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Fast-track Model to the Chinese Market
- Published on Monday, 30 November 2015 17:10
The Shared Ownership of Source (SOS) structure is a new powerful cooperation structure available to collaborating companies between China and foreign SME companies. Only a handful of companies in Denmark have discovered it so far, for example, Scape Technologies A/S.
By Hans Halskov, Managing Partner, Across Partners ApS
Fundamentally, the SOS structure is about realizing short- and long-term partner synergies, and competing in China anno the 21st century. The principle is simple:
The Danish mother company (the Source) allows a larger Chinese strategic partner to take a minority stake in the company. At the same time, they extend certain rights of main concern to the investor. The combination creates a powerful unit that can withstand competitive shocks in China. Benefits are mutual, and the mutual business will grow, as the two companies total with be greater than its parts.
The opportunity in the trend
Until a few years ago, there were bureaucratic procedures for Chinese companies to invest in companies abroad. This is changing. China recorded 16% growth in non-financial ODI for the first 10 months of 2015, reaching USD95 billion, increasing growth from 14% in 2014.
To move up the value chain, Chinese companies are increasing overseas investment in notably high technology, agribusiness and food, real estate, manufacturing, and services.
This outbound investment trend is an opportunity for Danish SMEs who crave for real access to sales channels, effective marketing, growth capital and a low risk set-up in China.
From own experience of advising more than 100 Danish companies on finding and entering cooperation with Chinese partners, we discovered fundamental risk-reward and prioritization imbalances in traditional cooperation structures that make them extremely uncompetitive and unsustainable.
To name a few disadvantages of traditional cooperation models (distributorship, JV in China, own sales office in China, etc.),
- The Danish SME has inadequate manpower and financial resources to support a Chinese partner’s growth aspirations in China
- The Danish company is unwilling or slow to adapt its product to uniquely fit the Chinese market demand
- The parties do not have common long-term interests so important IP or market information is hidden or not maximized
- The parties do not communicate at lengths compromising the quality of the business plan, so synergies are not utilized on continuous basis
- Collaboration evolution is very slow as there is insecurity from both parties about the sustainability of the cooperation
The Chinese company will be the lead operating company in China, but it will only be competitive if it has:
- Board member position in the Danish company to influence the strategic alignment of priorities
- Periodic posting of own staff inside the Danish company as effective interface with the Chinese market
- Long-term market protection and exclusivity for production, co-R&D, sales and/or marketing in China of the Danish company’s products
- Periodic lower royalty and sales prices from Denmark to establish reference projects and the initial customer base
It is universal practice that before entering into any equity agreement, a proper partner due diligence is an absolute necessity. A shortcut can sometimes be to partner up with a stock listed company in China. Here, the Danish SME can feel reasonably secured of a high level of transparency and an agreeable moral codex.
Across Partners specializes in equity cooperation deals with China and facilitates the Chinese investment into Nordic technology, brand and service companies. Anyone interested in our work are welcome to contact us.
Other articles part of Newsletter vol. 5, 2015