The business community is abuzz on how to address the demand and capitalize on the shifting demographics afoot on the U.S. economy. With some 25% of American’s retiring over the next two decades–some 10K per day–many business plans, including those in M&A are focused on capitalizing on this unavoidable change in the demographic landscape. Similarly, China is looking to address similar, albeit more complex, issues relating to retirement, birth rates and how this will ultimately impact dealflow for currently profitable enterprises over the next couple of decades. To understand the true impact, particularly on M&A, it may be helpful to address macro changes. Doing so may help predict opportunity and avoid missteps as the shift occurs.
Wealthy Chinese are Expatriating Money
While the Chinese government exercises some pretty stringent requirements on moving money outside the country, many of the most wealthy Chinese are diversifying heavily outside of China. Much of the focus on money expatriation is on consumption, but the real and last impact will occur on investment. The Chinese are buying U.S.-based, income-producing property en-masse. I personally experienced this impact a few years back when I worked in the property management industry and saw hundreds of units owned and managed by Chinese firms. One area whose market rates have been impacted by Chinese investment is Vancouver, British Columbia. Real estate prices in Vancouver have increased heavily, in part due to outside investment from Chinese nationals.
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The shift from production of Chinese wealth to investment of Chinese wealth will have an immense impact on foreign markets for years to come. When capital is created, savvy investors will seek a home where it can provide a meaningful return above inflation. Hence the focus on real estate purchases. The same holds true for cash-flow positive firms as well. We’ve seen a much larger demand for buy-side engagements looking for healthy U.S. companies. As Chinese workers and business owners turn to Chinese investors, my prediction is that this trend will continue its northward climb.
The One Child Policy and M&A Projections
Recent news has indicated a relaxing of the one-child policy in China. Motivation in doing so certainly includes the desire to avert demographic disaster, but unfortunately the die has already been cast. As one Forbes contributor writes, “it may be too little, too late.” One of the biggest issues with the one child policy impact on M&A has to do with the immediate and sharp decline in workers to fill existing conditions. What occurred first in Japan, then the United States may be seen in an pronounced and exponential way when the demographic drop hits the Chinese economy. This could impact Chinese M&A in a number of ways:
- Less Working Chinese=Less Demands for Goods and Services. Chinese population as a whole may not be expected to reach decline in the next decade, but as the working population transitions out of the workforce, the shift in demand for products will certainly continue to decline, a shift that could create a leveling-off of demand for consumer products which will eventually reach consumer-product deals.
- Uptick in Workplace Automation. Some have accused robotics, computers and an overall focus on capital efficiencies as a reason for America’s most recent jobless recovery. A similar shift will need to occur in China–out of necessity–in order to keep pace with the drop in worker supply. Some, including Harvard’s Clay Christensen have offered at least some potential solutions. Declining workforce numbers may force further consolidation along with automation. Eventually, as Christensen observes, the automation needs to include breakthrough innovations that empower the masses, not just the financial engineers in the back office. As most true dealmakers are aware, true innovation is hard to come by.
- General Industry-Agnostic Consolidation. When demand dwindles, consolidation flourishes. Increased consolidation efforts across industries opens up more broad use of M&A services. Nowhere is this potential more fitting than in China where demographics are shifting rapidly.
M&A will certainly be impacted by China’s shifting demographics. The overall size of the country’s population, the changing environment for workers and the shift in investment abroad will all play key driving roles for both internal, external buyers and sellers of businesses. While some are touting a complete meltdown, there are the savvy few who will see opportunities amidst the potential chaos. There is no question but that the coming shifts will impact both China and U.S. deal-making in a major way.
Nate Nead is a contributing member of NuWire and the manager of the merger and acquisition partnership network at Mergers.com, providing key advisory services for middle-market business buyers and sellers. He resides in Seattle, WA.