Chinese enterprises are set to see record overseas expansion
This year will be a milestone year for Chinese enterprises’ overseas expansion with an unprecedented rise in overseas investment and merger, analysts predict.
Chinese enterprises made 92 overseas purchases in the first quarter of this year, among which 63 disclosed their prices with a total trade price of $36.8 billion, according to research by Morning Whistle, a Shanghai-based financial consulting agent.
Although, Chinese economic growth slowed down last year, China’s foreign-bound investment exceeded $100 billion, up 21 percent yearon-year. Last year, Chinese enterprise spent $51.4 billion on mergers with foreign enterprises, a 50 percent increase from the previous year.
China is now the thirdlargest foreign-bound investor in the world. By the end of 2013, China’s accumulated overall investment out of its borders has hit $630 billion.
In the past few years, Chinese enterprises’ overseas purchases and mergers gradually changed to higher-end manufacturing and hi-tech industries from energy and mining enterprises.
Chinese manufacturing capacity exceeds 50 percent of the global total in many fields. But most of the brands, core technologies and research and development capacities are still held by foreign enterprises.
Fierce price competition at home brings about serious overcapacity for some industries, which used to be of vital importance to the Chinese economy and job markets.
Purchasing foreign enterprises is the fastest way to bypass the dead-end price competition and move higher in the value chain of Chinese enterprises.
The other change is that more private enterprises are paying more attention to overseas than home.
Domestic private-equity firms and cheaper overseas financing make private Chinese enterprises competent bidders in the global market. They are more flexible and more sensitive to market changes than State-owned enterprises.
Enterprises from Shanghai are an example. Their overseas investment hit $2.1 billion last year, accounting for 48.5 percent of the overall investment of Shanghai firms.
Apart from the manufacturing industries, private Chinese real-estate developers also show strong interest in buying land and houses abroad, using the huge profits they earned at home.
The appreciation of renminbi and the comparatively lower price of overseas assets are two important factors luring Chinese real-estate firms to foreign countries, especially the big cities of the developed countries.
Greenland Group, one of the largest Chinese real-estate developers from Zhejiang province, said it invested more than $10 billion this year in the foreign market, or 40 percent of its overall sales revenue last year, and its annual sales revenue from foreign market will exceed $3.3 billion this year.
Zhang Yuliang, president of Greenland, said in a forum held by the 21st Century Business Herald in Shanghai: “If an enterprise cannot allocate resources and participate in global competition in the world, it cannot be a first-class enterprise. Now is a rare strategic period of opportunities for Chinese enterprises to enter the foreign market, because the performance-price ratio of many foreign assets is more competitive than the domestic market.”
Chinese enterprises focus more on buying high technologies that can benefit themselves in the long run, than only acquiring stock ownerships.
This round of overseas merger and investment did not come by accident. China had only four enterprises in the world’s top 500 companies in1994, and now has 95. The transformation of economic structure and the upgrading of industries in China force the enterprises to acquire more advanced technology, better management, marketing systems and brands as soon as possible.
China’s fast economic growth has increased Chinese enterprises’ purchasing capacities. Meanwhile, the recession and debt crisis in developed countries have created considerable difficulties for some small- and medium-sized companies.
The Chinese government actively encourages domestic enterprises to expand globally.
After the Chinese leaders made the comprehensive plan of deepening reforms last November, the government has continuously simplified its foreign exchange administration and project approval procedures for overseas investments and mergers.
That the government encourages private capital to invest in some SOEs to promote the development of mixed ownership enterprises combines the strengths of private firms and SOEs in international market.
Apart from the United States and Europe, South America and Southeast Asia has also become increasingly popular among Chinese buyers and investors, because of strong demands and Chinese brands’ influence in those areas.
Despite this, the Chinese enterprises must be aware of the potential risks in buying foreign assets.
Lu Jun, an enterprise financing and mergers partner with the Price waterhouse Coopers (China), believes Chinese enterprises should first have the abilities to revitalize foreign companies before buying them.
“The purpose is not buying a company, but using its technology, marketing systems and brands,” Lu said. “Chinese buyers should look for the fittest target firms, but not the most famous ones.”
Farhad Jalinous, a veteran lawyer with the law firm Kaye Scholer LLP, thinks that the most fundamental aspect to a successful Chinese investment in the US market is careful planning.
“It is clear that there has generally been heightened sensitivity with Chinese transactions, but it is also quite evident that the US market is not closed off to Chinese investment,” Jalinous said.
He said Chinese enterprises should carefully study relevant laws and regulations and develop a strategy to minimize the risk of transaction failure due to US national security considerations.
In 2012, according to data, China overtook the UK for the first time with the largest number of transactions.