Losses are no obstacle: why does a power transmission line manufacturer need an AI startup

Picture this: your core business producing steel structures is posting only losses, accounts are running empty, and prospects are murky. What does typical management do in such a situation? Try to cut costs?

No, it decides to buy a trendy AI startup with its last dollars. This is exactly the scenario now playing out for Chinese company Fengfan Power, causing quite reasonable bewilderment among regulators. The Shanghai Stock Exchange (SSE) didn't stay silent and sent the company an official request demanding an explanation of what is actually happening.

The essence of the deal sounds ambitious and somewhat desperate. Fengfan plans to shell out 383 million yuan for 51% of shares in Beijing-based Yanling Jiaye, which operates in intelligent technologies. The problem is that Fengfan has spent its entire existence making electrical transmission line towers and other heavy equipment.

These are fundamentally different worlds. When a company with negative returns suddenly announces a "cross-border acquisition," it always looks like an attempt to throw dust in investors' eyes and boost stock value riding the wave of general interest in artificial intelligence. The regulator's letter hits on the most sore points.

First, where does the money come from? Using own and borrowed funds while posting current losses is a risk bordering on recklessness. Second, where is the synergy?

Shanghai's exchange directly asks to clarify how exactly the production of iron towers relates to Yanling Jiaye's intelligent systems. In the corporate world this is often called "strategic development," but in reality it often turns out to be an attempt to hide structural problems of the core business behind the facade of new technologies. Special attention is given to the integration question.

This is the stickiest moment in such deals. Fengfan management has neither a technical base nor relevant competencies nor understanding of the specifics of the software and AI market. How are tough industrialists from Changzhou going to control and develop capital-based IT professionals?

The exchange demands disclosure of concrete plans for resource and personnel management of the acquired company. Without a clear plan, such acquisitions typically end with the acquired asset "dissolving" in the parent company's bureaucracy, and investments simply written off after a couple of years. The story with Fengfan Power is a mirror of the current state of the Chinese market.

The traditional sector feels pressure and tries to find salvation in digitalization, but often does so crudely. Instead of gradual transformation, we see sharp jumps into the unknown. Investors should carefully watch the company's response: if loud words about an "intelligent future" are not backed by figures and logic, then 383 million yuan could simply burn up in an attempt to chase trends.

The main point: regulators no longer take companies at their word when they try to "green" or "intelligentize" their business through questionable acquisitions. Will the electrical transmission line manufacturer be able to prove its competence in AI, or is this the beginning of the end?