The Mazars Zhongshen Zhonghuan merger
In January 2016, Mazars announced a game-changing merger with the chinese audit firm Zhongshen Zhonghuan, bringing together 1,800 professionals from more than 15 offices across mainland China. Here, we look into how the transformation of the country and the drive of its businesses to go international changes everything for professional services firms.
On April 21st, 2016, a freight train reached its destination: Lyon, the 3rd largest city in France. What may appear as a small event in the world of transportation may well have a significance of an entirely different magnitude. One fortnight before that date, the 41-carriage convoy laden with automotive spare parts, electronic and chemical goods had left Wuhan(1). Departing from the megacity of 10 million inhabitants and biggest land transportation hub in China, it headed West in an 11,500 kilometre-long journey across China, Kazakhstan, Russia, Belarus, Poland, Germany, and France. This expedition, the first of its kind, was an extension of the already-existing route between Wuhan and Duisburg, Germany, part of what have been called ‘the New Silk Roads’ that unite China and the rest of the world.
One Belt, One Road: China’s Ambitious Plan
Why was this big news? Despite two transhipments – due to different rail gauges between certain countries – the new land route is a more efficient option compared to its alternatives. The maritime route is cheaper, but can take up to three times longer; transportation by plane, on the other hand, is quite expensive and troublesome custom operations can slow down the delivery. This venture is the perfect symbol of the ambitious ‘One Belt, One Road’ plan crafted by the Chinese government, which, at a staggering USD1.4 trillion, has been estimated to be 12 times bigger in absolute dollar terms than the post-World War II Marshall Plan(2), designed to help rebuild the whole war-torn European continent.
The importance of this mega- project does not only reside in its sheer size – the plan has the potential to touch on 64 countries, 4.4 billion people and around 40 percent of the global economy – or the amount of investment. It also underscores the long-term view of the government’s strategy, as it spans 30 to 40 years of relations between China and the rest of the world.
China’s soft power strategy has been in the news for several years now, with many initiatives meant to establish strong links with other countries and a priority given to Asia, Africa, and Europe.
State-Owned Enterprises (SOEs), the first Chinese corporations to reach the ‘critical mass’ needed to intervene abroad have been spearheading this drive, acting as the armed wing of the government’s strategy. Three of them, State Grid, CNP and Sinopec, are now part of the Top 5 in the 2016 Fortune Global 500 list (3). With 100 of the world’s biggest companies – both public and private – now headquartered in China, the country has become one of the three dominant seats of power together with the US and Europe and has reached the point where it is ready to move to the next phase of its development plan.
China finds itself at a crossroads, as it is shifting from a labour- intensive economic model with an annual growth rate well over 10 percent, to a technology- and innovation-driven economy featuring a lower growth rate (the famous ‘slowdown’). The 13th Five- Year plan, adopted on March 26th, 2016, lays down a framework for the country’s development from 2016 to 2020, setting a minimum annual growth rate target to a level deemed necessary in order to ‘double the 2010 GDP and the per capita income of both urban and rural residents by 2020’ (4). This groundbreaking document highlights key proposals for innovation, the environment, consumption, services, the digital economy, and structural reforms.
Managing a paradigm shift
These countries face a significant number of challenges. Some are linked to the environment, with increasing resource constraints; but others are of an economic nature, such as digesting industrial over-capacity or the rise of neighbouring countries such as Vietnam, which offer lower land and labour costs for industrial investors. The very structure of the Chinese economy is rapidly evolving. As a consequence of the emergence of a strong middle class (estimated at 225 million households; since 1978, an astonishing 700 million people have been lifted out of poverty (5).) With the increasing openness and internationalisation of the country, ‘there is a pressure on local businesses to climb up the ladder and improve their management, supply chain and processes to be able to compete with foreign- made goods’ surmises Aaron Xu, senior auditor working at Mazars in Shanghai. ‘That is quite new for local Chinese businesses.’
The impacts are more apparent in the quality of products and services. ‘Chinese companies are trying to build global brands, constantly improving their service offerings in align themselves with international quality standards’ says Joan Wu, a senior manager working in Accounting and Outsourcing at Mazars in Guangzhou. This, in turn, enhances the role of professional service firms. ‘Globalisation has certainly accelerated the development of the accounting industry,’ adds Wu.
Shifting from a labour-intensive economic model to a technology and innovation driven economy
‘Since the day China opened its doors to the world, many foreign investments have flowed into the country. This situation has prompted the adoption and implementation of International Accounting Standards, and a gradual alignment of China’s standards with the latter. Listed companies in China are now required to present their reports in accordance with International Accounting Standards. Not only will this raise the professional standards of China’s accounting firms, it also will improve China’s global competitiveness as a whole.’
Riding a Comet: Addressing Societal Changes
From another point of view, Chinese society is also affected by several critical changes, among which is a potential shift in perceptions between generations. China’s long-standing one-child policy (now dropped to try and reverse the population’s ageing) has not only created a strong bond between parents and children; it also has led the former to invest massively in their offspring’s education. ‘There is a value that is central to the Chinese culture, and that is unlikely to ever change: in this country, education is of paramount importance to families’ says Thomas Chen, a Shanghai-based Mazars partner. ‘It is so important that we still regularly see parents accompanying their child to a job interview!’. This protective behaviour is not only about career and ambition – it is fundamentally about the well-being of their children. ‘Some parents would strongly encourage their children to change jobs if they feel the work-life balance is being tipped too far towards stress. These examples show that children have been, in fact, protected so much that parents are at a loss as to how to let go of this bond over time.’
Younger generations, however, are more and more exposed to foreign influences. Among these, the impact of Korean and Japanese pop cultures is a famous phenomenon; more importantly – and this is a direct consequence of the above-mentioned priority given to education – the growing number of young Chinese people going abroad for their studies represents a strong, yet less apparent trend which may have profound effects in the long term.
Fifty-seven percent of Chinese parents would send their child overseas to study if their family had means, according to the Shanghai Academy of Social Sciences; and in 10 years, the number of Chinese secondary-school pupils in the United States alone has increased almost 60-fold, to 35,000 (6). ‘With all the recruitment events that we go to on various campuses in China, there’s a trend that strikes me as critical’ says Cindy Yan, senior HR officer at Mazars. ‘Not only do many more students go abroad to study, but they leave the country earlier by themselves, even in middle school. Their line of thinking goes ‘I am going to study abroad and when I am back, I will be ready to join a firm such as Mazars’.
Younger generations are more and more exposed to foreign influences
‘In my generation, there was nothing but the Chinese culture’ concurs Page Dai, Tax Manager at Mazars in Shanghai and a young mother of two. ‘Our children are exposed very early to different people and different cultures, notably through books, movies and TV series. The big difference with our generation is that they will have also gained real knowledge about how other countries function, including their legal and tax systems, during their college years – when in my case it was through work experience and training after joining an international firm that I discovered all this.
The changes occurring in the education system and the growing exposure of younger generations to the outside world is likely to transform the very fabric of society, especially given the importance of the youth in the country, with nearly half of all people living in cities being under 35. ‘Education is not only about the scores anymore, but also depends on extracurricular activities – it is a good thing for the children. They can develop more creative thinking as they are learning more diverse skills’ says Joanna Zhang, marketing manager at Mazars in Shanghai. ‘Our children will have more opportunities to explore the world and learn about many other different cultures. Therefore, their life values, their knowledge and their way of thinking will be very different from ours. It will make them more independent, with a stronger grasp on what they want’ reckons Joey Zhou, a tax partner working at Mazars in Beijing. ‘In the past, our parents would arrange a path for us and we would simply follow it. Young people nowadays have their own thoughts; they are more independent and would prefer to take full control of their own lives. Our current society still needs to adapt to their ways. On the other hand, I think this next generation will be much more agile, ready to welcome all sorts of challenges in life. Compared to the past, this is a very different scenario’.
In a new move, and as a striking parallel to this societal trend, the Chinese government now strongly encourages Chinese corporations to invest massively abroad, with impressive results in all sectors, from robotics to the entertainment industry. In the first half of 2016, Chinese investments abroad amounted to100 billion USD.
In 2015, for the first time, Chinese investments abroad exceeded the amount of foreign investment in China, at an astounding 145 billion USD, with mega-deals such as the acquisition of the agro-chemical Swiss giant Syngenta by ChemChina or, more recently, the 10 billion USD takeover of a part of CIT by the Chinese conglomerate HNA, creating the third largest plane leasing fleet worldwide.
this next generation will be more agile, ready to welcome all sorts of challenges
With an overarching goal to improve the quality of goods produced in China, these new orientations do not target the supply chain of raw materials anymore, but instead focus on American and European high-value targets – as an example, the takeover of Pirelli in 2015 by ChemChina giving it access to the Italian tyre manufacturer’s patent portfolio.
These orientations also bring a series of challenges for Chinese groups – notably the necessity of crafting sophisticated investment plans, that involve real partnerships with local investors, to avoid protracted and costly takeover battles (7).
Chinese investments abroad exceeded the amount of foreign investment in china
The Zhongshen Zhonghuan / Mazars merger
These new societal and economic trends shape a completely new landscape for the Chinese audit and accounting market, and not only in terms of accounting standards. In January 2016, Mazars announced a merger with the Chinese audit firm ZhongShen ZhongHuan, strengthening the Group’s unique integrated partnership model that had already been present in the Chinese audit and consulting industry since 1997. The merger brought together 1,800 professionals, including around 80 partners, from more than 15 offices across Mainland China.
Why was ZhongShen ZhongHuan the obvious choice for Mazars? ‘It is a huge professional services firm in China, with strong expertise in many industries, such as the financial sector. In China, there are only a handful of firms that can match ZhongShen ZhongHuan’s capacity and market reach, serving 90 listed companies and 20 state-owned large enterprises. Many of their clients are in high-end industries such as energy, aerospace, steel manufacturing, pharmaceuticals, financial services and the media’ says Wu. With the Chinese audit market being very competitive, being able to rely on local resources and know-how clearly was a key criterion for Mazars. As to ZhongShen ZhongHuan’s viewpoint, ‘We serve domestic listed companies, which are setting up subsidiaries overseas, with an increasing amount of mergers and acquisitions. The internationalisation of audit missions has led to different requirements for us’ states Chao Min, an audit standards training director with ZhongShen ZhongHuan, based in Wuhan. ‘Mazars is strong on international accounting, legal and tax systems – this will be beneficial to help our current clients expand to overseas markets.’
As with any merger, the combination of ZhongShen ZhongHuan and Mazars in China carries a host of challenges. ‘In order to reach an in-depth understanding of each other, we may need to intensify communication’ says Jia Liu, an administration officer working at ZhongShen ZhongHuan in Beijing. ‘We need to implement common, interactive training programmes, and develop work exchange programmes as well. Since the merger, we have been encouraged to improve our English proficiency – this pushes us out of our comfort zone and will be beneficial for all of us’. Many hurdles still lie in the way – some of them specific to the merger, as Li Liu, an audit partner working with ZhongShen ZhongHuan in Beijing, indicates: ‘We have to work hard on the development of our human resources plan, as well as on our brand impact.’ The sheer ambition that motivated the merger creates strong dynamics, and pressure to comply with high standards in all fields. ‘There are quite high expectations on the part of our new colleagues, and it is our duty not to disappoint them’ notes Chen.
A merger demands an in-depth understanding of each other
Technical excellence and improved internal communication, however, do not sum up what is needed in such an endeavour. As in any ambitious merger, the cultural aspect of the operation is vital: ‘Merging two different company cultures requires adaptability and flexibility’ insists Zhang, highlighting the fact that going more local, for Mazars, also means striving to fully understand and embrace both ZhongShen ZhongHuan’s company culture and the local context.
Challenges, on the other hand, can be embraced as opportunities, and leveraging on shared values can be a sound option. The two firms present strong similarities when it comes to providing quality services to their clients and promoting a good work-life balance for their staff, thus paving the way for building a global platform that can bring about more career opportunities. With more talents joining in 2017, Mazars China is expected in the short term to account for 10 percent of the Group’s turnover, making ZhongShen ZhongHuan and Mazars, combined, one of the 10 largest accounting firms in the country – a significant milestone in a long march.
Zhongshen Zhonghuan and Mazars, combined, will be one of the 10 largest accounting firms in the country — a significant milestone in a long march.
(1) Le Parisien, April 21st, 2016.
(2) Bloomberg, August 07th 2016 – http://www.bloomberg.com/news/articles/2016-08-07/china-s-marshall-plan
(5) The Economist, July 9th 2016, p. 3.
(6) ‘The long march abroad’, The Economist, July 6th 2016, p.14.
(7) ‘Pathways to success for Chinese companies expanding overseas’, by Erik Stroeve and Nikko Fu. http://www.mazars.com/outbound-china-2016