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China Looks Outward

Investing in tangible assets (such as natural resources) is considered a marked shift in Chinese M&A strategy

Published: Apr 19, 2011 06:15:16 AM IST
Updated: Apr 15, 2011 05:23:16 PM IST

The Great Recession of 2008 was undoubtedly a crucial turning point for China – both in terms of how it is perceived globally and also in the way China, itself, sees its global role. Then in early 2011, two events confirmed the country’s status as an economic superpower in the global economy: its upgrading to #2, in terms of economic size, and the red carpet treatment that the United States gave to visiting Chinese President Hu Jintao.

It is important to note, however, that even though it is #2, in many aspects China still lags substantially behind the US, which holds the top spot. The US makes up 24% of global output while China only contributed 9% in 2009. The average Chinese’s income of USD 3,650 is a far cry from that of his American counterpart who earns about USD 46,360. However, when it comes to the internationalization of the economy, the progress that China has made is truly impressive.

In 1990, China’s exports of goods and services made up about 1.3% of the global total. In 2009, this had increased to 8.5%. The US, on the other hand, reduced its contribution from 12.3% to 10% over that same 20-year period. Perhaps the most significant development in the internationalization of the Chinese economy is the onward global march of Chinese companies. The acquisition of IBM’s PC division by Lenovo, in 2005, was just the beginning. Other high profile acquisitions include the purchase of Volvo by Geely Automobile and China Merchants Bank’s snapping up of Hong Kong’s Wing Lung Bank.

At the end of 2009, China’s total outward foreign direct investment (OFDI) stood at USD 246 billion. The size of China OFDI stock is about the same as Russia’s, but much larger than other emerging markets such as India, Brazil and South Korea. Since the OFDI in 2008 and 2009 was USD 55.9 billion and USD 56.5 billion, respectively, we can conclude that the globalization of Chinese companies is a recent phenomenon. Although there has been much hype about China’s investment in Africa, as at 2009 the continent made up less than 4% of China’s total OFDI. On the other hand, Asia accounts for three quarters of total investment, with Hong Kong alone attracting 89% of Asia’s total.

Non-Asian countries that feature prominently on the radar of Chinese investments include Australia, South Africa, Russia and the United States. Yet over the years, Chinese companies have been accused of investing in countries, many of these in Africa, that are rich in natural resources but politically less democratic. However this is perhaps an exception, not the norm. Although Chinese investment in the mining sector is important (making up 16.5% of total OFDI stock), investment in the tertiary sector – such as financial services, wholesale and retail trade – is perhaps more important. China is a country that lacks natural resources, and tapping into the endowments of other countries is necessary to satisfy its economic appetite.

 In fact, investing in tangible assets (such as natural resources) is considered a marked shift in Chinese M&A strategy. The failure, due to integration issues and cultural differences, of Shanghai Automotive Industry Corporation (SAIC) and TCL to consolidate their acquisitions of Ssangyong Motor Company and Thompson, respectively, forced Chinese firms to look for more hard assets and those targets that could offer new technologies that could be easily scaled up by their Chinese counterparts.  Thus, a strong motivation for Chinese companies to acquire capabilities outside China is to ensure success within China. As the Chinese economy’s engine of growth moves from exports to the domestic market, Chinese companies are well aware that long term success depends very much on how well they perform at home. Geely’s acquisition of Volvo, for instance, was to ramp up sales in China. So, unlike western multinational companies whose motivation is to secure market shares globally, Chinese companies are more interested in using their newly acquired capabilities to secure the untapped domestic market.

Countries and companies that are interested in Chinese investments should also be aware of the increasing number of private Chinese enterprises that are going abroad. Although large state owned corporations like China International Trading and Investment Corporation (CITIC), China Ocean Shipping Company (COSCO), China National Petroleum Corporation (CNPC) and Sinosteel Corporation are large investors, smaller private enterprises are engaged in more investment projects. These enterprises are more risk averse in that they tend to invest less in politically risky economies and more in richer markets that are close to home. In this regard, strategies to attract Chinese OFDI should be tweaked accordingly, depending on the type of Chinese company in which one has an interest.

The world has become more Chinese than it was three decades ago. The internationalization of China – the country, its companies and its people – will continue in the foreseeable future. The world should view the globalization of Chinese companies positively. It provides opportunities for companies to enter the China market, and at the same time leverage the China advantage to tap into other emerging markets.  

Dr. Bala Ramasamy is Professor of Economics at CEIBS

[Reprinted with permission from The China Europe International Business School.]

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