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James Z. Li, a Harvard grad with an MBA from the University of Chicago, was a McKinsey consultant before he decided to run his own M&A advisory in Shanghai-- E.J. McKay & Co, of which he is currently Managing Partner. His specialization: cross-border mergers & acquisitions (M&As). His focus: Indo-Chinese business opportunities. His mission: to get Indian firms to snap up Chinese manufacturers. His logic: two distinct skills could form a world-beating combination. Here he is, in first person. Q. What explains your visit to India? A. Currently, we are working with a number of very large Indian manufacturers in the industrial sector that are considering buying Chinese companies. And the reason they are doing this is that they have run into Chinese manufacturers in the global markets. And they find that Chinese-manufactured products' prices are much lower than theirs. This happens in the machinery sector, the chemical sector and many others -- especially in sectors that are commodity-like where it is harder to differentiate the quality and price becomes the main differentiator. The Indians have lost out a lot of orders to the Chinese, and they discuss with us what they should do. Some want sourcing agreements with Chinese manufacturers, so that they can source the products and sell in the international market. The question is: Why do this? Why don't you come straight forward, and just own these manufacturers? Then they think that's a pretty good idea. Q. What about regulatory issues? A. A change took place in Chinese law in November 2002. Before that, there was no clear law that permitted foreign companies to buy equity in Chinese firms. It's not only the law, Chinese policy now favours foreign ownership in Chinese firms. Q. Is it a sector-specific policy or a blanket one? A. By policy, the Chinese government now encourages foreign investment in China. It has been, you know, a centrally-planned socialist economy. The attitude has now changed. Law-wise, it had something to do with China entering the World Trade Organization (WTO). In banking, finance and telecom, there are restrictions, and also sectors related to the military. Most of the areas that we are concerned about, such as machinery, chemicals, textiles and fibres, are open. Q. So, do you help formulate buy-out strategies? A. Two things. Corporate strategy and transaction strategy. Actually, what we do is three pieces -- pre-transaction strategy, the transaction and post-transaction integration work. Before you do a transaction, you need to understand why you should do it. I've worked with McKinsey, where we did the 'why' part and also the transaction itself. We find the target structure of the deal, value the company, negotiate the deal and close the deal. Very often, the deal's success depends on the post-merger integration work. The two facilities, cultures, people, products, markets... we cannot be involved in all levels of integration work, but we do continue working with the firm on such issues as personnel overlaps and product portfolio conflicts. Q. Given that it's China, is integration the hardest part? A. Strategy work is relatively straightforward, because it involves just one party. The transaction and integration parts are equally challenging. The transaction complexity depends on the ownership -- if it's a government or private firm, what's the attitude of the government, what does the law say, what's on the management's mind. How do you take care of different interests? If employees are to be laid off, how do you take care of that? Integration work -- if you have full control of the company, it becomes a lot easier. Q. How big are the deals we're talking about? A. In the $50-million range right now. Yes, that would be about right. Q. Do you target publicly-listed firms for acquisition as well? A. It is possible to buy publicly-listed firms in China. However, at this stage, the transactions we're working on are private market transactions. This can be a private company or a government-owned company. Q. What's motivating the Chinese owners to sell out? A. Oh, usually, it is because these Chinese companies are troubled. Q. But why should Indian buyers be able to make a go of them? A. That goes into the strategy part. Why should an Indian firm buy a Chinese firm? There are all sorts of reasons. One, as we've discussed, is that Indian firms cannot compete with Chinese firms. The second is that China's domestic market is very big. Q. Yes, but what would be the unique advantage an Indian brings to the table? A. First, Indian firms have the money. That's capital. The second, maybe, is technology and equipment. That depends on the sector, on a case-by-case basis. An Indian firm I'm working with has more advanced technology than the Chinese firm. Also, there's market access. Most Chinese executives do not speak English. Chinese companies are very strong on costs, commodity products and manufacturing. But they have great difficulty in exporting their products on their own. Customers are more our partners. Q. Building brands overseas... A. Very difficult for the Chinese. But senior Indian executives are educated in English, sometimes even in America or England. They can talk smoothly with customers anywhere in the world. So Indian firms have access to international market channels, while Chinese manufacturers have to rely on intermediate agencies. These are not that effective, and they also take money. Q. Do you foresee firms straddling both India and China for separate competencies? A. Yes, manufacturing can be done in China. Chinese firms are more competitive here. And China is also a bigger market. As for export, North America and Europe would be the big markets. An Indian firm would have local management expertise, but would have to operate globally. Q. Are China's manufacturers subsidized by the state? A. No. China is no longer a centrally planned economy.
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