The Simple Equation Behind China’s Big Pig Deal


Chinese Shuanghui’s $4.7 billion acquisition of American Smithfield Foods is a big deal. First, it is the largest Chinese take-over of an American company to date. That’s important. Second, it reveals the simple equation by which large Chinese companies can become true multinationals, which is:

C + E + B + BE = Chinese Multinational

More on this in a moment. First, it is worth noting how confused the discussion of the big pig deal has been. Commentary has been all over the map.

  • Smithfield Food has stated the deal will increase their exports to China. Probably true.
  • The New York Times described this as a supplier deal (Needing Pork, China is to Buy a US Supplier). Not really.
  • Shuanghui’s CEO has said Smithfield’s expertise will be used to modernize its operations (and China’s agricultural supply chain). This is definitely true.
  • Virginia government officials are worried American jobs will be lost as Shuanghui moves Smithfield’s operations back to China. Probably true.
  • There are widespread concerns about China’s food safety problems being introduced directly into American markets (Bloomberg article). Unlikely.
  • And there are concerns about Shuanghui’s environmental record (who knows?).

Overall, the discussion of the deal is confused.

I argue the deal is overwhelming about two factors. First, it is about bringing Western brainpower to a Chinese company that wants to advance from a low-cost processor to a world-class company. We have seen this in many recent Chinese acquisitions. Wanxiang acquired Boston-based A123. Geely acquired Volvo. These were deals about bringing brainpower and technology back to China.

The second major factor is that Shuanghui is finally transitioning from a dominant Chinese company into a true Chinese multinational, of which there are few. The dream of becoming a multinational is common among Chinese companies today. They don’t just want to win in China, they want to win everywhere. But few have figured out how to make the transition. Shuanghui now has, based on the below equation:

C + E + B + BE = Chinese Multinational

The First Part of the Equation is Chinese Consumers (C)

Rising Chinese consumers are the engine that is pulling this train. All the economics follow from them, and Shuanghui has been very successful in capturing this group. They are currently the largest pork processor in China (the world’s largest pork market) and have been selling branded sausages since 1992.

It helps that meat products benefit disproportionately from the growing wealth of China. Wealthier people eat more meat (and less rice and grains). And in China, people eat a lot more pork due to the limited land and water available for agriculture (pigs require less land than cattle).

Winning in China is an absolute requirement for a Chinese multinational. And the going global strategy is typically one of “protect and attack”. You attack foreign markets but you protect your home market. You can live without the former, but not the latter. Chinese consumers come first.

The Second Part of the Equation is Economies of Scale (E)

Winning in most businesses is about being the biggest. Or as Warren Buffett calls it, “survival of the fattest”. Most successful Chinese companies have built tremendous scale against their foreign exports and / or the rising demand of Chinese consumers. In competitive fights, this usually plays out as a low cost advantage.

China already has over half the world’s pig population (approximately 500M pigs ready for slaughter). So a big producer in China is big everywhere. That kind of scale is important. For example, Shuanghui currently makes more than 100 million sausages a day, or about one for every 13 people in China.


That gets us to (C + E) which is the situation we see for many dominant Chinese companies today. They are deeply entrenched in the world’s largest market and that is giving them economic scale.

However, this has not been sufficient for most to expand globally (beyond exported products). Most global expansion to date been limited to leveraging their low-cost advantages in secondary or niche markets, such as Africa and the Middle East. You see companies like Huawei and Haier dominating in Africa, but not in the UK or USA. Chinese companies have struggled to compete against well-entrenched and well-branded Western companies in their home markets. Local scale and brand equity have been the great firewall protecting Western companies.

The Third Part of the Equation is Brainpower (B)

As mentioned, the big pig deal is definitely about capturing brainpower. It is about Shuanghui going from a low-cost, but basic pork processor to a leading edge, high-tech processing system with expert management. They are buying Smithfield’s genetic labs. They are buying their supply chain management. They are buying their advanced hog farms and processing plants. This is desperately needed in China, as the agricultural supply chain is primitive. And food safety is a growing concern.

The Final Part of the Equation is Brand Equity (BE)

So you have a Chinese company that dominates in its large home market, has economies of scale and is increasing its expertise (often by acquisition). This is the state of most large Chinese companies aspiring to be multinationals today. They dominate at home. And they do well in other emerging markets. But they struggle to break into Western markets directly.

Shuanghui’s acquisition of Smithfield takes it over the finish line. It gives Shuanghui top consumer brands in the USA, including Armour and Farmland. Shuanghui has jumped the firewall to Western markets and it will now have a dominant presence in the world’s two largest consumer markets. That completes the equation that gets you to a true Chinese multinational. It’s all downhill from here.

C + E + B + BE = Chinese Multinational

This is actually a pretty rare event. Dominant Chinese companies are usually stuck with buying third or fourth tier US brands. There have been a couple of exceptions. China’s Dalian Wanda Group was able to purchase AMC Entertainment and form the world’s largest theater chain. Lenovo was able to buy ThinkPad from IBM and become the world’s largest PC maker.

But these deals are fairly rare and most large Chinese companies are limited to buying technology and building R&D centers in the West. And they are waiting for their opening.

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