Losses No Obstacle: Why a Power-Line Maker Wants an AI Startup

Picture this: your core steel-structure business produces nothing but losses, the accounts are running dry, and the outlook is murky. What does a typical management team do? Try to cut costs? No, it decides to buy a trendy AI startup with the last of its money. That is exactly the scenario Chinese company Fengfan Power is now playing out, and regulators are understandably baffled. The Shanghai Stock Exchange (SSE) did not stay silent and sent the company an official inquiry demanding an explanation of what is going on.

The deal looks ambitious and a little desperate. Fengfan plans to pay 383 million yuan for 51% of Beijing-based Yanling Jiaye, which works on intelligent technologies. The problem is that Fengfan has spent its whole existence making towers for power transmission lines and other heavy equipment. These are fundamentally different worlds. When a company with negative earnings suddenly announces a "cross-border acquisition," it always looks like an attempt to dazzle investors and lift the share price on the back of general interest in artificial intelligence.

In its letter, the regulator goes straight for the sore spots. First, where does the money come from? Using its own and borrowed funds while posting losses is a risk bordering on recklessness. Second, where is the synergy? The Shanghai exchange explicitly asks the company to clarify how exactly the manufacture of iron towers relates to Yanling Jiaye's intelligent systems. In the corporate world this is often called "strategic development," but in practice it frequently turns out to be an attempt to hide the structural problems of the core business behind a facade of new technology.

Particular attention is paid to integration, the slipperiest part of deals like this. Fengfan's management has no technical base, no relevant expertise, and no understanding of the software and AI market. How do hardened industrialists from Changshu plan to control and develop IT people from the capital? The exchange demands concrete plans for managing the acquired company's resources and staff. Without a clear plan, such acquisitions usually end with the purchased asset "dissolving" into the parent company's bureaucracy and the investment being written off a couple of years later.

The Fengfan Power story mirrors the current state of the Chinese market. The traditional sector feels the pressure and is looking for salvation in digitalization, but often goes about it clumsily. Instead of gradual transformation, we see sudden leaps into the unknown. Investors should watch the company's response closely: if loud talk of an "intelligent future" is not backed by numbers and logic, the 383 million yuan may simply go up in smoke in a chase after trends.

The key point: regulators no longer take companies at their word when they try to "green" or "intellectualize" their business through dubious purchases. Can a power-line manufacturer prove its competence in AI, or is this the beginning of the end?