Given the favorable
momentum
for the Chinese yuan, it is understandable that Chinese companies are expanding abroad. Chinese companies operating in the EU in particular are growing in number (report by the EU Chamber of Commerce available at:
http://www.europeanchamber.com.cn/en/publications-chinese-outbound-investment-eu-european-union
) and what is more they plan to increase their investments and further engage in M&A activity. Chinese investors view Europe as a safe, stable destination. However, the European operating environment is not regarded as easy to navigate. The report by the EU Chamber of Commerce stressed that:
- The biggest obstacles reported relate to obtaining visas and work permits for Chinese employees, dealing with European labour laws, HR costs and cultural differences in management style.
- 78% of respondents report encountering operational difficulties in the EU, mostly related to bureaucracy and high costs.
- 97% of respondents indicate that they will make additional investments in the EU, with the majority planning increases over their current investments.
- 85% of respondents are in Europe with the intent to sell their goods and services in the EU market.
China FDI vs. ODI
While FDI into China has been growing since the beginning of the 1990s, it was not until the early 2000s that ODI from China to the rest of the world notably rose and then not until the middle of that decade that a significant increase was seen.
According to data from the United Nations Conference on Trade and Development (UNCTAD), China’s ODI flows in 2011 were USD 65 billion and total ODI stock had reached USD 366 billion.5 Chinese Government information states that, by the end of 2011 more than 13,500 Chinese enterprises had established over 18,000 overseas enterprises in 177 different countries across the world.
The Chinese Government has put in place a number of targets relating to ODI for the period of the
12th Five-Year Plan
(2011-2015). These include:
• ODI will increase at an annual rate of 17% and will total USD 150 billion in 2015;
• The amount of China’s overseas contracted projects will reach USD 180 billion and turnover will be USD 120 billion by 2015, with an annual growth rate of 6%;
• 550,000 Chinese nationals will go to work overseas during 2012, with the total number being over one million by the end of 2015.
EU member states as recipients of Chinese ODI
Chinese ODI to the EU is unevenly distributed between the 27 member states but there are considerable differences between relevant data from official EU and China government sources. For example, a disproportionately large amount is recorded by Chinese government sources as going to Luxembourg (USD 5.8 billion in 2010; three to four times as much as to Germany), due to the business environment that encourages the establishment of holding companies there, with the actual investment going to a different country. Unofficial data for the period of 2000-2011 ranks France, the UK, Germany and Sweden (in that order) as the largest recipients of Chinese ODI in terms of investment value, and Germany, the UK, France and the Netherlands (in that order) the largest in terms of number of deals.
Sectors invested in by Chinese enterprises in the EU
With regards to which sectors are most frequently targeted by Chinese investors in the EU, unofficial sources rank communications equipment and services, industrial machinery, and equipment and alternative/renewable energy as the most frequently invested sectors in terms of deal numbers. In terms of investment amount, chemicals, plastics and rubber, utility and sanitary services, and automotive original equipment manufacturers (OEM) and components are the largest recipient sectors.
Size and type of Chinese ODI
Chinese ODI to the rest of the world by value sees slightly larger total amounts in Greenfield investment than M&A (in 2011, USD 39.7 billion for Greenfield and USD 34.4 billion for M&A). In terms of number of deals for China and the rest of the world, many more Greenfield transactions are conducted than M&A deals. From 2005 to 2011, there were 1,867 outbound Greenfield investments versus 603 M&A deals (UNCTAD, 2012,
World Investment Report 2012).
Why look outside of China?
In terms of what motivates Chinese enterprises to look outside of their home market in the first place, the main reasons cited during interviews were predominantly related to increased domestic competition. This led them to a) seek new markets for sales and/or b) become more competitive by acquiring new technologies, brands or expertise. It was also noted in an interview that Chinese enterprises may look to internationalize in order to differentiate themselves from other domestic market players and therefore avoid forced industry consolidations driven by the Chinese Government. There are also large variances between different sectors, and this results in substantially different strategies. Chinese enterprises in industries such as automotive or fashion do not necessarily feel the pressure to invest overseas since they are selling to a large and growing market at home. They may also feel that they are unable to compete with European companies in these sectors in Europe, for example fashion brands in Italy or car manufacture is in Bulgaria. “China has a number of leading IT & Telecommunications enterprises that are capable of competing in the European market on the strength of their products, however this is not the case for Chinese auto-components enterprises where they need to start small and gradually build up the capacity to compete in overseas markets.” – respondent enterprise.
Motivations for investing in the EU
If, then, a Chinese enterprise is motivated to invest overseas, what attracts them to invest in the EU? Survey answers to this question show:
• 85% indicate that the main reason for investing in EU is to gain market share in Europe and to provide goods and services within the EU market;
• The second most frequently indicated response (47%) was to provide goods and services to the Chinese market;
• One quarter have invested in the EU in order to service markets other than China or Europe;
• More than one third cite the attraction of intellectual and R&D resources as a reason for investing in the EU.
There is no doubt that in the future Chinese investment will reach new hights in the EU. Only to give you an idea of the importance of Chinese investments in the EU, it is worth to remember that Chinese investment flows to Europe reached $12.6 billion last year. This represents an increase of 21 percent year-on-year. Even more encouragingly for Europe these sizeable and growing sums are not just targeting natural resources and acquisitions of leading-edge technology but a vast array of business opportunities right across the manufacturing sector from industrial to consumer goods brands and services.
This topic will be further developed in the next entries, in fact is of basic importance for both, the EU and China to develop a better relationship, not only to further improve (business) relationships but also to sustain the respective economies.
Cristiano Rizzi