Using IP analysis to evaluate M&A outcomes
- 1. Using IP analysis to evaluate M&A outcomes Case Study: Haier acquires GE Appliance Division May 2016
- 2. Table ofContents Intellectual Property: major factor in M&A activity 3 IP analysis enables thorough market evaluation 5 IP - a window into future innovation strengths 7 Assess how well two IP portfolios fit together 9 Transformation into a global innovation leader? 12
- 3. Intellectual Property : major factor in M&A activity M&A activity reshapes the competitive landscape When two companies merge, or when one company acquires another, there is no doubt that it radically reshapes the competitive landscape. It has a big impact on market shares and a player’s market influence. These transactions are often hitting the news. We see, for instance, more and more Chinese manufacturers seeking to gain a better footing in the attractive US market – and one example of this is Haier’s acquisition of GE’s home appliances business earlier this year, in a deal worth $5.4 billion. Like many Chinese manufacturers, Haier has big ambitions to increase its competitiveness at a global level and this transaction finally gives it the chance to become a dominant player in the US home appliances space, by leveraging the long history of GE. Meanwhile, GE can now refocus on the more profitable divisions of its business, like gas turbines and jet engines. The importance of R&D Although a land grab for market share is the main motivation behind the transaction, it is clear that R&D opportunities – underpinned by intellectual property - play a considerable role. It could result in substantial advantages for the acquiring company, and have huge implications for other incumbent players in the market. As Mr. Hai Shan Liang, Haier’s vice chairman who led the company's negotiations with GE, explains: “The purchase of GE Appliances will boost R&D capacity, services and logistics for Haier's US operations.”1 © 2016 All Rights Reserved 3 The new agreement sees the integration of GE’s home appliances business into Haier, in a deal worth $5.4 billion. 1 http://english.caixin.com/2016-03-03/100915418.html
- 4. © 2016 All Rights Reserved 4 Ongoing M&A activity With that point in mind, this report will consider how IP research can be used to determine what the Haier acquisition means in terms of its impact on the home appliance market – however, the same approach can, of course, be used for any technology area where mergers and acquisitions are taking place. It is essential to be prepared to conduct this type of analysis, as consolidation and M&A activities have been gathering pace within so many different industries. It is becoming ever more important for market participants to be able to conduct thorough evaluations of the changes in their respective markets, especially given the dramatic reshaping of the competitive landscape that occurs as a result of such transactions.
- 5. IP analysis enables thorough market evaluation When we think of ‘home appliances,’ as we shall consider in this example, we already know that we’re dealing with a mature market. Everything from fridges to air conditioning units, ovens and vacuum cleaners have all long been part of our everyday lives. It’s an industry that gathered significant momentum during the 1960s, as developments in manufacturing methods led to mass production capability. And, by the 1970s, domestic appliances were deemed a household necessity. However, despite being a long established market, innovation has not slowed down, but has continued to grow throughout most of the 21st century. © 2016 All Rights Reserved 5 This healthy pace of innovation demonstrates how important the R&D aspect is for all the big names in the home appliance market – a market which includes brands such as Whirlpool, Electrolux, Samsung, Midea and, of course, Haier. The sustained rate of innovation shown here is indicative of a market that is set to remain robust in terms of sales; while the innovations themselves, as represented by these patents, will define each player’s competitive advantages. Sustained innovation in domestic appliances Source: PatSnap Insights -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 0 200 400 600 800 1000 1200 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Granted Application Annual Change Number of Patents
- 6. The home appliances market The market statistics are another indication showing a strong situation. In 2015, for example, world demand for white goods increased by 3.4% to reach 395 million units.2 There are many high growth markets driving this trend. India, for instance, represents the world's fastest growing market for domestic appliances and it’s all due to the increase in the living standards taking place there. China, meanwhile, registered immense growth between 2005 and 2010, not only because of an increase in revenues, but also thanks to government incentives for households that invested in home appliances. These market conditions have translated into a robust innovation trend, as the chart below shows China out in front in terms of patenting activity. © 2016 All Rights Reserved 6 Longer term future prospects, however, will invariably be tied to the ability of players in this sector to innovate. So, the interesting question for competitors facing the newly formed competitor is: how does the tie-up alter the innovation strength of the new entity? Or, in other words, what should we expect from Haier? Again, the answer can be found using information from patents. Analysis reveals that there are at least two particularly interesting innovation routes for domestic appliances. 2 http://www.freedoniagroup.com/industry-study/2822/world-major-household-appliances.htm 0 50 100 150 200 250 300 350 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 China South Korea European Patent Office WIPO(PCT) Germany Source: PatSnap Insights China takes the lead in innovation
- 7. One useful piece of analysis uses IP information to determine future market trends, by tracking words appearing in patents that suggest new or forward-looking technologies. Is the future smart? For instance, frequent terms that occur within GE’s IP portfolio, such as ‘computing device’ are an indication of one future direction: that of smart appliances. This could refer to internet-connected fridges, for example, which might be controlled via a smartphone app. The smart appliance market is expected to grow at a rate of 15.4% between 2015 and 2020, by which time it will reach $37.2 billion.3 Products like smart washers and driers and smart air conditioners are expected to register an important increase in sales, fueling a market that in 2014 was valued at $7.7 billion. And, by acquiring GE’s home appliance unit, we now know that Haier henceforth has access to patents that could give it significant additional technological advantages, including new patents in the field of smart technologies. It means that they should be able to use differentiation to compete even more efficiently in the future, having already had the skills needed to reach the world number one spot. At a global level, Haier is the biggest seller of "major appliances," with just over 10% share. 4 © 2016 All Rights Reserved 7 3 http://www.marketsandmarkets.com/Market-Reports/smart-appliances-market-8228252.html 4 http://www.haier.com/uk/newspress/MediaCoverage/201508/t20150814_281399.shtml IP - a window into future innovation strengths Value forecast (CAGR, 2015 to 2020) 15.4% 1 2 3 Power consumption Computing device Wireless communication Haier takes 10% volume share of retail sales Double digit growth in smart appliances Text clusters in patents reveal potential new areas Haier is number 1 in household appliances Driving change - forces in the home appliance market
- 8. The environmental factor And, there is another important trend in this space, linked to environmental matters. Some consumers choose efficient products in order to protect the budget of the household; others opt for environmental-friendly appliances that can, over the longer term, reduce the negative impact on the planet. Either way, there are big incentives for manufacturers to continually improve domestic appliance performance in these areas. This is where some of the specific patents submitted by GE become interesting. While GE appears to have far fewer patents relating to domestic appliances compared to Haier, GE is estimated to have applied for the most valuable patents in this space. One pending patent has a value estimation that is almost six times that of the most valuable Haier patent. And its subject? Energy management. Acquiring this technology therefore enables Haier to potentially strengthen its go-to-market message in the United States. On this back of this, it could also further solidify its position in emerging markets, where incomes are lower and where consumers will be especially keen to save money on the household budget. From a competitive perspective, the ability to address both these types of market significantly reinforce Haier’s prospects. And uncovering this information at this stage gives competitors a chance to consider their next steps. © 2016 All Rights Reserved 8
- 9. Assess how well two IP portfolios fit together Haier’s innovative history Haier has a heritage anchored in innovation. In 1985, Zhang Ruimin took charge of the then named Qingdao Refrigerator Factory. After a customer brought to his attention a defective fridge, Zhang found a further 76 fridges on the factory floor that were defective. He had them publically lined up, then took a sledgehammer and destroyed one. He ordered staff to destroy the rest, and from that point forward, the emphasis was on innovation and quality.5 This is perhaps a rather dramatic reaction to customer feedback, but it’s a good story to underline the point: customer feedback has played an important role in shaping innovative ideas at Haier, from a design or functionality perspective. Zhang has a history of supporting not only corporate R&D, but also employee-led R&D. He encouraged employees to use the corporation as a platform for innovation - including the creation of their own micro-enterprises inside the company. © 2016 All Rights Reserved 9 0 200 400 600 800 1000 1200 1400 1600 1800 Granted Application Number of Patents 5 http://www.ft.com/cms/s/0/942787ce-9cdf-11de-ab58-00144feabdc0.html#axzz46ZTeugNS Innovation at Haier gathers pace in some of the most recent years Source: PatSnap Insights
- 10. Solid rate of innovation This gives a good indication why there has been a solid rate of innovation at Haier, in terms of volume. Data from PatSnap Insights shows that Haier was granted 1,181 patents in 2013 and just last year it applied for another 744. Haier has over 9,200 patents and has applied for 2,536 more. Almost 98% of Haier's patents are registered in China. The appliance division of GE, on the other hand, achieves a lower volume. Last year, 113 appliance-related patents were granted. The portfolio of the division is believed to comprise over 1,500 patents. Interestingly, as the chart below reveals, the application process has increased significantly since 2012. One possible explanation is that the company had decided to increase its patent portfolio in this area in order to improve its value in the market, in the run-up to sealing an acquisition deal. © 2016 All Rights Reserved 10 Whatever the motivation, it is clear that both GE and Haier have been ramping up innovation and, as both are in a patent portfolio growth mode, at least some aspects of the integration process should be smoother. From a geographical perspective, 64% of GE's patents in the appliance sector are registered in the US. Therefore, overall, the merger is an extremely good fit in terms of teams, geographies and also complementary technologies. On this last point, from a technological perspective, patent analysis reveals some new markets for Haier that previously might have been more problematic. One method for conducting this type of research is to use circle chart analysis. 0 50 100 150 200 250 300 350 Granted Application Number of Patents Acceleration in appliance related patents at GE before acquisition Source: PatSnap Insights
- 11. © 2016 All Rights Reserved 11 Circle chart analysis These circle charts show segments of keywords in a 2- tier hierarchy. The outer circle is an additional breakdown of keywords within the inner circle segment. < Haier This first chart is based on the keywords used in Haier patents and applications, before the acquisition. < GE’s IP relating to appliances By comparing the above to GE’s circle chart, we can see that, with the acquisition, Haier stands to gain in the fields of dishwasher appliances and oven appliances. Overall, it is GE's diversity that provides real gains for Haier.
- 12. Transformation into a global innovation leader? A global strategy While much focus and early analysis inevitably concentrates on immediate market share gains for Haier, it is clear that patent analysis reveals much more information about the likely future direction of a newly formed entity. Of course, Haier would not be happy with a 1.1% market share in the United States,6 when it commands 10% globally. As far as the US market is concerned, GE has benefited not only from its long history, but also from the fact that all its products were labeled “Made in the US”. Haier was already at pains to address this – to become a ‘global’ manufacturer rather than being known as a Chinese manufacturer - as underlined by its 2015 announcement that it would invest $72 million to expand its 15-year-old refrigerator plant in Camden, South Carolina.7 So, the potential gains from the acquisition of GE’s IP has ramifications far beyond the acquisition’s ability to simply capture share in the American market – it gives Haier the standing of a global home appliances manufacturer - with a global R&D force. Long-term consequences Successfully transforming a brand from a well-known domestic player in the Chinese market into a global leader is not without precedent. Forbes’ Allan Adamson points out in one of his articles how Lenovo used the IBM ThinkPad brand to turn Lenovo into one of the most respected and innovative brands in the hardware and electronics industry.8 The question we need to investigate in IP intelligence is: Will Haier adopt the same strategy and, if so, will it succeed? The first vote of confidence comes from GE itself. It is allowing Haier to use the GE brand for up to forty years. This is clear confirmation that GE believes Haier has the management, production and R&D capabilities to represent the GE brand for another four decades. In the meantime, competitors might want to have a look at the inventors behind some of the lucrative patents, and see if there is appetite for any of these to transfer during this time of transition. © 2016 All Rights Reserved 12 6 http://www.bloomberg.com/news/articles/2016-01-20/higher-ambitions-china-haier-s-gambit-to-invade-american-homes 7 http://www.wsj.com/articles/haier-looks-to-expand-toehold-in-u-s-appliances-1440093281 8 http://www.forbes.com/sites/allenadamson/2016/01/19/will-haiers-big-investment-in-ges-appliance-business-pay-off-in- continued-brand-equity/#55589bbe4f56
- 13. About PatSnap PatSnap is the leading IP Analytic and Management platform that empowers even non IP- proficient users to understand this competitive landscape. Through our simple yet powerful interface, IP is now accessible to everyone allowing you to compete and innovate on a global scale. Since it was founded in 2007, PatSnap has served thousands of customers in more than 30 countries worldwide including IBM, National Institutes of Health, United States Department of Defence, MIT and Singapore’s Agency for Science, Technology and Research. Find out more: www.patsnap.com 13