The Dragon flies high: China’s rise to a global investor

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13 Mag
Foto del profilo di Olga Annushkina

by Olga Annushkina

SDA Professor of Strategic and Entrepreneurial Management

In 2015 the emerging markets (neither “BRIC”s nor “MINT”s) are still not back to the double digit growth due to the sluggish global economic context, low oil prices negatively affecting oil exporters, Ebola epidemic and political instability.

The double digit growth is nevertheless there, in the statistics on the accumulated stock of outward foreign direct investments by the key emerging economies (acquisitions of lasting management interest of minimum of 10% of voting stock in markets other than that of an investor).

In 2013 the stock of Chinese outward foreign direct investments (OFDIs) became the largest among the emerging economies surpassing Russian OFDIs. In fact, Chinese OFDIs had been recently attracting more and more attention in the mature economies as some of the “iconic” brands and companies are changing the hands. The objectives of Chinese cross-border M&As and greenfield investments vary by industry and by country, but most of them seem to share the common pattern: mid-term and long-term orientation.


China's diversified investment model

china flagAs Chinese growing economy is increasingly needing to access natural resources and to limit the possible negative impact of the commodities prices fluctuations, the Chinese state-owned companies are implementing their intent to access the shale technology. In July 2012 CNOOC (China National Offshore Oil Corporation) acquired Nexen, a Canadian firm specialized in onshore oil, oil sands and shale oil & gas production, for USD 15,1 billion, promising no reduction in employees headcount to the Canadian government, the promise was later revised after the integration of the acquired business started negatively impacted the overall firm’s performance.

In 2012 Sinopec, or China Petroleum and Chemical Corporation, created a joint venture with Talisman Energy, a Canadian global upstream oil & gas company actively working with shale oil & gas projects, via its wholly-owned subsidiary Addax Petroleum UK Limited, acquiring a 49% interest in equity of Talisman Energy’s UK North Sea activities for USD 1.5 billion. The deal followed the acquisition of another important Canadian player in the shale gas industry, Daylight Energy Ltd. for USD 2 billion. Later, in 2013, Sinochem, a Chinese chemical giant, invested USD 1,7 billion to acquire a 40% stake in Wolfcamp Shale located in West Texas (USA), from US Pioneer Natural Resources.

The Chinese OFDIs’ interests spread from technology (Lenovo-IBM and Lenovo-Motorola Mobility Unit of Google deals) to cars (Geely-Volvo deal), to fashion (YGM Trading Ltd – Aquascutum, Mr.Woo – Salvatore Ferragamo) to food (a $4.8 billion acquisition of the pork producer and processor Smithfield Foods by Shuanghui International), to real estate (Blackstone’s sale of an office area in London to China Investment Corporation, a sovereign wealth fund, for USD 1,28 bilion).

With the growing pro capita income and the country’s increasing desire to compete with quality and technological products and services, Chinese investors are increasingly looking to expand their manufacturing base for industries with relatively low technological content and with high intensity of labour input. After the initial relocation of production to the nearby Asian economies such as Bangladesh or Vietnam, Chinese investors moved overseas. A 2013 investment by Huanjin Group in its first factory for shoe production in Ethiopia contributes to the company’s cost competitiveness with its circa 40USD a month wage level.

china investmentAccording to UNCTAD, the outward investments from the emerging and developing economies rose to 39% of world outflows in 2013 (from 7% in 1999), reaching the best ever level of USD 454 billion in 2013. In 2013, Chinese investments rose by 15% to USD 101 billion, out of which USD 50 billion went for cross-border M&A deals. In some cases Chinese investors and other investors from developing economies acquired overseas subsidiaries of Western multinationals. An example can be Eni’s sale of 20% of its subsidiary in Mozambique to China National Petroleum Corporation for USD 4,2 billion, or Sinopec’s acquisition of Apache’s Egypt subsidiary for USD 3,1 billion., or Total (France)’s sale of its Nigerian field to Sinopec for USD 2,5 billion.

Africa is the new core investment area

The Chinese investments in Africa are attracting a lot of attention in Western media, in particular if the investments are driven by the need to gain access to natural resources, even the overall weight of Chinese investments in Africa is not significant if compared to the largest investors – UK, US, France, South Africa and India.

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Interestingly, data show that so far the most important resource for Chinese companies in Africa was its purchasing capacity. Chinese merchandise trade in the region had been growing double digit, at the expense of the “historical” trade partners: European Union and USA.



China's challenges in "going abroad"

The Chinese government’s policy on “going abroad” launched in early 2000s starts bringing its fruits, as Chinese state-owned and private companies are skilfully navigating among the possible available entry modes to foreign markets to increase their competitiveness by being present abroad – being it via merchandise export or via investing across the globe to knowledge, technology, markets.

One of the challenges still to be tackled by Chinese private or state investors is the public opinion on the Chinese business, in particular the perceived low quality of Made-in-China products and services and the short-term orientation on the immediate profitability. For instance, according to some research the perception of Chinese business in Africa is not always as good as that of US or European origin. In fact, the major vehicle of Chinese aid to Africa is China-Africa Development Fund which main objective is to support Chinese investments and Sino-African commercial ties. The impact of the social acceptance of a foreign company cannot be underestimated, as the public opinion may create a long lasting negative impact on many aspects of doing business abroad.

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