M&A

First of its kind

Whirlpool closes landmark takeover of Shanghai-listed firm

Employees walk towards a factory of Hefei Rongshida Sanyo Electric in Hefei

Sayonara: formely a JV with Japan, but now controlled by Whirlpool

David Whitwam always asked the same question at the beginning of a mentoring relationship: “How often do you look out the window and dream?”

Whitwam was Whirlpool’s boss for almost two decades and when he asked that question his goal was to get senior staff at the US-based home appliance maker to think more innovatively.

In 1988 Whitwam laid down another mission – to globalise – and to elucidate his vision he made a well publicised address titled “Dragons be here”.

That speech was not specifically about China – the country that springs to mind when dragons are invoked. But Whitwam’s successor Jeff Fettig can now claim to have fulfilled his predecessor’s vision in two respects.

With his latest acquisition Fettig has secured a major presence for Whirlpool in the key market in which it was largely absent.

And by buying control of a Shanghai-listed state-owned enterprise, he has done something very innovative. In fact, Fettig has sent up a spectacular flare for other bosses around the world that it’s now possible for a multinational to purchase 51% of a Chinese A-share company.

On November 21 at a shareholder meeting Hefei Rongshida Sanyo voted to change its name to Whirlpool (China) – a move that recognises that a decisive change of ownership has taken place. The takeover had required two steps. Initially the American firm had bought the 20.3% stake held in the 12 year-old joint venture from Japan’s Sanyo. What then followed were negotiations with the city of Hefei in Anhui province, as the local government’s Sasac bureau held a majority stake in the firm. The Economic Observer describes this as the “critical factor” in the takeover, since the real test was whether the Chinese government would be willing to cede control to a foreign firm. With the sale of 233 million shares to Whirlpool, it showed that it was.

According to the Shanghai Security News, the Benton Harbor-based company has paid Rmb3.4 billion ($554 million) to buy the stakes from Sanyo and the Hefei government. For this it got 51% of the equity and the ability to nominate seven directors (thus far it has already named four Whirlpool staffers with international experience in fields like finance, procurement and technology).

By contrast Hefei’s Sasac only gets to nominate five directors.

The move is designed to send a strong signal that the government is serious about its new mantra of ‘mixed ownership reforms’ – a theme we have touched on fairly regularly since we first mentioned it in WiC230.

As financial commentator Song Qinghui put it: “This shows that the reform envisages more than just foreign companies taking stakes in state firms; they can buy a controlling interest.”

Song adds that the timing of the deal also chimes with the positive noises emanating from the Ministry of Commerce, including a draft proposal reducing the number of industries barring foreign investment from 79 to 35.

So what has Whirlpool bought?

Hefei Sanyo – to use its old name – was the the first Sino-foreign joint venture in the home appliances field. Established in 2002, it used Japanese technology to gain a top- three share of the market in China’s washing machine and microwave oven markets. So the Economic Observer points out that Whirlpool is buying into the first rank of China’s home appliance industry, rather than acquiring an “underdog”. In the first nine months of 2014, the company had sales of Rmb4 billion and net profit of Rmb300 million.

For Whirlpool, the deal offers a substantial bridgehead to grow its China revenues. As NetEase Finance comments, the US firm has registered “unsatisfactory” sales in China and has struggled in its previous efforts to work with local refrigerator and washing machine makers like Beijing Snow and Shanghai Narcissus.

Liu Buchen, an analyst who covers the white goods sector, comments: “This deal will greatly accelerate the pace of Whirlpool’s market expansion. Whirlpool had been looking for the right platform to get bigger, and Hefei Sanyo will offer distribution channels, marketing and other resources.”

This year Whirlpool will generate worldwide sales of $21.5 billion, Fettig says, and the impact of the Sanyo deal could soon see that reaching $25 billion.

One of the inducements for the acquisition is that Whirlpool has said it will use its new Hefei manufacturing base to sell more China-made appliances internationally. With Sanyo struggling in recent years (“Sanyo is a sunset brand,” one analyst told NetEase), the JV’s international sales have been uninspiring. For example, last year’s overseas revenues dropped nearly 12% to Rmb529 million. Likewise it seems that Whirlpool will produce new refrigerator ranges for the China market, especially now that it has access to Hefei Sanyo’s nationwide distribution.

In both cases, branding will be key. While the Whirlpool brand isn’t strong in China, it is known as one of the major marques globally. Management at the Chinese venture view it as far stronger than the ailing Sanyo marque and say it will spur their overseas sales. But while the Sanyo badge looks like it will be phased out in China, there are two other local brands that Whirlpool will inherit.

The more promising is Diqua, which is one of the company’s newer launches and produces products that consumers feel have a South Korean styling. The other is Rongshida. This trademark had been the subject of a legal dispute between Hefei Sasac and appliance maker Midea, which had been using the brand to make washing machines of its own (under a lease arrangement). In April Hefei Sasac consolidated its right once again to use the Rongshida trademark for three categories of product: refrigerators, washing machines and microwaves. (This legal case may partly explain why Whirlpool’s acquisition of Hefei Sanyo took so long – after all, the US firm first announced its intent to buy the Chinese entity as far back as August last year.)

Analysts like Liu Buchen think the lower-end Rongshida brand might be marginalised in the new structure, where the focus will be on Whirlpool and Diqua. However, company representatives have refuted this, telling NetEase that Rongshida’s sales this year have exceeded target (Rmb1 billion versus an expectation of Rmb700 million) and that with the growing popularity of e-commerce, a multi-brand strategy “is a good thing”.

The other area to watch is how closely the American firm integrates its new 51%-controlled China entity into its global R&D efforts. Foreign carmakers, for example, have taken a measured approach to technology transfer as far as their JVs are concerned, preferring not to share their latest blueprints. In this case, Whirlpool reckons that China could become its second biggest R&D base globally.

Certainly Fettig remains optimistic on China’s market opportunity and insists that Whirlpool’s new acquisition will make his shareholders happy.

“If we invest here we want to make a return on investment. If the investment environment was negative, we would not make the investment,” he told the Economic Observer.


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