Rise of the challengers

Last Updated: Sun, Dec 30, 2012 20:21 hrs

An important question that confronts managers and researchers... is this: If Chinese and Indian firms are beginning to behave like Western multinationals, what are the implications of this development for managers? We discern three broad approaches:

1. Treat the development as a revolutionary break in the history of global business and hail the acquiring firms as bringing unheralded changes to the world of commerce. This perspective views the overseas acquisitions by emerging market firms as a natural trajectory of their internationalisation. Researchers writing in this vein carefully document and celebrate the growth of MNCs from emerging markets but leave unexplored the implications of the phenomenon.

2. Acknowledge that acquisitions by C&I firms are indeed rising but question whether they are indeed value creating. Taking the cue from traditional finance and strategy literature, this approach asks questions such as these: Have the buyers from newly industrializing countries overpaid for these acquisitions? Do such buyers have the wherewithal to add to or extract value from their overseas acquisitions? If the answer to these questions are in the negative, then incumbents in global industries have little to fear from or worry about such acquisitions.

3. This final approach, which we adopt, is to acknowledge that acquisitions by firms from China and India are indeed rising. But we then ask a different set of questions, primarily from a competitive perspective. Taking the cue from strategy literature, this approach asks questions such as: How do these overseas acquisitions by firms from newly industrializing countries change the competitive landscape in global industries? How do they influence the strategic options open to incumbents in these industries? In what ways do different responses to the questions influence how incumbents react, or should react, to these overseas acquisitions by Chinese and Indian companies in their industries?

The first approach is exemplified by writers who praise the growth of multinationals from China and India but stop there.

A recent book on emerging Indian multinationals cites a number of Indian firms, such as Tata Motors, Tata Steel, Godrej, Suzlon, Bharat Forge, and Hindalco that have made acquisitions abroad and indicates that it is part of the companies’ strategy to globalize. The authors do not, however, ask why it should matter to their global rivals. Witness their description of Suzlon’s acquisitions: “Suzlon acquired Hansen Transmissions of Belgium in 2006 . . . [which] cemented Suzlon’s position ... as a top-tier global manufacturer.” The authors then go on to describe how Suzlon is trying to overcome challenges associated with globalization such as managing cultural diversity, maintaining financial performance, and growth. There is no discussion about what challenges Suzlon’s rise poses for its global rivals and how they could and should respond to them. Many commentators in newly industrializing countries have taken to writing paeans of praise for globalizing firms. For our purpose, though, such pronouncements of greatness of globalizing firms from India or China are not of much help.

The second approach acknowledges the rising trend in overseas acquisitions by Chinese and Indian firms but then goes on to question the value of such acquisitions. This approach takes a firmly financial perspective. The literature suggests that a large proportion of acquisitions does not, in general, create value for the acquiring firm. Some researchers have concluded that between half and three-fourths of acquiring firms have actually cost their shareholders by destroying shareholder value. One researcher has used this value creation perspective to question the usefulness of Indian firms’ overseas acquisitions. He argues that Indian firms’ recent overseas acquisitions have not been value creating but value destroying. Using detailed case studies of acquisitions in the steel industry (Tata Steel’s acquisition of Corus), aluminum industry (Hindalco’s acquisition of Novelis), and automotive industry (Tata Motors’ acquisition of Jaguar and Land Rover), he argues that these acquisitions fail the test of value creation. He hypothesizes that management hubris and nationalistic cheerleading have led to poor strategic assessments, followed by overpayment and poorly conceived integration efforts. These have combined to make these acquisitions poor strategic moves. His conclusion is that Indian firms’ acquisitions have destroyed shareholder value and are more of an albatross around the necks of Indian companies rather than opportunities for enhancing long-term advantage. Presumably similar arguments can be made of Chinese acquisitions abroad.

Excerpted with permission from the publisher. Copyright Wiley India. All rights reserved.

Anil K Gupta, Toshiro Wakayama, U Srinivasa Rangan
ISBN: 9781118217979.

More from Sify: