could immediately upgrade their resources and capabilities, potentiate
Preh’s R&D capabilities by injecting financial resources, and open the Chinese
market to Preh. Joyson raised the needed financial resources by listing the company
on the Shanghai stock exchange and by securing approval from China’s State
Administration of Foreign Exchange (SAFE), thus gaining direct access to China’s
institutionalized financial system. As a result, Preh improved its financial situation,
with reduced debt and needed investments in critical areas such as R&D. For
Joyson, the acquisition of Preh also constituted a significant cost reduction given
that the combined company was readily able to develop products in the electronics
segment that would have taken Joyson a number of years to develop without access
to Preh’s product R&D capabilities. By acquiring Preh and introducing their
products to the Chinese market, Joyson was able to readily access the local elec-
tronic automotive market and sell a larger number of products under their brand
portfolio, and do so at lower costs. In addition, Preh possessed important product
development capabilities that Joyson was lacking. Preh’s products have higher
value and higher margins, and are more difficult to imitate given the company’s
distinctive R&D and innovation capabilities. Furthermore, Preh was present in
international markets critical for Joyson to leverage its own product portfolio.

2.4 Supportive Partnering Integration Approach

Given the considerable capabilities gap between the Chinese acquirer Joyson, Ltd.
and the German target Preh, GmbH, it is surprising that the former was able to
effectively incorporate the latter and manage the combined company in a way to
achieve a sizable sales growth and significant benefits that made the transaction
successful. Through our executive interviews and secondary data sources as well as
conceptual reasoning when analyzing the gathered qualitative data and information,
we argue that this success is the result of a unique post-acquisition integration
approach Joyson implemented, which we refer to as supportive partnering
approach (Torres de Oliveira and Rottig 2018). This new approach consists of a
partnering component that resembles more a strategic alliance in form of an
international joint venture (see, e.g. Reus and Rottig 2009) than an acquisition
given that the acquired company is operated as a separate, autonomous business
unit in order to keep the target’s identity, formal structure, and brand. This new
approach also consists of a supportive component to emphasize the importance of
creating a shared vision for the combined company despite the autonomous status
of the target, and the highly supportive nature and support provided by the acquirer
to ensure that the acquired capabilities inherent in the target do not disintegrate after
the change in ownership.
The supportive partnering approach differs from traditional post-M&A inte-
gration approaches that are discussed in the literature in a number of ways: it
includes a partnering component in form of setting a unique organizational structure
International Expansion of Chinese Emerging Market … 47

and coordinating business activities, top management, branding, as well as vision

and values in a specific way, as well as a distinctive supportive component. These
characteristics are summarized in Table 1 and will be discussed next to demonstrate
the practical and theoretical implications of this new approach.
Organizational structure: Extant literature suggests that M&As typically lead to
better performance outcomes if the involved firms’ operations are integrated
compared to keeping them separate (Cartwright and Schoenberg 2006). Such
integration is typically conducted with the objective of reducing costs and/or
increasing sales. In this case, however, Joyson kept the operations of the acquired

Table 1 Traditional versus supportive partnering approach

Traditional approach Supportive partnering Illustrative quotes
approach
Organizational Integration with the Each organization “I am not worried
structure objective of cost keeps full operative with daily activities.
reduction and/or freedom even if in the I want to influence the
increase of sales same GVC. The strategy”—Joyson
objective is not CEO (Note: Joyson
operational cost pro-actively
savings but the communicated with
preservation of the the different
strategic value and stakeholder groups
superior capabilities about not changing
of the target the organizational
structure and
operations of its
subsidiary Preh.)
Business Acquirer takes control Acquirer controls the “Preh has better
activities and integrates acquired firm’s resources than us
functional strategic direction and (Joyson) so our focus
departments of the annual budgets, but was in the long-term:
acquired firm does not interfere with strategy and annual
daily operations and financial elements”—
functional Joyson CEO
departments
Top Replacement of (at Preservation of the “We had no changes
management least some) top entire management of in any managerial
management positions the acquired firm. positions at any level,
Placement of key not even in the first
executives of the level, not in the
acquirer onto the second level and not
acquired firm’s board in the third level.
with the objective of Joyson CEO had a
transferring the vision clear point of view.
and values of the He is not buying a
acquirer company, he is
buying its
management.”—Preh
CFO
(continued)
48 D. Rottig and R. Torres de Oliveira

Table 1 (continued)
Traditional approach Supportive partnering Illustrative quotes
approach
Branding Integration or Keep acquirer’s and “Joyson and Preh are
replacement of the acquired brands independent brands
acquired brand independent and and even with my
autonomous. No future acquisitions I
active advertisement do not foresee any
or communication integration. It is not
that acquired brand is our interest and
owned/controlled by strategically does not
acquirer make sense because
of the different
segments and quality
levels”—Joyson CEO
Vision and Communication of Communication of “Focus on strategic
values vision and values are vision and values, and direction and cultural
relegated to later strategic cultural integration are the two
stages in the integration, are key important roles that
post-acquisition focus in the make a combined
integration phase, and post-acquisition company globalized
the initial concern is integration phase and booming after an
centered around acquisition.”—Joyson
producing quick Chairman and CFO
returns through cost
reductions and the
creation of synergies
Support Key objective is to Acquirer provides “We have been
integrate a target to dedicated and fortunate with the
produce quick returns consistent support to large investments that
through cost the acquired company Joyson provided per
reductions and/or sale our requests.”—Preh
increases—support is CEO
limited to achieve
these objectives

company separate and provided Preh with full operational flexibility and freedom.
While doing so did not lead to cost reductions, it shielded the Joyson Group from
diminishing value or disintegrating acquired, superior capabilities, which may
likely have happened had Joyson attempted to integrate (part or all of) Preh. Joyson
developed a lean and non-intrusive formal organizational structure for the combined
company based on establishing structural ties, which limited formal reporting
relationships to a strategic budget approval process and the monitoring of the
achievement of a shared vision. Doing so allowed the acquirer to gain full control
and influence over the strategic direction and overall budget of Preh, while granting
the acquired company full autonomy and flexibility in all other organizational
aspects. Doing so had the additional benefit of creating valuable social ties between
the managers and workforces of both companies leading to better communication,
International Expansion of Chinese Emerging Market … 49

mutual commitment and cooperation, as well as the sharing and transfer of

knowledge and capabilities. Such an approach has important implications for
academia and business practice. Formal organizational structures may not neces-
sarily be built based on hierarchical control relationships, as is suggested in the
organizational development and design literature, and as is often done in business
practice in order to keep tight control over foreign subsidiaries. Instead, the case
showed that establishing a formal organizational structure based on internal
structural ties greatly facilitates the integration of developed country targets with
superior capabilities by emerging country acquirers.
Business activities: In addition to creating a formal organizational structure
based on structural social capital, Joyson’s CEO sent a clear message that his
company would not interfere with Preh’s day-by-day management, operations and
business activities. As opposed to traditional acquisition integration approaches that
focus on functional integration to achieve short-term cost savings and synergies,
none of Preh’s departments was controlled by Joyson’s headquarters. Given the
considerable capabilities gap between the two companies, Joyson trusted that Preh’s
management would know best how to manage the company, and only provided
guidance based on a shared vision. Doing so allowed Preh to continue their suc-
cessful business model, supported by needed financial resources from Joyson as
well as access to the vast Chinese market. In so doing, Joyson was able to build
mutual trust and cooperation among the combined workforce, and particularly sent
a message to the acquired managers and engineers that their knowledge, expertise
and experiences are highly valued by the acquirer. Whereas the existing literature
on M&As focuses on tangible benefits of integrating business activities to achieve
economies of scale and scope, and business practice typically follows a similar
path, our study has shown that, in the context of emerging market acquirers of
developed country targets, intangible and informal relations between key actors and
managers may be more important than readily quantifiable, short-term economic
benefits. If an acquirer lacks the expertise and experience in certain business
activities, e.g. due to a lack of technical and managerial skills, trying to integrate
these business activities may diminish combined value and threaten to disintegrate
valuable resources and capabilities of the acquired company. Instead, focusing on
creating a shared vision and strategic initiatives, but allowing the acquired company
to determine how to best achieve this vision and implement these strategic initia-
tives, as well as using social (rather than coercive) controls to monitor progress,
seems to be an unconventional yet more effective approach for the integration of
emerging market acquisitions in developed countries.
Top management: In traditional M&A transactions, the replacement of (at least
some) top management positions of the target company is a natural consideration by
acquirers to gain control of the acquired company and to align it with the acquirer’s
vision, strategy, and procedures. In Joyson’s case, however, there was no consid-
eration of any personnel layoffs or replacements, and the company was particularly
careful to avoid any such discussions or rumors. In so doing, the acquirer did not
only prevent top level managers and key executives and engineers from leaving the
combined company, something that is very common in international acquisitions,
50 D. Rottig and R. Torres de Oliveira

but also kept the existing workforce motivated. Hence, whereas business practice is
struggling with considerable turnover of key executives after an acquisition, which,
at least partially, constitutes a reason for the high failure rates of these transactions
(e.g. Krug and Nigh 1998), the findings of our study illustrate how to curtail this
detrimental issue.
Branding: From the outset of the acquisition, there was a clear sign from Joyson
that ‘Preh remains Preh’ as far as the branding of its products was concerned. Joyson
understood that Preh’s superior image and reputation was based not only on its
valuable production and quality control capabilities, but also on the country of origin
effect (its products are labelled ‘Made in Germany’). Products produced in China,
however, typically hold a negative image (Pappu et al. 2007), especially in the
automotive sector in which high quality and reliability are key for securing orders. In
fact, all of Preh’s clients were located in developed countries, which meant that mixing
Joyson’s and Preh’s brands, or even actively promoting Preh as part of the Joyson
Group, could have significantly jeopardized Preh’s image and reputation as a
high-quality and reliable automotive supplier. Interestingly, as we learned through our
qualitative research, the image of Joyson was considerably increased by this approach
when it became known that it helped opening up the Chinese market for Preh, and that
it provided financial support for Preh’s R&D operations with the clear intention of
developing new and better products for customers. This allowed Joyson to not only
establish valuable internal relational and cognitive ties (Tsai and Ghoshal 1998)
among the combined workforce due to their apparent altruistic motive of supporting
and protecting Preh and its brands, but also led to the establishment of additional
external social ties (i.e. guanxi) in the complex institutional environment of China in
which reputation and image are very important in order to build such reciprocal
network relationships with key actors and the local government.
Vision and values: Traditional M&As are typically characterized by an integration of
assets, operations and workforces in an attempt to quickly create synergies, before
establishing common values and a shared vision for the involved companies. In the case
of Joyson’s acquisition of Preh, however, the creation and communication of common
values and a shared vision was the key focus. In fact, we found that both companies were
able to focus on building and communicating a shared vision and mutually held values
due to the lack of pressure for an integration of assets and operations (i.e. a lack of
pressure for creating short-term synergies), and so focus on the importance of a strategic
direction for the combined company and socio-cultural integration of the involved
workforces (Rottig 2013; Rottig et al. 2017). This can be illustrated by the remark of
Joyson’s Chairman and CFO: “Perfect strategies and cultural integration are the two
important roles that make a company globalized and booming.”
Supporting Component: While traditional M&As often are characterized by
acquirers trying to improve their own market position by integrating a target,
Joyson did the opposite. In addition to freeing Preh from debt, Joyson injected
significant amounts of financial resources into Preh to support the acquired com-
pany’s R&D operations, market entry into China and successful operations in this
market. Joyson further supported Preh by transferring valuable location-specific
International Expansion of Chinese Emerging Market … 51

knowledge and information, and by connecting the acquired company to its local
networks (or guanxi), and so helped diminish the liabilities of foreignness Preh
faced when entering and operating in China.

3 Conclusion

We believe that this new supportive partnering approach will allow managers of
MNCs from emerging markets to develop better strategies when integrating
developed market acquisitions. The relatively high failure rate of emerging market
multinational acquisitions in developed economies, which seems consistent with the
general finding in the literature that 70–90% of international M&As fail (Martin
2016; Rottig 2017; Rottig and Reus 2018), is quite concerning, especially against
the background that M&As remain a key vehicle through which MNCs conduct
foreign direct investments. It therefore becomes crucial for managers of MNCs to
gain a better and more encompassing understanding about the performance deter-
minants of these transactions, and more specifically, about the factors that deter-
mine an effective implementation of M&As of developed market targets by
emerging market acquirers in the post-M&A stage.
With our analysis of a Chinese acquisition in Germany, we discovered that the
post-M&A integration approach diverged from what would have been expected from
typical acquisitions, and from what the current M&A literature has prescribed, given
that it did not entail the integration of the involved companies. Based on our findings,
we believe that a context-specific supportive partnering approach is an available
option to Chinese firms, and possibly other developing market firms, when acquiring
companies in developed markets, and that integration (as prescribed by the existing
literature) is not an ultimate obligation. The often-used adage that in successful M&A
transactions “one plus one equals three” may be adjusted to “one and another equals
three” to illustrate the unique, social-capital based nature (Rottig 2011) of this new
supportive partnering approach. We further believe that this study will help managers
of Western-based firms, multinational corporations as well as small and medium-sized
enterprises, to better understand the unique institutional characteristics and legitimacy
demands in emerging markets (Alon and Rottig 2013; Rottig 2016) and so be better
able to navigate these complex institutional environments.

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