CONSUMER: Midea Follows Haier Abroad with Toshiba Talks

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Bottom line: Midea’s reported bid for Toshiba’s home appliance business reflects a renewed global push by Chinese white goods maker, but is likely to fail due to Midea’s lack of experience managing a global brand.

Midea eyeing Toshiba’s white goods?

Leading appliance maker Haier (HKEx: 1169) could quickly discover it’s not the only Chinese company roaming the globe for acquisitions, with word that domestic rival Midea (Shenzhen: 000333) is in talks to buy the white goods business of Japan’s Toshiba (Tokyo: Tokyo). This particular news comes as Haier finalizes its purchase of the home appliance unit of General Electric (NYSE: GE), and is part of a larger push by big western companies to sell their lower-margin white goods businesses.

A subset of that bigger story has seen Japanese brands engage in their own campaign to sell off assets from their lower margin businesses, many of which are losing money. That trend has culminated in prolonged talks that are likely to see the struggling Sharp Corp (Tokyo: 6753) sell itself to Taiwan’s Hon Hai (Taipei: 2317), in what would mark the largest-ever sale of a Japanese electronics company to a foreign buyer.

The Chinese buyers believe they can purchase these low-margin brands from developed markets and quickly turn them around by moving their manufacturing to China. At the same time, these global brands have well established reputations and extensive sales channels that could help the Chinese buyers quickly gain market share in lucrative developed markets.

While such reasoning has a certain logic, I expect that some of these purchases will ultimately fail due to lack of experience by the Chinese buyers, an outcome that has occurred in past similar cases. We’ll return to that part of the story towards the end of this post, but first let’s look more closely at the reports on Midea’s talks to buy Toshiba’s white goods business.

The reports come from Chinese media and cite a long-time follower of Toshiba as their source, which seems to indicate they are coming from an analyst or observer rather than directly from either company. The source says that talks for the Toshiba unit, whose products include washing machines and refrigerators, are in advanced stages. (Chinese article) They add that a “major development” could come later this week, which seems to indicate a possible announcement of a deal. Neither company would comment on whether such talks were happening.

Losing Money

The reports point out that Toshiba’s white goods unit is currently losing money, and the latest talk of a sale follows a non-stop string of similar rumors that the company is looking to offload other non-core assets. Toshiba already sold 2 of its China-based white goods factories to Chinese TV maker Skyworth (HKEx: 751) last year, as part of a broader overhaul of its operations following an earlier $1.3 billion accounting scandal.

This particular deal comes just 2 weeks after Haier said its previously announced deal to buy GE’s home appliance unit for $5.4 billion received approval from the US anti-trust regulator. (English article) GE had previously tried to sell the unit to Sweden’s Electrolux (Stockholm: ELUX-B), but that deal was vetoed on anti-trust grounds. Reflecting China’s willingness to pay major premiums for big-name overseas brands, Haier’s current offer is more than 60 percent higher than Electrolux’s original bid of $3.3 billion.

Haier has been one of China’s most successful appliance makers looking to go global, following its 2012 purchase and later successful operation of New Zealand’s Fisher & Paykel. But the company has had difficulty selling its own brand into western markets, and most observers say the GE purchase is aimed at giving it a quick boost in the lucrative but highly competitive US.

As to whether Haier and now Midea can succeed with this kind of big overseas acquisition, I would point out that similar past purchases have often failed. The most notable of those include TCL’s (Shezhen: 000100) purchases a decade ago of well-known French TV and cellphone brands, both of which later led to major headaches. In this instance I have a bit more confidence in Haier due to its longer experience on the global stage. I would peg Midea’s chances of success much lower, perhaps just 20-30 percent, if the latest reports are correct and it ends up buying Toshiba’s white goods business.

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