The economics of Barbie dolls helps explain why Chinese companies are increasingly snapping up famous brands like the most recent big target: Volvo.
Chinese officials and businesses cite a much-noted analysis by UBS economist Dong Tao who said the busty plastic doll is sold for $20, but the Chinese manufacturer only earns 35 cents from that. The lesson: the big money is in owning the brand, not just making it for foreign companies.
China's biggest acquisitions abroad are by state-owned companies that are investing in mines and oil fields -- deals geared toward supplying the country's rapidly growing economy with raw materials. But ambitious private companies are acquiring foreign brands in hopes of speeding up their evolution into international competitors. The trend began a few years ago, but analysts say it's speeding up now, and could generate a backlash overseas. The acquirers, meanwhile, sometimes have little global experience and could struggle to make a success of the acquisitions.
"A lot of Chinese companies are ranked in the Fortune 500 now, and they want to do some deals that reflect their international prestige," said He Yuxin, analyst at Dragonomics, a research firm in Beijing.
For a decade, China has been encouraging its companies to think big and expand abroad to diversify its economy. China's foreign direct investment more than doubled from 2007 to 2008, rising to $55.9 billion, according to the Ministry of Commerce. Yet-to-be-released figures for 2009 were expected to be even higher.
The surge in Chinese acquisitions is reminiscent of Japan's buying binge in the 1980s when the Japanese splurged on trophy assets like the Pebble Beach Golf Links in California and Rockefeller Center in New York. Those deals sparked a backlash from Americans fearful the Japanese were taking over the world.
Similar resistance has scuttled a few large Chinese deals. There's much debate about whether Chinese will make some of the same mistakes as the Japanese, such as buying overpriced assets they can't manage.
The Chinese will continue to bump up against more hostility overseas if they try to buy big stakes in backbone or sensitive industries, such as oil companies, said Huo Jianguo, president of Chinese Academy of International Trade and Economic Cooperation, a Commerce Ministry think tank in Beijing.
"But if they are projects that are based on mutual benefits and bring along local employment and tax revenue, they will be welcomed," he said.
Cash-starved companies welcome Chinese investment or acquisition offers. General Motors Co. jumped at the opportunity to unload its Hummer brand on China's Sichuan Tengzhong Heavy Industrial Machinery Corp. The Chinese government, however, vetoed the deal.
Other recent acquisitions of famous brands include Nanjing Auto Group's purchase of Britain's MG sportscar brand. Beijing Automotive Industry Holding Co. purchased Saab Automobile's core technology from General Motors Co. The deal didn't include Saab's brand or factories, but the link with the famous Swedish automaker will likely provide crucial cachet for the Chinese company in its home market.
The push overseas comes amid grumbling from foreign companies in China who say business conditions are souring for them. A recent report by the American Chamber of Commerce in China accused Beijing of shutting out foreign companies in various market segments in a bid to bolster Chinese global competitors.
Andy Xie, an independent economist in Shanghai, doesn't think the two phenomena are connected.
"It's just the rise of the state-owned enterprises," said Xie. Policies have been favoring state-backed firms and "Chinese private companies are facing the same trouble," he said.
But China might incite a protectionist backlash if it restricts its market at home while aggressively expanding overseas.
The bulk of China's foreign investment is still being done by state-owned enterprises in energy and natural resources, said Peter Thorp, the Asia managing partner for law firm Allen & Overy.
But the investment patterns will change in the near future, with more private investors and companies diversifying into biotechnology, agriculture and pharmaceuticals, said Thorp. He said half the business done by his firm's China offices involves Chinese firms investing overseas.
"One can never be sure what's going to be the hot sector, but we're seeing real estate as one that is increasingly active," Thorp said. "And the reason for that is very obvious: You have low valuations in many markets, and you have Chinese investors with plenty of money to spend."
Recently, the big head-turning deals have been in the auto industry.
The European luxury car maker Volvo was purchased by Zhejiang Geely Holding Group, an automaker that is relatively unknown outside of China. The Chinese firm bought Volvo for $1.8 billion from cash-strapped Ford Motor Co., which was desperate to unload it.
Geely's purchase of Volvo was done for two of the main reasons why Chinese companies are investing abroad, said He, the Dragonomics analyst. One of the reasons was bargain hunting, getting a solid brand at a good price, she said.
The other was Geely could acquire technology that would strengthen its position back home. She said China's Lenovo Group, the world's fourth-largest personal computer maker, did the same thing in 2005 when it acquired IBM Corp.'s PC unit -- a move that boosted the Lenovo's market share in China.
Other Chinese acquisitions have been "deals driven by desperation" by companies struggling with razor-thin profit margins and other growth barriers in China, He said. One example was TCL Group's ill-fated joint venture with French TV maker Thomson and the RCA brand in 2003. The partnership has fallen far short of its goal to create the world's top-selling TV maker.
"Thomson's brand didn't do well in the U.S. or Europe," He said. "It didn't have a technical advantage in the Chinese market, which is very globalized with Japanese and Korean competitors."
A study of Chinese mergers and acquisitions by the Economist Intelligence Unit said that China's companies still face several major handicaps when investing abroad. One is that companies registered in mainland China have to get overseas investments approved by the government, which is keen to avoid embarrassment and can be overly cautious. This can cause serious delays for Chinese firms competing with American and European bidders with much more experience in negotiating and lining up finance, the report said.
The report includes a survey of 110 Chinese executives, with 82 percent of them saying a lack of management expertise was their biggest challenge when investing overseas. Only 39 percent of them said they knew what was required to integrate an acquired foreign firm into their company.
Stephen Joske, director of the China Forecasting Service at the Economist Intelligence Unit, said many of China's recent acquisitions could have problems.
"We'll have to wait and see, but it's not going to be a simple process," he said. "China has a long learning process to go through in terms of how to operate in foreign markets and how to operate foreign companies in those markets."
AP Business Writer Joe McDonald in Beijing and researcher Bonnie Cao contributed to this report.