China consumer market ‘too big to ignore’, to attract domestic and foreign M&A activity amid trade war
- Economic uncertainty will push Chinese companies to focus on M&A to boost business at home
- Consumer spending stimulus could attract foreign players despite trade war
Deal making in China’s retail sector will thrive as economic uncertainty surrounding the US-China trade war and top-down stimulus to boost consumer spending push Chinese companies to focus on the domestic market, analysts have said.
These same factors could also attract multinational companies to step in and fill gaps left behind by US players, and enhance their offerings in the mainland China market.
“One of the implications of [the trade war] is that it becomes doubly important for China to grow its economy through domestic spending,” said David Brown, Asia-Pacific deals leader at PwC Hong Kong.
“From a domestic perspective, you might expect that to drive some positive M&A [mergers and acquisitions] activity, and you might also expect to see some multinational companies coming into the market to take advantage of that growth in consumer spending.”
If a trade agreement is not reached, other inbound players in the consumer and retail sector may find opportunities, according to Grace Tso, a partner at Baker McKenzie Hong Kong.
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“The trade war effects might depress valuations, or prompt those who already planned to exit China to expedite their exit, thereby presenting buying opportunities,” she said.
“The consumer market in China is simply too big for anyone to ignore, so foreign players will remain interested. The impact of the trade war on foreign companies making deals in China could be relatively limited.”
An unresolved trade war may also amplify an inward-looking trend among Chinese companies. The country’s outbound M&As were already slowing down across sectors from a 2016 high, and fell by more than half between 2016 and 2018, thanks to capital controls and regulation meant to stem speculative buying.
In contrast, domestic deals in the same period remained relatively flat, not changing more than 12 per cent between 2016 and 2018, according to data from financial markets platform Dealogic.
“If there are hurdles for local players when it comes to outbound deals with the US, then that capital will be deployed more in the [domestic] consumer market. The potential there is big and it’s going to be very active and have more volume in the future,” said Erica Su, managing partner for transaction advisory services in Greater China at EY.
Last year, China’s US$10.4 billion in outbound transactions targeting foreign consumer products bucked the overall trend, overshadowing the about US$8.3 billion in domestic deals, according to Dealogic.
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But this outbound activity was still about the domestic market, as Chinese companies looked to acquire recognised products and expand their reach to lower tier cities and across e-commerce platforms, a trend that is poised to continue, according to Wei Lin, head of consumer markets advisory at KPMG China.
“If there’s a category that makes sense for [a company’s channels] and it means that they need to acquire a brand in a western market, they will do it. It’s about growing market share and expanding penetration in the domestic market,” he said. Lin noted that M&A in this sector could slow, alongside other investment demand for technology and research and development, as well as declining global M&A activity, as forecast by a KPMG report released last week.
