China is showing innovation muscle with IP-fuelled M&A
Business Management

China is showing innovation muscle with IP-fuelled M&A

This is a contributed piece by Jon Calvert, CEO of ClearViewIP

 

The global economic landscape is changing and with it, new innovative players are emerging. Thousands of miles from the blue-chip enterprises of Silicon Valley or London’s industrious Silicon Roundabout, two of the top five global hubs of innovation are emerging in China.

In the 20th century, China was primarily a manufacturing economy as it developed and industrialized after the Chinese economic reform. To source the raw materials required to fuel this growing manufacturing economy, Chinese businesses engaged in foreign M&A to enable energy and natural resource acquisition.

In the 21st century, China’s economy has morphed into a global innovation hub with companies looking to make their mark on the international business landscape. With this brings a shift in Chinese M&A activity towards high-end technologies and brands.

Historically, China had a poor reputation for respecting the innovations of others, disregarding IP rights and effectively copying protected technologies. This was compounded by an inability to differentiate and elevate the status of Chinese brands on the world stage.  

In order to overcome these issues, Chinese businesses have become increasingly creative in terms of their global strategies and mergers with or investment in western brands is an attractive option. This provides an established foothold in economies that were hard to address directly. These trends may go some way in explaining the increased M&A market activity, particularly amongst high tech Chinese businesses.

 

What does Chinese M&A innovation look like?

The Chinese company Geely has led the way with this strategy. In recent years it acquired Volvo Cars, London Taxi Company and Lotus Cars. These have provided new injections of innovation to their products originating in China and have also elevated, and some might argue, disguised, the international perception of their brand. Following this, Geely has of late shown the confidence to enter the European market with an all new brand “Lynk & Co” for a new digital business model to sell their cars as opposed to attempting to enter the market under the Geely brand itself.

By undertaking M&As, Chinese companies have shaken the reputation of “copycats” by acquiring technology and IP rights from Asian and Western companies and securing market access by licensing IP from major technology owners. This labels them as trusted innovative companies with respected technologies that have the weight of secure IP behind them. In addition, it has allowed these Chinese companies to use ‘western proven’ brand equity to enter markets quickly and with consumer confidence. This is a vital part of the smart business strategy emerging.

The Chinese expansion into technological innovation has boomed in the last decade but past fiscal policy in China restricted the international flow of capital. This coupled with US and EU political policy attempting to protect national interests means the M&A market has been challenging for these technological businesses. However, recent consortia investments such as the investment in Imagination in the UK by the Chinese backed private equity firm Canyon Bridge Capital Partners show that M&A activity is still possible. We expect deal flow to continue and accelerate deploying ever more innovative collaborative investment models.

From a Western perspective, there are many opportunities opening up as a result of the international expansion of Chinese businesses and investment funds into technological industries. The current Chinese business landscape provides interesting opportunities for Western businesses looking to partner with companies in the East and warning signs for those who may face competition from new sources. For those willing to grasp opportunity, they are able to offer the supporting bridges to connect Chinese companies to otherwise inaccessible markets. Equally, Western companies with ambitions of acquisition might consider collaboration with innovative and lucrative Chinese businesses to grow partnerships that may be fruitful for all involved.

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