Case Study: China Merchants Group’s Acquisition Of The Newcastle Port

Case Discussion Questions

1, Who are the main stakeholders in China Merchants Group’s acquisition of the Newcastle Port and what are their key interests and concerns in this acquisition?

 2, What are the challenges facing large state-owned enterprises (SoEs) in their efforts to acquire strategic assets in foreign countries in comparison with those by private firms, and what can SoEs do to deal with those challenges?

 3, What are your recommendations for China Merchants Group to effectively manage and operate the Newcastle Port after its acquisition?

Case Discussion Questions

China Merchant’s Group has discovered its significance by acquiring the Newcastle Port which is a biggest port in extracting energy resources such as coal. Newcastle Port is generally situated in Australia and the owner of Newcastle Port has decided to give this port for a lease period of 98 years to China Merchant’s Group. Mainly most of the parties were attracting towards the Newcastle Port when New South Wales state government, the owner of the Australian port declares for giving this on lease (Dunning, 2012).

From all over the world, Hong Kong tycoon Li  Ka-shing owner of Cheung Kong infrastructure, Deutsche Bank, Macquarie Bank, China State Commission, and many more were the main parties who showed in acquiring the port. But after the acquisition by China Merchant’s Group, they all become its stakeholders because in last year it exported 140 million tons of coal which was the highest amongst all the ports of the world. Quantity of the coal extracted from the Australian Port was a benchmark for all other coal extracting companies and ports across the globe (Liang, et. al., 2011).

All these stakeholders were involved in the procedure of the bidding for acquisition of the Australian port because even its huge benefits could not be assumed. After successful acquisition of the Newcastle Port of the Australia, China Merchant’s Group was involved in contributing for global energy transport market. This also helps the China’s economy because its Newcastle port’s exporting capacity could made any country of the globe developed in very short time.

Main concerns and interest in acquiring this port from the perspective of the China was going in international market which was good symptom for making effective position in the world economy by contributing effective part in global energy market. Secondly, China Merchant’s Group’s growth chances increases and company’s expansion process starts with a large project as well as its market position in the global market also improves due to performing in the large project. China’s economic conditions will also improves from income generate from the Newcastle port. For any company, going in the international market for performing business activities is not easy but many of the Chinese companies involved in the same business i.e. manufacturing, extracting and distribution of the coal and other energy resources across the global market in the Australia from last 20 years (Shealy & Dorian, 2010).

When acquisition of the Newcastle port was handover by the New South Wales state government to the China Merchant’s Group to rule for next 98 years, their company’s track record not only in terms of profitability infect their fundamentals, their methodology used to perform the activities in the international market, etc. Apart from this, their employees were also questioned about their experiences in the energy resources extraction market. This was done to reduce the possibilities of decreasing capacity of the Newcastle port. As this is the only port across the globe in terms of volume of productivity so if it will goes in wrong hands, Australian port’s owner as well as Australian government needs to face a big loss (Backer, 2010).

State owned enterprises are owned by government partially or fully and these perform under the government body’s control. Apart from this, they perform business activities in other parts of the world on government’s behalf. As per this scenario, before acquiring Newcastle port in Australia, many big companies failed to acquire satisfactory place there. Australian government never trusted Chinese companies to perform for such big projects (Song, et. al., 2011). 

For instance, in 2009 Aluminum Corporation of China also known as Chinalco takes parts in the bid program conducted for Rio Tinto Company. Rio Tinto is multinational company involved in Mining Corporation. These companies forms joint venture or lease their position to perform the particular task. But in that bid program, Chinalco was rejected and there are lot other instances which prove that Chinese Companies were under estimated for such big projects.   

But in the current scenario, China Merchant’s Group succeeds in acquiring Newcastle port of the Australia which is also known for its vast productivity across the globe without generating much criticism in Australia. From the succession of Merchant’s group, other Chinese Companies could also learn the lesson of patience. Because for acquiring this project, their performance across the globe including their fundamentals used for achieving objectives, etc. were evaluated by the Australian government. So, constant performance with never giving up strategy helped the Merchant’s Group to rule over the biggest port of the globe for next 98 years. During this period, Merchant’s Group will be included in contributing towards the energy global market (Szamosszegi & Kyle, 2011).

Apart from these failures, Chinese SOEs were also suffering from fewer funds which were very crucial in terms of going abroad for company’s expansion. Private organizations easily arrange funds by sharing their profitability statements and through this they issue shares and debentures and this helps the audience to form a stakeholder of the organization. State Owned Enterprises of China were failing in abroad countries mainly due to its State ownership. State ownership organization would not be able to take decisions by their own as well as it will also leads to consumption of more time in comparison to private owned organizations (Cui & Jiang, 2012).

As Merchant’s Group convinced the Australian public and the owner of the Newcastle port through explaining them that in this acquisition is for commercial purpose which is other than the political interest of China. This was the biggest factor of Merchant Group’s success and by following this step, government of China introduces various benefits for public in return to their investment made under SOEs.  Investment made by the public helped the State Owned Enterprises to arrange satisfactory funds, infrastructure and required assets to expand their business in the foreign markets (Li, et. al., 2014). 

Challenges faced by State-owned enterprises and methods to deal with those challenges

China Merchant’s Group has performed ultimately as per the past experiences of Chinese SOEs. Before this acquisition in 2009, Aluminum Corporation of China, biggest company involved in mining corporations also tried to expand its business in the foreign market but they failed. And the main reason for their failure was their partnership with state which extracts the political interest. After that in 2014, another State Owned Enterprise which is China Merchant’s Group which is basically involved in the coal extraction and other energy resources’ extraction processes. When owner of Australian port which is also known as Newcastle port declares to give this on lease, many big organizations showed their interest because the port is the famous for its productivity across the whole globe. There is no port like Newcastle port in the world which could produce 140 million tons of coal and these are the values of the financial year 2012-13 (Yi & Davey, 2010). 

According to my experience and after reviewing the scenarios provided by Dr. Hao Tan, I analyzed that acquisition of Newcastle port is not a small achievement for China because many big companies were also involved in the bidding program of this port. All the activities of this project should be managed properly and if effective and experienced employees are required for better performance of the organization then it should be implied without any hesitation. The most important factor of succession of the China Merchant Group’s convincing power which helps them to prove that in this organization, political interest is absent and this project will be adopted for commercial interest.

Adequate quantity of the coal should be extracted from the Newcastle Port as it is capable to produce enough quantity which could result in sufficient income generation for the organization. Machinery used for the extraction of the coal and for its refinery, experienced employees should be appointed who could turn these things into positive side of the organization. Otherwise Newcastle port’s vast productivity will be wasted. And wastage of energy resources could be a great disastrous situation for global energy market as well as it will also leads to increase in the prices of the energy resources (Jiang & Sinton, 2011). 

Hence, all the activities should be performed under expertise manner so that it does not generate negative results for the organization. Apart from these recommendations, China Merchant’s Group has performed very well.  

References

Backer, L.C., 2010, “Sovereign investing in times of crisis: global regulation of sovereign wealth funds, state-owned enterprises, and the Chinese experience”, Transnat'l L. & Contemp. Probs., vol. 19, pp.3.

Chen, Y.Y. & Young, M.N., 2010, “Cross-border mergers and acquisitions by Chinese listed companies: A principal–principal perspective”, Asia Pacific Journal of Management, vol. 27 (3), pp.523-539.

Cui, L. & Jiang, F., 2012, “State ownership effect on firms' FDI ownership decisions under institutional pressure: a study of Chinese outward-investing firms”, Journal of International Business Studies, vol. 43 (3), pp.264-284.

Dunning, J.H., 2012, “Routledge”, International Production and the Multinational Enterprise (RLE International Business).

Jiang, J. & Sinton, J., 2011, “Overseas investments by Chinese national oil companies”.

Li, M.H., Cui, L. & Lu, J., 2014, “Varieties in state capitalism: Outward FDI strategies of central and local state-owned enterprises from emerging economy countries”, Journal of International Business Studies, vol. 45 (8), pp.980-1004.

Liang, X., Reiner, D. & Li, J., 2011, “Perceptions of opinion leaders towards CCS demonstration projects in China”, Applied Energy, vol. 88 (5), pp.1873-1885.

Shealy, M. & Dorian, J.P., 2010, “Growing Chinese coal use: dramatic resource and environmental implications”, Energy Policy, vol. 38 (5), pp.2116-2122.

Song, L., Yang, J. & Zhang, Y., 2011, “State?owned Enterprises' Outward Investment and the Structural Reform in China”, China & World Economy, vol. 19 (4), pp.38-53.

Szamosszegi, A. & Kyle, C., 2011, “Capital Trade, Incorporated for US-China Economic and Security Review Commission”, An analysis of state-owned enterprises and state capitalism in China, pp. 89.

Yi, A. & Davey, H., 2010, “Intellectual capital disclosure in Chinese (mainland) companies”, Journal of intellectual capital, vol. 11 (3), pp.326-347.