Maneuvering Through China’s Merger & Acquisition Market
Activity continues as companies look to expand their offerings and opportunities.
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By Dan Jacobs
Senior Editor
The mega-deals the industry experienced in the pre-COVID-19 era, including ChemChina’s acquisition of Syngenta, have largely disappeared. That doesn’t mean the M&A market has gone cold. Many Chinese companies continue to explore opportunities to expand their operations and offerings.
AgriBusiness Global interviewed Yuhong Wu, Director for Agriculture Subscription Services for Kynetec in China to get her perspective on the China’s merger and acquisition market.
ABG: How would you characterize the merger and acquisition market in China in the past few years?
Yuhong Wu: During the M&A process of Chinese enterprises in the past decade, the purpose of M&A is mainly three-fold.
One is to deepen the commercial moat of their own enterprises. There are two ways to deepen the moat, the first is the integration of production capacity, and the other is the integration of the whole industry value chain. For example, in 2017, Limin acquired Shuangji Chemical, realizing the integration and coverage of the production capacity and market of mancozeb and dithiocarbamate fungicides in China. So Limin became the second largest supplier of such products in the world. Limin formed advantages in both production capacity and market coverage in a single category market. In 2023, Guangxin’s acquisition of Liaoning Shixing Pharmaceutical & Chemical was mainly to achieve the industry chain integration strategy.
A second direction is to expand product categories horizontally. For example, in 2021, Wynca Group invested RMB 178 million in the acquisition of Hefei Xingyu, which enabled Wynca to move forward from glyphosate to oxadiazon, oxadiargyl, and bentazone, etc. In 2023, the company acquired Sinosteel Thermal Energy Jincan New Energy Technology through its wholly owned subsidiary, Zhejiang Qiyuan New Material. The purpose of this acquisition was Wynca’s preparation to penetrate into the supply chain of graphite anode materials for lithium-ion batteries in the new energy sector. This was associated with the high growth market in the new energy sector in China.
Third, Chinese companies want to expand their sales channels and increase their commercial reach overseas. The most representative case was the acquisition of Sarabia in Spain by Rainbow by the end of 2022. Through M&A, Rainbow could own the capacity of overseas factories and enhance the flexibility of global supply. At the same time, it could also acquire the experience of overseas teams for market expansion. In 2023 Xingfa Group also acquired 70% stake in Indonesia’s AMCO. This was a typical case of a Chinese company expanding its overseas formulation production capacity while looking to expand its sales channels.
ABG: What factors are driving the M&A market in China.
YW: Chinese companies’ M&A is mainly for strategy of growth. The supply market in China is now highly competitive. With the current low prices in China’s supply market, companies must have scale effects to remain profitable. The whole industry value chain integration strategy is a strategy that almost all companies are promoting. This is also what investors want to see.
Another factor is that companies are diversifying to lower the business risk. It makes sense for agrochemical companies to expand their product categories. Category expansion requires sufficient experience in chemical synthesis, which is preferred by agrochemical companies. Like Wynca Group has mineral resources, so they can expand into new energy sector’s negative electrode materials. As minerals require huge capital operation, only listed companies can have such strength. It depends on what kind of strategic advantages the company has.
On the other hand, it is worth mentioning that channels are the weakness of Chinese agrochemical companies. This is related to their business model in the past decades. However, we are glad to see that some companies have started to consider capitalizing on international sales channels. Japanese companies such as Mitsui and ISK are in the leading position for channel layout. Chinese companies need more time to explore the international channel, and more importantly, how to manage their overseas teams.
ABG: We’re all familiar with the Syngenta/ChemChina relationship. Are Chinese crop input companies exploring companies outside China to merge or acquire? Why or why not?
YW: I think this is an inevitable choice for Chinese companies. In 2023, we see that the performance of Chinese enterprises is generally under great pressure. Under pressure, companies must change. However, Chinese companies have very little choice in hand. They are increasingly realizing the need for overseas channels as well as production facilities.
Of course, Chinese companies are also considering trade tariff barriers. For example, Indonesia is a good place to locate production facilities for the entire ASEAN market and even for the Australian market. Mexico is an ideal candidate for a production base for North American trade. Colombia and Central America have a natural affinity for the South American market.
Not only that, but overseas M&A also requires the right partners. Chinese companies need overseas partners to leverage China’s advanced manufacturing to drive growth. The choice of overseas partners is the bottleneck for Chinese companies in overseas M&A.
ABG: What size companies seem to be involved in M&A activities (large, medium, small) and why do you think that is?
YW: At present, the M&A of Chinese agrochemical companies are mainly concentrated within the scope of listed companies. The leading companies have financial advantages. And they can afford professional M&A consulting services. Chinese companies increasingly need specialized services in M&A. At the same time, only the head enterprises have such talent attraction. However, it also requires a personal appeal on the part of the company’s leaders in order to gain the assistance of talents.
Of course, we are not saying that there are no opportunities for medium-sized and small companies in future M&A. Perhaps the greatest strength of SMEs (small- and middle -size enterprises) lies in innovation. Not only Chinese companies, but also multinational corporations currently license-in innovation mainly through external M&A. Therefore, I think SMEs are more likely to be the target of M&A rather than the subject of M&A.
ABG: We heard a great deal about China’s Double Control and Environmental policies. Can you briefly describe what the government’s reason was behind those policies?
YW: It was very similar to China’s 2017 environmental storm. China’s 3060 carbon neutral target is an ongoing policy. In China, the influence of policy on the industry is huge. However, the introduction and implementation of new policies require feedback from practice. There is a famous saying in China, which was put forward by Mr. Deng Xiaoping, the pioneer of China’s reform and opening up, that: “Practice is the only standard to test the truth.” Therefore, China’s dual-control policy at the end of 2021 needed to be fine-tuned according to the actual situation.
The dual-control policy did bring a shock to China’s pesticide supply chain when it was just implemented. However, the government’s decision-making was adjusted at the time of the 2022 Central Economic Conference, thus leaving room for flexibility in the normal production of Chinese agrochemical companies. This was the reason why China’s pesticide supply was recovered on track in 2022.
ABG: Did those policies have the desired effect?
YW: As I have just mentioned, the dual-control policy is now shifting toward the “active adoption of green energy.” The energy consumption of agrochemical companies comes mainly from electricity consumption. China’s agrochemical companies will make more use of green energy. The Chinese government is actively building a new energy hub infrastructure in the northwest. If we look beyond 2060, when China will be carbon-neutral, then controlling energy consumption now is partly the beginning.
ABG: The global pandemic had an effect on the industry in general. Did it have an impact on merger and acquisition activity in China?
YW: The pandemic has changed the entire human race in some ways. What has changed the most is the way people view the world. People’s mentality is subtly changing. Accumulating huge amounts of wealth in a short period of time is no longer appropriate. People are more attracted to things that are down-to-earth, textured, and warm. Deep thinking between people has become more important.
If we have to link the pandemic to M&A, then I would say that we are becoming more cautious. The era of high economic growth is a thing of the past, and companies are shifting from profit-driven to value-driven. Chinese companies are likely to think more deeply about what value their expansion creates for farmers, or for global agriculture, before they go for M&A. Companies, like people, are becoming more genuine and reliable.
ABG: What do you see happening regarding M&A activity in the next several years (more activity, less, etc.)?
YW: In the short term, I personally don’t see large-scale mergers and acquisitions continuing to occur. At a time when growth in the agrochemical industry as a whole is sluggish, any agricultural practitioner will be more conservative.
In fact, agriculture is a very conservative sector. Farmers know best what agriculture is. There are four seasons in a year, and that’s agriculture. We need to think about the future of agriculture with a more long-term strategy. Short-term investments will be defeated by the market truth.
ABG: What else should we know about the M&A market in China?
YW: If I had to give an answer to this question, I would say innovation. Kynetec is a data provider. We are deep in the market. What we feel most deeply is that innovation is everywhere. The quality of Chinese companies’ pesticide products is now continuing to improve. In the Chinese market, Chinese companies pay a lot of attention to brand cultivation. This requires them to invest more money and time in R&D. Chinese companies are benchmarking the quality of their products against those of multinational companies. This shows that they are paying enough attention to innovation.
In the area of investment and M&A, I think Chinese companies have innovation as their ultimate goal. Not just products, Chinese companies may also diversify into M&A in digital platforms, agricultural services, precision ag, and agricultural infrastructure. •
Photo of Yuhong Wu courtesy of Kynetec.