Joining the Yacht Club

Chinese SOEs make forays into the luxury brand market but may be all too eager to scoop up big names in foreign markets By Lan Xinzhen

Joining the Yacht Club

Chinese SOEs make forays into the luxury brand market but may be all too eager to scoop up big names in foreign markets By Lan Xinzhen

Italian luxury yacht-maker Ferretti Group,a world leader in the design, construction and sale of luxury watercraft, is lost in choppy waters. Since 2009, the yacht industry has been in decline with orders and price tags shrinking as demand dwindles. Financial difficulties have also hampered Ferretti’s business operations, making the company run into heavy indebt, and, as most European banks are mired in troubles of their own, they are unable to lend support to keep the renowned yacht brand afloat.

SHIG-Weichai Group, a manufacturer of heavy-duty vehicles and other auto components in east China’s Shandong Province, saw the chance to buy Ferretti. The acquisition is already under final assessment, marking the first time that a Chinese state-owned enterprise (SOE) become the owner of a luxury product brand.

Weichai signed a strategic restructuring agreement with Ferretti in Jinan, capital of Shandong, in January. Under the agreement,Weichai will pay 178 million euros ($136.9 million) for the stake and the Industrial and Commercial Bank of China will pitch in another 196 million euros ($150.8 million) in loans to Ferretti. With a total investment of 374 million euros ($287.7 million), Weichai will have a 75-percent stake in the Italian company.

Founded in 1946, Weichai now has more than 40,000 employees worldwide, with total sales revenue in 2010 standing at 91.1 billion yuan ($14.47 billion). After the deal, Weichai Group will begin its strategic adjustment. By fully optimizing Ferretti’s resources in the yacht sector, Weichai aims at being a supplier for world leading luxury yachts.

The Ferretti deal demonstrates China’s growing interest in luxury consumer goods and hi-tech products. Since 2010, Chinese enterprises have also looked to Europe to expand, with a direct investment in the continent reaching $5.96 billion in 2010, up 101 percent year on year.

Juicy outlook

Although outsiders have doubts on whether Ferretti can regain its fading glory by utilizing the emerging market in China, Weichai’s Board Chairman Tan Xuguang remains positive on the foray into the luxury yacht sector.Tan said his company has set the yachtmaking industry as a strategically important target for the next fi ve years.

By the end of 2010, China had registered 1,500 yachts and 8,500 yacht berths, including those in construction and those already put into use, said Liu Cheng, a professor at the University of Science and Technology Beijing.

Yachts are mainly marketed to higher income groups due to their hefty price tags.Currently, there are about 10 million Chinese residents who may become potential buyers of luxury yachts. So China will become not only the largest manufacturer but also the largest consumer of yachts, said Liu.

Weichai’s first goal after the deal is to turn Ferretti from debt into pro fi t by fully exploring the emerging market in China. Ferretti agreed to set up a new factory in China and design a series of luxury yachts especially for Chinese consumers, said Tan.

Chinese enterprises have recently been actively engaged in overseas M&As in mining,manufacturing, electricity production and supply,professional technological service and fi nance.

China has been predominantly interested in investing in energy and mineral resources sectors alongside its soaring demand in those areas. Now that attention is shifting to consumer goods and hi-tech products,said Wang Hongtao, Vice President of China International Economic Cooperation Society under the Ministry of Commerce and Executive Secretary General of China Overseas Investment Fair.

ON A BOAT: Prospective buyers look at a yacht at the First China Marine Economy Investment Fair in Ningbo, east China's Zhejiang Province, on November 11, 2011

China’s overseas direct investment now accounts for 5.2 percent of the global total, ranking fifth in the world. There are 16,000 Chinesefunded companies scattered in 178 countries and regions, with their overseas investment coverage surging to 72.7 percent globally, and 90 percent in Asia and 85 percent in Africa, according to the Ministry of Commerce.

China’s overseas direct investment covers almost all aspects of the economy, with $280.16 billion, or 88.3 percent of the total, going to business service, finance, wholesale and retail,mining, transportation and manufacturing.

Worries

China does have worries about the proliferation of M&As in the luxury sector as its SOEs look to spend their money abroad.

“Weichai doesn’t have the same experience in luxury goods as Ferretti,” said Ma Guangyuan,a doctor in economics at the Chinese Academy of Social Sciences. “Besides the possibility of providing engines and some yacht components,Weichai has basically nothing to do with the yachting industry. The two are hardly connected with each other.”

“Too little information has been unveiled in this case and the public have a vague knowledge of it. The 374 million euros investment embraces two parts: 178 euros direct investment for the stock ownership and 196 euros loan credit. But Ferretti is deeply indebted, around $800 million according to public information. How should Weichai deal with the debt after the deal? Has it done some acquisition deals with Ferretti’s lenders to lower its fi nancial risks in Ferretti? ” said Ma.

“Besides, it’s a key whether the 374 million euros will bring over Ferretti’s brands and core technology. Whether Weichai can have Ferretti’s core assets, is not known” said Ma.

Weichai doesn’t have specific arrangements in debt management, core asset ownership, integration with Ferretti and Ferretti’s localization plans in China. Besides serving as a model for future ventures,Weichai’s case is also a warning for Chinese enterprises that want to merge or acquire international luxury brands.

Former Vice Minister of Commerce Wei Jianguo offered several tips for Chinese enterprises.

“After the euro debt crisis, European countries have welcomed Chinese enterprises’investment, offering a good opportunity for their overseas M&As,” said Wei. “But, Chinese enterprises must be highly cautious in overseas investment. They should have a specific goal and shouldn’t be blind. Before closing a deal,they should do thorough market research and get to know their European counterparts very well.Also, they should know whether they have potential for sustainable development abroad.”

Without the above-mentioned information, even if Chinese enterprises manage to acquire sales channels, the core technology and even research and development power after the deal, they will end up with a bitter fruit because of the large amount of debt they can not shoulder, said Wei.