November 29, 2017
After a strong start to the year, questions are now swirling about the future pace of M&A spanning the Pacific. The landscape has CEOs on both sides of the ocean considering their best paths to growth overseas. The US and China are among 21 economies that make up the Asia-Pacific Economic Cooperation (APEC), a forum that promotes free trade and accounts for 53% of global foreign direct investment inflows. President Donald Trump’s recent Asia trip included a stop at APEC’s annual summit in Vietnam at a time when policy barriers against foreign investment are growing.
President Trump recently blocked a Chinese-backed bid for a US semiconductor company, citing national security concerns. The United Kingdom and European Union each are proposing measures to tighten foreign acquisition and investment screenings. And late last year, China put additional capital controls in place that have limited foreign deals in certain sectors. These targeted actions come as businesses consider the broader effects of new trade policy directions, with the Trans-Pacific Partnership (TPP) members recently deciding to advance without the US, and the UK continuing to negotiate its exit from the EU.
The advantages of alliances
Ahead of the summit, PwC surveyed business leaders in APEC markets to learn how they are taking stock of this more fluid trade policy and technology environment. Most – 71% – expect to make greater use of strategic alliances to secure footholds in foreign markets. This sentiment was particularly strong at companies with headquarters based in emerging markets in Asia. Other adaptations are also in the cards; more than half of CEOs are considering a shift to a “build where you sell” global model. See their responses here.
Some of this is likely related to the TPP and other potential trade policy changes. Industries or nations subject to new tariffs may prefer to avoid the higher costs of moving goods across the ocean and instead seek US partners that can produce comparable volume and market penetration. An alliance or joint venture could also provide more flexibility than an outright acquisition – possibly useful if trade barriers fall again in the coming years.
Beyond manufacturing, the TPP would have opened Asian markets to U.S. services exports at a time when services make up a growing share of the US economy. From 2014 to 2016, America’s sale of services abroad – including management, legal, technology, education and medical services – grew significantly while exports overall sagged, as a Brookings Institution report recently highlighted. Strategic alliances may help service companies continue to engage in their Asia growth agenda without the benefit of TPP.
Other partnerships may be encouraged by China’s “One Belt, One Road” initiative. The infrastructure investment plan aims to link China to Europe, the Middle East and North Africa through a network of rail lines, energy pipelines, ports and highways. Even with continued interest in US companies by Chinese-backed buyers, Chinese President Xi Jinping in May pledged tens of billions of dollars in funding for the initiative, and nearly 70 countries agreed to participate.
Capitalizing on partnerships
Given both the growing strategic importance of alliances, as well as some of the tactical challenges, companies can’t afford to stumble in execution. When asked in PwC’s APEC survey what’s most important in a strategic partner, CEOs said industry and marketing expertise, as well as transparent governance and operations. By comparison, delivery and distribution capabilities were much less important.
These findings confirm changing views toward strategic partnerships and what they can accomplish beyond access to foreign markets. Companies risk falling behind if they aren’t responding to these developments. For example, strategic partnerships built around advancing technologies and innovation are now a common feature when companies form alliances – in part because some companies just need access to a technology, not to own it. Some of the world’s largest firms are likely managing hundreds of such partnerships.
Or consider the new directions for partnerships with governments as they seek different sources of capital or expertise to fund and operate large infrastructure projects or help jumpstart local businesses. More are willing to do so through a JV or strategic alliance, such as public-private partnerships (PPPs) or sovereign wealth fund investments with established corporations. This is common in the defense industry and now could expand to other sectors.
To be sure, these alliances can come with obstacles, which can include cultural nuances, country risks and other factors. For instance, as many Asian companies look to partner with US high-tech firms, who will own and control intellectual property between partners, and how will it be handled? Also, how do local policies and commercial requirements, such as import and export duties, impact a company’s business model and competitiveness? Will local employees be available and skilled for new roles? What are the safety precautions being taken for employees working in emerging markets? How will culture affect the joint decision making efforts?
Navigating these challenges and others won’t be easy. But doing so can result in successful partnerships that enable companies to grow in an increasingly complicated and uncertain world.