Chinese LED enterprises are spending a fortune in acquiring foreign manufacturers in 2015. A couple of examples include Shenzhen Kaifa Technology (Kaifa) recent acquisition of U.S. LED manufacturer Bridgelux, Shanghai Felio Acoustics interest in Osram’s distribution channels, and Go Scale Capital’s acquisition of Philips Lumileds. Why has there been an increase in international mergers? What are manufacturers motives? Below is a summary of Chinese media Alighting’s prove into these issues.

Why are international manufacturers searching for Chinese buyers?

From a macroeconomic perspective, changes in the global economy has presented new business opportunities for countries, said Congfeng Zhang, President, Innoev New Energy Technology (Innoev). The rising Chinese economy and comprehensive national power has allowed the business to further expand. More leading manufacturers are entering the international stage, or acquiring foreign companies to enter other markets. Some successful merger cases in other industries include Lenovo’s acquisition of IBM’s PC business and Geely’s merge with Volvo. Similar trends of Chinese manufacturers merge with renowned international manufacturers are also being observed in the LED lighting business recently.

Main reasons foreign companies prefer finding Chinese acquistors include China’s good economic situation is beneficial for the industry and manufacturers developments, said the Zhang. Moreover, listed Chinese manufacturers have a strong financial foundation and sufficient finances to avoid investment risks. China’s large consumer market also ensures manufacturers plenty room for further developments, and lastly globalization of the world economy has made the integration between east and west a necessity. Complimentary partnerships can improve manufacturers’ developments.

“Chinese manufacturers are the only potential buyers,” said Fairtek International Chairman Peizhi Dong. “If international manufacturers do not sell now, when their still valuable, they will only see their value shrink in the future.”

According to Yinshui Peng, General Manager of Romney Opto-electronics Systems (罗姆尼光电系统技术), the differences between Japanese and Korean manufacturers LED chip technology is not as significant. Hence, the chances of these manufacturers to spend excessively on the acquisition of these companies is remote.

China is also the world’s largest LED downstream product manufacturer that is looking for potential opportunities to move into the upstream market sector, said Yujie Lin, General Manager of PN-Stone. Moreover, listed Chinese manufacturers have much better financing channels.

LED technology might have taken off later in the Chinese LED industry, but the country is currently the world’s top LED manufacturing hub, and supplying more than 80% of LED products to the market, said Hangzhou Zhonghen Power Energy CEO Shi Wen.

“When products meet market conditions, high manufacturing costs are a disadvantage,” said Wen. “We have observed Chinese LED companies and foreign counterparts prefer to sell their companies when prices are right, so they can focus their finances on their company’s strengths. Instead of being gradually absorbed by Chinese manufacturers. Global surveys suggest Chinese manufacturers are the most qualified candidates.”

The LED industry in China agrees intense price wars is the main reason that international manufacturers, such as Osram and Philips are selling their less profitable lighting businesses to focus on more profitable niche market applications. But what about Chinese acquisitor motives?

Reasons behind Chinese manufacturers acquisitions of foreign companies unwanted LED businesses 

Factors Chinese manufacturers have taken into consideration include innovation, intellectual property rights, and expanding international markets, said Innoev President Congfeng Zhang. “International manufacturers tend to emphasize technology innovation, and are better at transferring scientific research results into products and market applications,” he added. Continual technology innovation can bring considerable economic benefits to manufacturers, and stabilize the R&D team’s dynamics and stability. This is the basis of LED industry developments. Chinese LED manufacturers need to follow international norms if it wants to perform well in oversea markets, intellectual property rights are unavoidable. The LED industry’s core technologies include patents. Especially in the upstream LED industry, a few international oligarchs control LED chip and package technologies, such as Philips, Osram, Cree and Nichia.” he added.

Acquisition of foreign companies is a shortcut for Chinese manufacturers vying to enter international markets, he added. Acquiring foreign companies intellectual property rights and patent rights can greatly help Chinese companies. All these trends involve international acquisitions that effectively use the company’s existing employees, distribution channels, and resources. This is the most effective method, and why leading Chinese manufacturers have been enthusiastic in merging international companies.

Peng also agreed with the above viewpoint. Mergers with foreign company can assist Chinese manufacturers in reaching their internationalization goals, and acquire certain business channels. Secondly, Chinese manufacturers especially desire LED chip patents that leading international manufacturers have an extensive portfolio. Thirdly, the company can build on the international company’s brand value. There are Chinese manufacturers that are truly international yet. Building a global brand requires finances and time, so acquiring an international company is the fastest short cut.

Some perspectives on the market point out Chinese manufacturers decision to acquire international manufacturers was affected by the potential expiration of nearly 20-year old LED patents in the industry. However, an engineer from Guangdong Solid State Lighting Research Institute (GSSL) Longfei He noted the “patent theory” was flawed. “Patents in the LED industry tend to be patent families, and are not single patents,” he said. “If the patent expires, and another patent application is filed for related technologies than the patent has not expired. In other words, this is a false proposition, manufacturers are no longer filing a single patent to protect their products, but are trying to increase the number of patents they hold.”

Advantages and disadvantages of frequent mergers for Chinese manufacturers

Chinese manufacturers’ international acquisitions mostly reflect domestic competition. One evident advantage for Chinese manufacturers acquisition of international manufacturers is it greatly shortens the time and resources needed to develop the company’s brands and sales channels, especially in the oversea markets, said Wen. Chinese companies have started much later on the market, and it’s more difficult for them to develop their brand in overseas markets. However, by merging with an already well known international enterprise, companies can quickly acquire brand recognition, distribution channels, and integrate resources.

As for pros and cons of these mergers, Dong believes this should be approached from two perspectives. “Merging with foreign companies can greatly strengthen Chinese manufacturers globalization and patent strategies, but integrating the international company and transforming into it into a valuable asset can be a huge challenge. I don’t think the outcome of all these mergers will necessarily be equivalent to ‘1+1>2’. Most manufacturers will encounter difficulties during the integration process with the newly acquired companies.”

In contrast, Yujie Lin, General Manager of PN-Stone noted “The benefits for Chinese manufacturers outweigh the disadvantages. Chinese manufacturers are able to improve their brand recognition in domestic and international markets. Moreover, consumers will no longer believe foreign brands are better, but will gradually recognize domestic brands.”

However, industry insiders have voiced their concerns. “I believe most manufacturers participating in these acquisitions are unprepared. Many do not have an international mindset, and have not made sufficient risk assessments. This can be observed from several aspects: the first is financing issues, in this aspect we can observe ‘boa constrictors trying to swallow elephants.’ The acquisition funds are really just one of the many costs to follow. Do manufacturers have the budget to cover many of these unforeseen costs. This is not the most serious issues, the biggest problem will be management and cultural clash. I have worked in both Chinese and foreign companies before, Chinese manufacturers tend to emphasize fast reaction rates and efficiency. However, foreign companies tend to follow protocols, if the acquired company cannot adapt to the new Chinese management styles, they will definitely fail. Lastly, is wrong market positioning. Manufacturers that have never been involved in branding, will not know how to position their products in the market. This will include Chinese lighting brands that might not have international branding experience.”