5. China’s (Economic) Rise
5.7 Chinese FDI to developed economies: Europe
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driven by a host of motives. These include access to markets, technology, knowledge, management skills, brands and efficiency gains. (Zhang/ Filipov 2009, 10)
The developed markets take a special place among Chinese investment destinations.
While technology and skills are what drives Chinese investors to them in general, still the sectors of interest for Chinese FDI are different from US to Europe. The largest proportion of investment towards the USA was in the banking and finance sectors (with a total value of 19,50 billion US$, accounting for two thirds of all Chinese OFDI in North America). Europe, on the other hand has been the main target for investment in energy, power and transport sectors. (Krusiewicz 2011, 24)
The US as well as Europe are both on the cusp of becoming important investment destinations for the Chinese. Both US and Europe are themselves investors to other parts of the world and have experienced an inflow of investment to their domestic markets. Thus both the US and Europe are familiar with foreign investment, yet the case of Chinese OFDI is somewhat of a different nature:
„Prima facie, the rise of Chinese investment in Europe differs from earlier waves of investment from the United States and later from Japan. Many Chinese firms are going abroad to become globally competitive rather than to exploit advantages developed at home.“ (Nicolas et al 2008, 2)
5.7 Chinese FDI to developed economies: Europe
Recently China appears to be on its way to make Europe its latest economic conquest.
It buys state bonds of highly indebted European countries, including Spain, Portugal and Greece. (Reuters 2010) Chinese companies participate and win tenders for public infrastructure works in Poland and in the Balkans. (BBC 2009) Chinese brands suddenly appear on European markets- formerly unknown Chinese brand names like Huawei, Haier or even Changyu are carving out a new presence on their own terms.
And Chinese enterprises are buying up European companies like there is no tomorrow- or so at least the media say.
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Chinese investment to European countries has increased rapidly in size. Overall Chinese investments have grown by factor 18 since 2003- more than 3 billion US$
have been invested by Chinese companies. The State Fund CIC- China Investment Corporation has already invested more than 20 per cent of its holdings in Europe.
(Kamp 2010) And indeed, Europe is an attractive investment location for Chinese enterprises. The integrated market of the EU 27 and its single currency system in addition to good regulatory framework are all key factors in shaping an environment conducive to investment. (CCPIT 2010, 63)
Even during times of crisis, Chinese investors have increased their involvement in Europe. Currently, China is planning to set up a new investment fund with a budget in excess of more than 300 billion US$, targeting Europe in particular. The fund is to conduct investments only in the mature markets of the US and EU countries. The new fund is set to be under management of the People’s Bank of China, which also
manages the foreign reserves. (NfA 2011)
Nonetheless, we still know very little about the actual size of current Chinese investments and investment locations in Europe. Statistics of the European agency Eurostat show that data gaps prevail with regard to Chinese investment to the European Union. In 2009 around 36 per cent of all Mainland Chinese investments could not be attached to specific investment destinations. Yet, based on the available data, it is still possible to identify a certain recent regional focus on Western Europe, as “(...) the United Kingdom, France and Germany focus to 60 percent of Chinese investments since 2008.“(Shi/ Hay/ Milleli 2010, 14)
Secondly, the statistics provided by the statistical office of the EU, assume the factual Chinese investment (including Hong Kong) to be much higher than indicated in Chinese statistics. Between the years 2006 and 2008 this divergence was the most pronounced:
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Figure 8: Chinese Investment in the European Union, comparison between statistical data of Chinese Ministry of Commerce and EU Statistical Agency Eurostat
Source: Heidel 2010 b, 16.
It is assumed that the official Chinese statistics on OFDI understate its actual amount, since only the investments of registered Chinese firms are accounted for. Also, lacking systems on national and local data make a clear analysis for the time prior to 2003 impossible, since investment below US$350,000 as well as debt financed OFDI were not considered in national level statistics. (Nicolas et al 2008, 6)
Though on the rise, Chinese investments are currently still of marginal importance to the overall EU economy. Compared to all other non-European investors, in 2009 China only held 0.29 per cent of all foreign investments in Europe. Adding in the investments originating in Hong Kong, the total Chinese investments still accounted to a meager 1.6 per cent. In a list compiled by the American Heritage Foundation, sampling all Chinese investments above a 100 million US$ threshold, destination Europe comes in last with only 8 per cent of such investments. (American Heritage Foundation 2012)
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Thus it is safe and sound to state, that until now, Europe is only a secondary investment destination for Chinese OFDI, as compared to a primary one like Asia.
However, given the current rise in OFDI-rates to some (primary) European
destinations, the nature of the game may soon be much more in flux. The economic crisis has provided ample opportunity for takeovers of so far inaccessible market leaders in technology, manufacturing or IT- the backbones of European economy.
When entering the European market, the majority of Chinese companies primarily concentrate on Greenfield Investments. (Shi et al 2010, 10) The creation of local subsidiaries minimizes risks and transaction cost, which would increase manifold with a takeover procedure in a legal context literally foreign to the investor. Another
growing entry-route however is the acquisition of a former subcontractor or partner, particularly if opportunity arises due to financial vulnerability of that enterprise:
„Cross-border M&As by Chinese firms are gaining in importance (...) In Europe, one can identify three main categories of firms targeted by Chinese acquirers: ailing or financially distressed firms (...), competitive niche producers (...) and former partners or sub- contractors/suppliers (...). They can take the form of outright acquisitions or start with a strategic investment which is eventually followed by a complete takeover.“ (Nicolas et al 2008, 20)
For obtaining protected know-how or technology, it is more convenient for Chinese investors to acquire a foreign firm rather than start a Greenfield operation. Through acquisition they can directly gain access to the firm’s knowledge and technology, as well as existing customer base. This may in turn also allow them to channel know-how back to the domestic market to upgrade production there. (Deng 2004, 11)
Chinese investors in general are very focused on specific areas of expertise in Europe.
They tend to gravitate around local strong points; thus in each country they tend to show a different interest: Chinese investors focus on electrical and electronic equipment mainly in France, Italy and Spain; on automotive equipment in the UK;
and on mechanics and telecommunications in Germany. A recent addition to this
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preferred portfolio is in energy. Investment in renewable energy from China, which was practically non-existent prior to 2008, occupied a significant 11 per cent of Chinese investments to Europe after the crisis. 41 per cent of these investments are directed to Germany and 22 per cent to France. (Shi et al 2010, 15) Furthermore, Chinese investors are starting to dive into R&D projects- while by the turn of the century R&D was accounting for virtually zero per cent, investments into R&D grew from zero to considerable 2.8 per cent in 2006. (Nicolas et al 2008, 15)
This investment activity towards European industries is still highly focused and selective on key countries within the European framework. To Chinese investors, Western Europe is a repository of technological assets required for international competitiveness. However Chinese investors increasingly also make use of the free market within the European Union- using eastern Europe as a gateway for market entrance in other parts of Europe:
„(...) Europe represents a particular case, mainly due to the European integration. (…) by entering only one member state, Chinese companies de facto get access to the entire Single European market.” (Zhang et al 2009, 5)
This new strategy is underlined by increasing investments in (still “low-pay-”) locations such as Romania and Bulgaria, using these new member states as platforms for European operations. (NfA 2012)
In the past years, reports on China and its M&A behavior in Europe have often seen the extensive use of aggressive vocabulary: Chinese investors have been termed
“dragons”, that are “hungry” for European companies. (Drewe 2010) Indeed, the climate for M&A transactions in recent years has been favorable for Chinese companies, as the continent was heavily affected by the economic downturn since 2008. This crisis drove a lot of smaller and medium sized companies into financial problems, if not bankruptcy, opening convenient alleys for takeover. This has not been limited to the already weak Southern European economies, but likewise impacted mature economies like France or Germany. As Li Jian, a researcher at the Chinese
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economic crisis allows Chinese companies, with their ample cash reserves, strategic cross-border partnerships with cash-strapped international companies (...)“ (China Daily 2011) A concurring publication issued by the German federal Ministry of Economics and Technology states that the economic crisis did not hamper Chinese investments- the Ministry on its part instead notes that the currently low prices for takeovers instead represent favorable conditions for foreign investment. (BMWI 2009c) As the crisis did not affect the Chinese economy on a similar scale as it did with the US- or EU economy, observers worry that “Beijing will be in a position to assist other nations financially and make key investments (...) at a time when the West cannot.“ (Altman 2009) This means only a few states are able to benefit from the financial crisis, but those who do, will ultimately strengthen their global position through investment.
While this has created much ado about Chinese investments on the European side, the Chinese themselves point out that by deploying hard currency to buy assets in
European countries, China is getting more than just low prices. They argue that China is setting an example as a responsible global power, securing or creating jobs and helping Europe overcome the crisis through its increased consumption of European goods. (Becker 2011) However, where China has in the past stretched out its monetary arm to ailing European countries, it naturally did expect something in return. Many investments helped to advance the interest of Chinese companies- one example by Liz Alderman in the NY Times: credit lines of 4.5 billion US$ were extended to troubled Greek shipbuilders in 2010, but only under the condition of using the money to purchase Chinese materials. (Alderman 2010)
On the whole, Chinese investments to Europe have –so far- clearly not gained an economic importance that would be on par with the media attention paid towards it.
Nevertheless, growth rates of Chinese OFDI to the EU point to a substantial importance in the years to come. This may indeed become more of a problem, as investing companies from the PRC are not only mostly state owned (Zhang et al 2009, 19), but seek to acquire the crucial resources of European companies: technology, knowledge and know-how. (Milleli et al 2008, 13)
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China has liberalized its FDI regime and actively promotes investments with the aim to enhance capabilities of its domestic firms, creating fierce competition to their European counterparts. (Berger et al 2008, 3) Given the regional concentration currently prevailing to Western Europe, this effect will be more significant to some European countries rather than to others (or persist in substantially different ways).
Among the countries under increasing scrutiny should therefore be Germany, as “(…) Germany is the top target country, in Europe, for the investments and acquisitions made by Chinese companies (...) German medium-sized companies with specific and valuable technical know-how and customer bases are of particular interest (…)“
(Milleli et al 2008, 12; Cooke 2008, 240)
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