This article was first published in the May 2013 International edition of Accounting and Business magazine.
The European Union (EU) offers a more favourable investment environment compared to North America or South-East Asia in the eyes of Chinese investors, according to a recent study of Chinese companies investing in Europe. Africa, however, is seen by 85% of them as the most welcoming destination for Chinese investment, according to the survey of 74 firms carried out by the EU Chamber of Commerce in China (EUCCC), in cooperation with KPMG and Roland Berger Strategy Consultants.
Also in the report, Chinese investors warn that EU antitrust investigations could potentially create ‘huge challenges’ for Chinese state-owned firms seeking to invest in the EU. And any EU national security review (similar to that in the US) of potential Chinese investment could have a major dampening effect on Chinese overseas direct investment (ODI) into the EU.
Launching the study in Beijing, EUCCC president Davide Cucino said: ‘Greater Chinese investment in the EU is a positive trend and this survey clearly shows that Chinese companies face few regulatory market access barriers in Europe.’ He stressed that official figures showed Chinese ODI (minus financial investments such as purchases of US Treasury bonds) on the previous year, even as inflows of foreign direct investment into China fell for the first time in several years.
But it is still not easy for Chinese investors to work in Europe. Cucino conceded that some 78% of those surveyed said they faced operational difficulties, including high personnel costs, difficulties obtaining visas and work permits for Chinese employees, complex European labour and tax laws, plus ‘cultural differences in management style’. Significantly, one suggested the EU ‘relax labour law requirements and contributions, if not for local employees at least for Chinese employees’.
Of the respondent firms, the three most well represented sectors were: IT and telecoms; financial services and machinery; and a ‘mining/metals/commodities’ category. State-owned firms account for 75% of Chinese ODI deals in the EU in value terms, but privately owned Chinese firms sign a larger number of overseas investments.
Quoted in the report, a respondent to the survey noted that ‘the financial and economic crisis has made it cheaper to invest’ in the EU. Private firms accounted for 9.5% of China’s overall ODI globally in 2012, but that is up significantly from 4% two years before.
And Chinese ODI is set to rise further and fast, noted KPMG partner Thomas Rodemer at the launch, pointing to the government’s 12th Five-Year Plan, which makes it ‘part of government strategy’. Under this blueprint, Chinese ODI will grow 17% per year to total US$160bn per year in 2015. The government encourages firms to buy overseas brands, resources and technology, he says. Likewise, he adds: ‘Enterprises invest overseas mainly to gain market share because of increased competition at home and to differentiate themselves from competitors to help avoid forced government industry consolidations.’
Certainly, Chinese ODI is in its early stages – China lags Belgium and Spain in terms of overseas holdings. Yet Chinese companies will invest as much as US$2 trillion overseas in the decade to 2020, a report by New York-based Rhodium Group estimated last year. The EU currently accounts for a small portion of Chinese ODI: from 2004 to 2011, 72% of the country’s overseas investments went to Asia, compared to 5% to the EU. In 2011, EU investments into China (which account for 20% of China’s overall foreign direct investment) totalled €17.5bn, compared to €3.2bn Chinese investment into the EU.
In value terms, the European countries most benefiting from Chinese investment are France, the UK, Germany and Sweden. In terms of number of deals, the ranking is Germany, the UK, France and the Netherlands. In terms of completed ODI deals, communications equipment tops the list of sectors benefiting from Chinese investment, followed by industrial machinery and alternative/renewable energy.
In value terms, the list is topped by chemicals, plastics, rubber, utilities and automobile OEM equipment makers. Leading recent deals include the purchase by Sany Heavy Industry of German machinery maker Putzmeister, while state-run First Tractor (also known as YTO) bought France-based engine specialist McCormick France SAS. Carmaker Geely, meanwhile, now owns Swedish carmaker Volvo.
That said, China’s ODI remains focused on greenfield sites rather than M&A, in terms of value and number of deals (1,867 compared to 603 between 2005 and 2011). Charles Edouard-Bouée, president of Asian operations at Roland Berger, said some 85% of Chinese investors said they were investing in the EU to get market share, while 47% said the investment was to service the Chinese market. ‘A third of respondents also cited the wish to acquire technology and R&D resources.’
While Chinese ODI into the US has totalled US$50bn since 2005, that figure is a mere 2% of investment in the US, according to the US-based Heritage Foundation, which noted that more than US$200bn-worth of potential deals – especially with Chinese state-owned firms – had fallen through as a result of regulatory obstacles.
China’s strong growth
Yet cash-rich Chinese firms look set to persist in the US: China’s commerce minister, Chen Deming, recently predicted Chinese investment in the US would equal American investment in China in the next five to 10 years. This is possible, given China’s strong growth: in the period 2004–11, China’s GDP grew by US$3.8bn in absolute terms, compared to US$1.1bn for the US and US$575bn for the EU.
To attract more money to Europe, the survey’s authors recommend that the EU tries to minimise the complexities of member states’ multiple legal and tax regimes and establish a ‘one-stop shop for legal and other regulatory information’, and ‘address inefficiencies’ in the FDI approval process.
Meanwhile, survey respondents suggested EU governments should give more guidance to Chinese investors on their investment environment, finance and tax systems, and labour and environment systems ‘to reduce the amount paid to intermediaries’.
Yet there is a key obstacle to realising this. The 27 EU nations are, notes the report, ‘actively competing with each other for Chinese investment, and in some circumstances they may not wish to see greater European cooperation efforts which would help Chinese investors’. Representatives of European government agencies interviewed for the survey noted that moves to a united EU body providing information to Chinese investors might be opposed by EU member states with well-established investment promotion activities in China, because it ‘undermines their competitive advantages’.
The EU can clearly look forward to more investment from China, judging by the intentions of respondent firms. According to one: ‘We may consider investing in innovative, high-tech and high-quality manufacturing companies with clear potential in the Chinese market, and not only limit ourselves to our traditional sector.’
Meanwhile an expected rein-in of China’s powerful state-owned sector looks set to push more of them to invest overseas, suggests Edouard-Bouée. ‘Certain sectors in China are dominated by state-owned enterprises, and greater competition in the market should lead to increased efficiency and capacity to compete overseas.’ Private firms will be treated with less suspicion.
Respondent firms recommended the Chinese government liberalise controls on foreign exchange and integrate approvals for the ministry of commerce and the state foreign exchange regulator. One called on Chinese officials ‘to fight Chinese misperceptions of Western political systems and intellectual property protection, while improving English-language skills’. Others called for the establishment of a Chinese Chamber of Commerce in the EU.
Mark Godfrey, journalist based in Beijing