Vancouver, Canada, August 2016

“Please call me now!” Squinting at the phone in my hand, I drowsily pieced together the email that had just arrived in my inbox. Just a few minutes before 5 a.m. Vancouver time, my university classmate Claire had emailed me with an urgent plea. “There’s a big Chinese corporation that just contacted me to do a huge deal with my company. Can we talk?”

Nearing the end of my family vacation, I responded that I was on holiday in Canada and promised to call her in two days when I arrived back home in Shanghai. She emailed back immediately: “Man… it is moving a bit fast. Is there any way I could talk to you earlier? ASAP?” Fighting the urge to fall back asleep, I rolled out of bed and called Claire.

My former classmate, now CEO of a UK-based lifestyle brand and a media darling, briefed me quickly. Just hours before, Claire had received a call from a young Chinese woman representing one of China’s biggest and better-known conglomerates. Regularly written about in the Western press, such as the Financial Times, the conglomerate is a household name for all Chinese yet also owns brands widely known in both Britain and America.

Claire explained the situation: “The young woman said she is close to the chairman. Apparently, he wants to buy up my whole company or co-invest in a new lifestyle company focused on China with a British branding. They’re willing to fund the whole venture and give us a 50 percent stake so that we develop a brand and manage its growth. What a potentially game-changing opportunity.”

But then came the kicker: “They’ve given me just three days to prepare a term sheet and five-year business plan with the goal of hitting $100 million USD in revenue in three years. According to the woman, their chairman needs the plan immediately so that he can choose which option to take. They want to turn this into a billion dollar company if we go public with it.” Taken completely off guard, my friend had never faced such a fast-moving potential partner or acquirer and now sought the most strategic approach given her circumstances.

She continued somewhat perplexed, “This could be a really big payoff. What do I do? They want everything in three days. They said that after they get my proposals, they will choose which path to take within a week and it’s basically a done deal because the chairman loves my company’s brands! They’re even talking about term sheets. Is this normal for Chinese companies?” I could hear the excitement in Claire’s voice, tinged with slight apprehension as she remarked on the speed at which negotiations were taking place.

The potential business opportunity and payoff were huge—a once in a lifetime opportunity afforded by one of the few Chinese companies making it onto western business radars. Nearly every month in recent years, business media headlines from the Wall Street Journal to Bloomberg featured Chinese companies’ scooping up of Western lifestyle brands. Turning heads in 2015, for example, Dalian Wanda Group bought Ironman Triathlon for $650 million USD and Anbang Insurance followed suit in its acquisition of the Waldorf Astoria from Hilton Worldwide for $1.95 billion USD.

What if Claire’s company could also make it to the big league? While excited by the prospect, Claire feared moving too fast, and getting cheated or losing control of the company she had so laboriously nursed to strength over the years. Having never before faced a deal of such scope and speed, she was determined to be as methodical as possible in analyzing the present situation.i

Contextualizing Chinese business speed, I explained to Claire that the rapidity and magnitude of the conglomerate’s demands were a standard tactic of Chinese businesses—both within China and when dealing with mergers and acquisitions overseas. Yet there are several reasons why Chinese companies far outpace American and Western European management standards. Sometimes China’s conglomerates genuinely do operate at breakneck speeds in order to seize fleeting opportunities. At other times, however, haste may be used as a negotiating ploy to throw others off-balance and thereby extract a better deal. More nefarious companies might even be seeking a free business plan. Lacking the brainpower or adequate resources, these companies essentially appropriate Western companies’ proposals to construct new operations, all under the guise of partnership.

“But speed is not always sinister,” I told Claire. Often, profit-making opportunities in China exist for a mere matter of weeks, whether in public equities, commodities, real estate, or some other asset class. Reliably vigilant, the government is known to intervene at a moment’s notice, shutting everything down to avert a bubble. Windows of opportunity may only be open for a couple of days before China’s government enforces new restrictions on anything from real estate purchases to license plates, inevitably sending prices soaring. Prompted by ever-present volatility, two CEOs may have dinner together one night and decide to raise billions of USD the next, one from the other. Take Alibaba’s Jack Ma, for instance. Just days after having drinks with Evergrande Group Chairman Xu Jiayin, Ma self-reportedly bought half of the soccer club Guangzhou Evergrande for $192 million USD with minimal knowledge of the sport. Final discussions, according to Ma, took only 15 minutes.ii

Negotiating at such speeds is something I have had to deal with often throughout my career. A few years ago, for example, I was interested in starting a small $150 million USD private equity firm under CMR’s umbrella. After engaging a close friend in China—one I trust almost as much as I would family—we had resolved to collaborate on the project with one of his closest friends whom I had yet to meet. Assembling for the first time at the Kunlun Hotel in Beijing, we had a one-hour long meeting, at which we discussed how the fund would invest in IPOs just weeks before they were to go public. Companies would take our money to signal the markets that, through us, they were well-connected in China. One of my responsibilities involved endeavoring to raise money from wealthy individuals and institutional American investors, and perhaps a Middle Eastern royal family or two. After concluding our initial discussion, the three of us planned to meet again a week later.

A week went by and my friend called me. “Have you raised the money yet?” Stunned, I questioned him: How could we possibly raise money before even agreeing to do a fund, let alone have a formal fund structure, legal framework, bank account, or even registered company? Shocked, he was under the impression I could just call up three to four friends and get everything committed. He explained that it was impossible to wait months to set up everything legally because the IPO market was about to be shut off. We had only a week, two maximum, to deploy the funds before China’s government stepped in to close off any opportunities. He therefore reasoned it was essential to get the commitments, make the investments, and exit them within a tight interval, essentially on the basis of our word—forget written contracts.

We quickly realized that the barriers were insurmountable. It was simply too rapid a process for American financiers to invest even relatively small sums. Institutional investors in the U.S. typically need months of due diligence and meetings with investment committees before they can even consider investing in a PE fund. Left with little choice, we put the fund on hold. Ultimately, however, my friend was right on the need for speed. Within less than a month, the Chinese government indeed stopped all IPOs for an extended period of time, leaving slower movers out of luck. In stark contrast, funds that had seized the opportunity to go public skyrocketed as investors tumbled into them with mounting momentum—speculative play more than anything.

With firsthand experience of Chinese negotiation speed, I counseled Claire to gather a few brief ideas and craft a mini-proposal. Yet I warned her against including too much detail lest the Chinese company attempt to steal her ideas or simply waste her time. She had to tread a cautious middle ground. On the one hand, Claire in no way wanted to turn off a potential suitor that might prove a big break for both her and her company. Her proposal needed to be sufficiently meaty to pique interest. On the other hand, however, she had to avoid preparing an entire business plan or thorough case study for what might become a competitor under the initial guise of friendship.

Heeding my advice, Claire put all other work on hold for three days to compose two succinct yet informative plans—fairly in-depth but not to the extent she had originally aimed for. Meeting the conglomerate’s deadline, she then sent off her proposal to the young woman who had contacted her, purportedly with a direct line to an excitedly expectant chairman keen to read Claire’s materials.

About a week later, I emailed Claire to see what the response was. “Nothing,” she wrote back. “Girl didn’t even let me know that they had received my two potential paths forward.” After I followed up a month later, Claire sent the same response with an additional, “What is the matter with these people?” After three months of waiting, she gave up. Claire never heard from the Chinese company again.

Perplexed and irritated, she expressed to me months later that she still failed to understand how such a famous and purportedly reputable conglomerate could conduct itself in such a way. “How can they contact the CEO of another company, show such extreme interest, even talk about term sheets, and then never respond again? It just does not make any sense.”

***

Unfortunately, stories like Claire’s are not uncommon. In fact, I am contacted several times a year by CEOs of large corporations expressing bewilderment at the manner in which Chinese firms operate culturally. They come on so strong, negotiate so hard and seek commitment so quickly it almost feels as if they lack any interest in building long-term relations. As a result, they seem merely intent to maximize short-term profits at the expense of longer-term yield. Almost flying in the face of the common stereotype that Chinese think in centuries rather than quarters, this supreme focus on the short-term has caused many a conflict between Chinese and Western businesses.

As Chinese companies follow the State’s agenda and increasingly do business offshore, these corporate culture clashes are sure to grow more frequent in coming years. Largely directed by efforts in Beijing, the next phase of growth for both state-owned enterprises and private Chinese firms is to become global players, often through full acquisitions and stake investments. Consequently, just as American consumers grow accustomed to Chinese brands and Chinese conglomerate-owned foreign makes, Western corporate chieftains must learn to deal with Chinese firms doing business abroad. The days of China’s relegation to a manufacturing label are long gone.

Quite the contrary, many factors are stacked in favor of Chinese business success. Armed with ambition, Chinese companies have access to low interest credit lines from state-owned banks and are frequently supported by regulators. As long as outbound investments conform to their company’s core business lines, follow the government’s list of supported sectors, and are not deemed a conduit to getting capital out of China, corporations will amply profit from regulatory backing. In addition to growing profits, business abroad effectively dovetails with President Xi’s ambitions for the country. Aiming to move China up the value chain and gain influence on the global stage, China’s government recognizes SOEs as a critical component of President Xi’s OBOR initiative. And in order to kick-start such a massive international enterprise, SOEs and private corporations have no choice but to adopt outbound strategies in facilitation of Chinese political and economic influence abroad. As explored in Chapter 4, OBOR’s success hinges upon a successful mix of public and private Chinese money, and political support of the latter is necessary to drive the two. One must also remember that while China’s private companies operate on a mostly sovereign basis, their organization usually contains a Party committee that regularly reports to government officials.iii

Bolstered by the above combination of factors, many private Chinese firms are steadily and organically growing abroad. Take Chint, for example. A low-voltage electrical power transmission company that made $6 billion USD in revenue in 2013, Chint now sells its products in over 13 countries. When I travel to any of a multitude of Southeast Asian nations, I cannot even walk a few blocks without glimpsing Chint’s red, white, and blue signs lining city shops. Green signs touting Chinese handset maker OPPO’s mobile phone line intersections throughout Ho Chi Minh City.

Historically, Chinese firms that trend toward organic growth have focused first on Southeast Asia, Africa, and Eastern Europe in order to minimize risks and strive against relatively weaker competition. In recent years, however, private Chinese companies have gradually begun moving into America and Western Europe. Think Haier home appliances or electronics maker TCL Corporation, which, in 2013, bought the naming rights to Grauman’s Chinese Theater in Hollywood.

Other private Chinese corporations have demonstrated faster growth targets and acquired entire companies in a bid to become immediate global players. Dalian Wanda Group stands as a perfect example, sweeping through cinemas in its acquisitions of Ironman, AMC, and the Odeon & UCI movie chains, as well as Hollywood’s Legendary Entertainment film studio. Acquirers like Dalian Wanda and Fosun Group often originate in the real estate or insurance sectors, from which they derive ready capital bases to spread into new sectors. They have essentially attempted to master Warren Buffet’s strategy of attaining capital from one main line of trade to then deploy it in higher return businesses. At the same time, their fast expansion has drawn the attention of Chinese regulators determined not to allow overseas investments gained by risky capital raising initiatives.

For Western firms, it can therefore be highly lucrative to sell entire companies or stakes to Chinese conglomerates, often with higher valuations than those found in public markets. Exceedingly eager to join global ranks, many Chinese firms are even willing to overpay in their ambitions to scoop up prized brands and coveted technology. Typically run by founders who are already rich, such Chinese corporations acquire Western businesses and sports teams more as trophies than for profit-making purposes. This trend marks a clear divergence from many Western multinationals, often run by professional managers obligated to focus on profits when making acquisitions.

Accordingly, CEOs like my friend Claire have the opportunity to make enormous profits if they have significant shareholding stakes in their companies and can manage to successfully close a deal with a large enough Chinese firm. However, they can also run into serious problems if they lack an appreciation for how to deal with potential private Chinese acquirers and investors. To sell well, Western firms have a stake in understanding two key components: (1) Why Chinese firms are looking to go abroad; and (2) what challenges they face when doing so.

The next section will be dedicated to exploring these critical issues.

***

There are four general reasons why Chinese firms are attempting to go abroad:

Tracy Wut, Principal of the M&A Global Practice Group for multinational law firm Baker McKenzie, underscored to me the major reasons behind China’s outbound M&A: “A growing appetite for cutting-edge technology, manufacturing capabilities, consumer brands, and safe haven assets in advanced economies have been driving China’s outbound investment as Chinese companies seek to diversify their businesses and make inroads into international markets. According to our firm’s report, Chinese direct investment in North America and Europe more than doubled in 2016, reaching a total of USD 94.2 billion.”

For those eager to sell to Chinese firms, it is imperative to appeal to these four categories. Those that position themselves accordingly—appealing to both private Chinese companies and, in some cases, SOEs—have the opportunity to cash out completely and otherwise gain smart money partners. These partners can critically facilitate both business growth and the long-term wealth of their network.

Yet even with these guidelines, Western brands may be frustrated by Chinese business challenges—a factor outside foreign firms’ control. As Chinese companies strive to become global players, it is plainly evident that many are not yet ready for prime time and will most likely fail—even those that have repeatedly made forays abroad. For every successful M&A accomplished, there are hundreds of failures. As deals fall through and Chinese companies flop on their promises, such miscarriages often leave a bad taste in the mouths of CEOs worldwide. Having experienced this frustration firsthand, my friend Claire conveyed to me, “I doubt I will entertain selling my whole company again to a Chinese conglomerate. If another one contacts me, they will have to move slowly and on my terms.” Yet many of these issues are simply due to cultural and communication clashes. In some cases, Chinese firms are brash and oblivious to the rules of international business. In others, they quite frankly mean to break the system’s model, hoping to bend others toward China’s less rigid and rapid fire manner of doing business.

Overall, there are three fundamental challenges hindering Chinese firms from succeeding in outbound M&A. Companies aiming to sell to Chinese businesses must therefore comprehend and account for such challenges in order to minimize risk in negotiating deals and in general collaboration.

***

For acquisitions, companies are typically acquiring assets of companies from wealthier Warm Partner and Cold Partner categories. Germany, Australia, New Zealand, America, and the United Kingdom are the regions with the most vaunted brands. Aside from New Zealand, all the other assets come from countries that are not political allies. Part of this makes them more exotic and wanted by Chinese brands.

Although outbound Chinese M&A dropped 46 percent in the first part of 2017 year over year (again, especially from the private sector), there exist many opportunities for Western companies to sell stakes or entire companies to Chinese firms looking to buy innovative technology, management expertise, and desirable brands. When my firm interviews Chinese companies, outbound M&A is a tool many want to employ to diversify assets. The main barrier is government regulation. In 2017, the government put a halt on much outbound investment because they are worried about capital flight, a depreciating RMB, and too much debt used for investment that could cause a systemic risk.

However, the underlying demand by Chinese companies to grow through acquisition remains strong. Once the government lessens the restrictions, when fears of debt and capital outflow diminish, the outbound trend by both private Chinese companies and SOEs will continue.

******

Dialogue:
Winston Cheng, President of International, JD.com

Winston Cheng has had a storied career. Before joining JD.com as President of International, he was Managing Director, Head of Asia Media, Telecom and Technology for Bank of America Merrill Lynch. Before that he was Managing Director, Head of Asia Ex-Japan Technology, and IBD for Goldman Sachs.

Rein: What are JD’s plans for overseas investment? Are there specific regions that you are looking to invest in, and why is JD targeting these?

Cheng: We have been enjoying significant growth inside China, but we’ve been predominantly within China. Yet as we examine and maintain our growth rate, we are also interested to replicate our experiences from China elsewhere, in terms of helping bring in international brands, improving retail environment efficiency, and offering a better consumer experience to domestic customers.

Regarding the regions targeted, we seek markets in a development stage or environment similar to what we saw in China more than fifteen years ago. We considered Indonesia to fit this category, for example, so began the planning stage and entered Indonesia almost two years ago. And as we continue our growth in the international market, it is important to identify the most opportune regions. The U.S. is an extremely large market, for example, but quite mature. China and India are also huge markets, drawing numerous investments, but India has reached a development stage ahead of what Chinese investors are seeking, so the criteria by which we assess regions for expansion in the international market are quite stringent. We look for markets that currently lack a clear leader and in which we haven’t considered the regulatory environment, and then we examine whether we can add value to the local market, providing a differentiated and superior service to local consumers.

When examining investment opportunities, it is also vital to consider the financial and developmental risks involved in targeted regions and countries. When looking at India, for example, we saw the country get extremely ‘hot’ about five years ago, looking at India in a stage that was still rational. So three years ago I would deem it highly overvalued, but then we have seen some divesting in the last year by which valuations have come down somewhat in India. Indonesia, on the other end, is enjoying that up cycle right now, rising exceedingly quickly. However, local markets all have their challenges. Chiefly, it is important that people be careful not to look at Southeast Asia as a bloc. The size and internal variation of different Southeast Asian countries are both important distinguishers. While Indonesia has an enormous population, for example, it consists of many islands and domestic disparities pose difficulties. As a result, China and India are still much more attractive given their respective concentrations and uniformity of law enforcement and infrastructure. So while different nations present distinct disadvantages, Southeast Asia is certainly attracting many; valuations are high. Yet there will be opportunities. And within this context, JD is fixated on the long-term view and takes entry points into strong consideration.

Rein: What are your underlying reasons for investing abroad? To bring products and services back to the Chinese market? To invest in start-ups to get access to innovative technology? To service the local market, such as in Indonesia?

Cheng: As the President of International, I think it is critical not to look only in one direction. We cannot narrow-mindedly bring Chinese expertise elsewhere or focus solely on JD’s launch outward into international markets. In fact, I dedicate a significant amount of time to bringing foreign companies into China via JD’s platform, helping them access Chinese consumers, and effectively grow their revenues inside China. This actually occupies over 50% of my job today. Much of JD.com’s tremendous growth—in excess of 40% a year, even at our over 100 billion dollar GMV run rate—derives from our significant GMV [gross merchandise value] increase within China alone. For that reason, we’re always looking for markets that are growing in excess of that for our next stage of development, making sure to service local markets abroad and contribute to their domestic consumers.

In the meantime, however, we cannot forget about our opportunities inside China, which is why we dedicate significant resources to helping international companies with their entry to the Chinese market and, once inside, ensuring the entry of superior products, services, and technology to China. In the last couple months, for instance, we’ve announced a focus on luxury brands. We now have a partnership with the Kering Group, one of the high profile global brands keen to work with us. Working directly with Yves Saint Laurent, Swarovski, and premium watch brands, among others, we’ve been sought out by a great number of brands that work with us on an international basis and have opened their flagship stores with us.

We have also developed an effective system for working with smaller brands, differentiating us from competitors. By buying products into our inventory from these brands, we can actually provide them a much more efficient service. Almost two-thirds of our revenue today actually comes from first parties, meaning we buy and hold inventory. For an SME [small and medium enterprises] business owner in the U.S., Africa, or Europe, it is therefore better to work with JD because we take on inventory and a significant portion of risk. As a result, these SMEs have a guaranteed sale that we then push actively in marketing, more so than our competitors, many of which essentially serve as a mere platform.

Without this type of assistance, many smaller brands are unable to gain a hold. Lacking brand recognition, they spend a debilitating amount of advertising dollars for ranking and exposure on pure marketplace models. Yet these don’t necessarily translate to sales. Using our model, we already buy inventory and therefore don’t require small brands to spend additional dollars in vain. Because our buyers include large retailers like Walmart and other department stores, our buyers are powerful and know which products will sell. Moreover, given our use of big data, we manage our inventories very efficiently and know what will sell on the market. And as our inventory turnover rate continues to decline—one of the lowest in the industry—we’re trying to continue to improve on that.

Rein: Are there certain sectors in which you are working to get more inventory?

Cheng: Given that we are China’s largest inventory for consumer electronics already—not to mention one of the more important partners for major brands such as Apple in China—we can be extremely helpful to most players. Given that we are one of the largest general retailers both on an offline and primarily online basis, we are not specifically focused on any category. Consequently, we are looking to develop the categories for which we haven’t reached the top or second highest position, primarily those categories which are broad and fragmented, such as the apparel industry. Certainly in 3Cs (Computing, Communication, and Consumer) and other realms, however, dynamics are easier to track and we are definitely a leader in those areas. Therefore, while all products are important, the fashion apparel industry (which provides significant business for us already) is one area that we plan to focus on more. We have also noticed that the number of female users on our platform is growing significantly so we are seeking out more products to sell to female customers.

Rein: What is your thinking process when considering an acquisition or investment abroad?

Cheng: Somewhat diverging from our competitors, we always look at the market first to determine whether we have the capability to grow organically in that market. When growing organically in the market, we both contribute Chinese talent and predominantly hire a significant amount of local talent. Hiring sufficient local talent is essential for us to grow our business. In places such as Indonesia, we are actually working to foster the growth of IT professionals, to build our executives, to train people in working closely with a diverse team and improve our approach. It’s therefore critical that there be a sustainable, long-term local work force because we enter foreign countries for the long haul. So, this capacity to grow organically is an integral component of my thinking process when considering investment overseas.

With regard to acquisitions, we work more on a case-by-case basis. Of course, sometimes we need to watch out for competitive moves. In the Internet space today, many seem to be playing a capital game, seeking to store more and more capital in the sector until everyone else is ultimately forced out and the entire space is occupied. As one can see, it’s a dangerous game but unfortunately there is plenty of capital out there to engage in it, so we certainly need to be aware.

Rein: The Chinese government has announced its move to crackdown on certain types of outbound investments, deterring companies from buying into sports teams, casinos, and real estate, for example. Do you predict that some of these outbound investment controls will stop JD from investing abroad? Or since you are part of the tech sector and have better compliance and risk controls, do you think the government still supports you?

Cheng: Overall, I don’t think JD necessarily gets overt government support. We are certainly subject to government policy like any other company based in or operating out of China, so I don’t think we enjoy special treatment by any means. Given that we are a U.S.-listed company, a sizeable portion of the capital we’ve raised in the past is already sitting offshore and our cash flow is fairly strong on an onshore basis. We have also run our investment like a regular committee and have not made outrageous bets akin to some of those that have caught political attention in recent years. JD has not historically been excessively acquisitive externally, investing in a manner similar to most regular enterprises. And in addition to having a certified board, we undergo highly formal processes with our best committee and have had feasible valuations throughout the past. Needless to say, all our operations have been carried out according to the regular Western book from the government’s perspective.

Rein: President Trump has criticized China for stealing American jobs. Yet it seems JD might be able to create jobs in the United States because U.S. brands that were not able to sell to the Chinese consumer ten years ago are now able to do so using your store. Do you see JD as assisting in job creation and balance of payment issues abroad?

Cheng: As a retailer that doesn’t necessarily manufacture, we actually do not dictate where things are made necessarily, yet we are not agnostic. Based on our experience and knowledge of consumer behavior in China, in some instances we in fact recommend that brands manufacture products in their home country to offer more authenticity. Ultimately, however, manufacturers and brands determine where products are made, accounting for cost structure and competitors in their industry. Therefore, while we don’t dictate where products are manufactured, we do often encourage brands in the design stage to make products domestically if we think local manufacturing will result in higher quality, better brand positioning or other advantages. So in that regard, while we can’t pinpoint how many jobs we are creating exactly, we are certainly helping to some extent by driving the entry and growth of foreign companies—not just U.S. firms—in China, allowing them access to China’s growing mobile internet consumer base and encouraging them to manufacture and hire talent in their home countries.

Rein: Are there any investments that you think could significantly help JD’s bottom line in the future, such as your acquisition of Farfetch perhaps?

Cheng: Our partnership with Tencent in 2014—in which Tencent contributed their e-commerce business to JD—has been remarkably powerful. At the time, Tencent was entering the Chinese trade market but realized that backing JD would be more profitable than attempting to make it on their own, largely given the challenges of e-commerce and of differentiating oneself in the arena. Our exclusive partnership with their WeChat app—now home to 940 million mobile users—has given us an exclusive window into the Chinese version of the app as we are now placed right next to the gaming and shopping sections. We have also enjoyed strong ties with Walmart as it contributed its Chinese Yihaodian e-commerce marketplace to JD in exchange for close partnerships. As a result of these two alliances, we now have online mobile traffic connected to e-commerce procedures, our own logistics, and over four hundred plus Walmart stores, forming a competitive setup. To put it in concrete terms, what you have in China today is as if Facebook, Amazon, FedEx, and Walmart in the U.S. were all tied together to provide a streamlined service. A powerful combination, this union offers a wealth of excellent experience to our respective teams.

Rein: When we interview wealthier consumers in tier 1 cities especially, they tend to report that they trust buying from JD over buying from your major competitor platforms, often saying they think you offer stronger service as well as more genuine and higher quality products. Is it part of JD’s strategy to be more upmarket than the competition and bring more trust to the transaction?

Cheng: It is certainly our strategy to provide an authentic product and the best service possible to our customers. We don’t necessarily target upmarket, but it is clear to us that the upmarket consumer is particularly attracted to our services. Given that the upmarket consumer’s time is limited, these customers are looking for a platform that is hassle-free, on which they know they are guaranteed the best product, the most competitive prices, and the highest levels of authenticity at the fastest rate possible. So, JD definitely seeks to ensure these qualities consistently.

Furthermore, as China’s per capita GDP continues to grow in conjunction with increasing consumption power and a rising white collar workforce, upmarket consumers want to use their time more purposefully, whether at work, enjoying leisure with their families or going on weekend excursions. They thus have less time to browse through a tediously constructed setup and then negotiate with the purchasing platform. They want a hassle-free, top quality, competitively priced, and expedited customer experience. While going to a physical shopping arena certainly has its benefits, consumers will rarely return home having efficiently found everything they want for the best possible prices. We therefore believe that over time people will want to increasingly buy from trusted online platforms like ours.

Case Study: Selling a Company or Stake to a Chinese Acquirer

An enthusiastic go-getter with a slight frame, Little Zhang was a middle-aged woman who helped lead acquisitions of foreign companies for her own Chinese conglomerate. Holding a large glass of Coke when I met her, Little Zhang had a pleasant face that would have fit well in a kindergarten setting. She worked for ASIC, a large state-owned enterprise in the aerospace sector and once the parent company of Comac—China’s airplane initiative set up to rival Boeing and Airbus.

When I first met her, Little Zhang had just heard me give a speech on how foreign companies can best sell to Chinese companies while minimizing risks. Approaching me after the talk, she told me, “You are right, Xiao Shan [my Chinese name]. The Chinese companies that have fared best in overseas acquisitions are just like Geely in its acquirement of Volvo.” During my speech, I had argued that China’s most successful overseas acquirers tend to bring in capital and resources but leave management teams largely intact. China’s Dalian Wanda Group, for instance, injected tremendous capital into AMC when it acquired the movie chain, but made sure to keep AMC’s executives in place.

Even more striking has been the success of automaker Zhejiang Geely Holding Group Corporation, which acquired Volvo in 2010 and more recently bought a huge stake in Malaysian automaker Proton. After buying out Volvo, Geely similarly left the company’s Swedish managers in place for the most part. Investing both capital and expertise regarding China’s distribution network, Geely subsequently saw a remarkable rise in profits as well as the release of its critically acclaimed SC CXC 600 line.

Elaborating on Chinese firms’ M&A strategies, Little Zhang continued to speak of her own company, ASIC, “We have made a slew of acquisitions across America and Europe in auto and aircraft parts, and results have been excellent so far. Our strategy has been to buy either an entire company outright or a stake, but we are more passive in day-to-day decisions. We don’t try to bring our compensation, travel, and other similar elements into the mix.” Outside of full acquisitions, most investments have been fairly small, ranging from $5 to $100 million USD. As a result, most foreign investments fly below the radar of Western financial journalists. Most importantly, however, these investments are small enough not to produce anxiety in the companies and countries targeted.

Chinese conglomerates will either (1) buy out an entire company, inject capital, and generally leave successful management teams in place, or (2) make a fairly small investment, flying under the radar and not causing anxiety. Chinese firms understand that current employees can be disquieted about a stake sale to an unfamiliar Chinese firm, and that regulators are concerned about ties to the Chinese government, even for private companies. Regulators and politicians often claim private Chinese companies, like telecom maker Huawei or real estate developer Wanda, are simply fronts for the Chinese government or military and thus place a lot of scrutiny on deals.

Speed, as we saw in the case of my classmate Claire, often marks typical dealings with Chinese firms.

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