The Malta Independent on Sunday
China moves from trade to investment
HSBC Malta recently participated in a virtual media conference with top management of HSBC group to discuss Chinese international investment. The event offered an opportunity for Piers Allen to review, with key HSBC Group officials, their views on the int
Speaking first, Peter Sullivan (HSBC Bank’s managing director, Research EQ Strategy) commented on the potential that outbound investment, from China, has to grow. Mr Sullivan pointed out that while when discussing growth “people normally think of trade growth, it is the growth of outbound ODI [Outbound Direct Investment] that will surprise people. Increasingly Chinese companies are buying stakes in foreign firms, or buying whole companies.One recent example is Peugeot, where in February of this year the Chinese car manufacturer Dongfeng Motors agreed to purchase 14% of Peugeot. Another example is House of Fraser, 89% of which was bought by Sanpower recently”.
Explaining what was the source of this new found enthusiasm in China, for ODI, Mr Sullivan pointed to the low levels of Chinese consumption and high levels of saving: “The saving rate in China is around 50%. Some of this goes into foreign bonds, and into investment in China’s economy, but the rest goes overseas.”
And this is a trend that is likely to expand: “Chinese ODI has tripled over the last three years, and yet it is still only 6% of global flows as of 2012, so it could easily triple again over the next three years.” The other explanation for the expansion of ODI is that it offers the Chinese an alternative entry point to foreign markets: instead of going through the lengthy and unreliable process of developing new products, they can follow the slightly more reliable path to success of buying firms that already have established products or market positions.
Furthermore the expectation, Mr Sullivan explained, is that this will expand since, “a very popular framework for modeling growth in new businesses is the ‘S’ curve, where growth starts off slowlyin the early stagesand is then replaced by a middle stage of explosive growth. Well, in Europe we have had a decade of rapid trade growth, and now we think that we will be seeing 10years of Chinese investment growth in Europe”.
Discussing the European sectors that were particularly of interest, Mr Sullivan suggested that China’s primary interest in Europe was in goods and services (with infrastructure and commodities then placing second and third). So far, Europe has seen significant interest in the food and automotive sectors, with particular mergers and acquisitions activity in Germany. (In fact, in 2013, 25 out of 120 European M&A deals took place in Germany.) Then it was the turn of Spencer
Lake (HSBC’s Group general manager, Global Head of Capital Financing) to speak about China’s underlying investment approach. Mr Lake pointed out that, on current trends, “in 2017, China will become a global net investor” adding that China is highly strategic in identifying investment opportunities to go out and build strategic collaborations between onshore and offshore such as the alliance between the Shanghai and HK stock exchanges. He added that the current wave of ODI will continue to focuson more around goods and services, observing that this favours the big Western economies which are strong in these areas. He added that “as the Chinese become more of a consumption based society they are looking for brands to support, and we are seeing a broadening out of this brand focused investment”.
Mr Lake then spoke about the importance of demystifying Chinese investors suggesting that: “Chinese investors are not only interested in purchasing majority stakes. Instead, Chinese investors are increasingly happy with minority stakes, because they appreciate that the Western management framework is indigenous and they do not want to undermine that. They then want to bring that expertise back to create centres of excellence, which in turn will help create true synergy in management and demandin both Chinese domestic market and overseas market.”
Another myth about Chinese investment that Mr Lake wanted to correct was that the market perceives that Chinese investors are full of cash; in reality those buyers are actively looking to engage with the capital markets. Mr Lake’s final point was that “many Chinese investors are sophisticated in the mergers and acquisition space, and are looking at quality companies to achieve long-term value creation. They are looking for true partnerships with emphasis on cultural affinity and environmental awareness”. With regards to the question of which economies China was particularly interested in, Mr Lake reiterated Mr Sullivan’s point by observing that Chinese investors are especially interested in Mid-Cap German Mittelstand firms (where foreign investors offer opportunities for those small and mid-sized German firms looking for changes in ownership). Europe in general is well positioned to capture the third wave investment, that is, those outbound investment opportunities from China especially when it comes to ‘goods and services’”.
Florian Fautz (Global head of Mergers and Acquisitionsat HSBC) then discussed the mechanics by which the Chinese authorities give approval to overseas direct investments. Commenting on the perceptions of Chinese investors Mr Fautz, pointed out that “in the past, while it was noted that Chi- nese corporates were willing to pay a good price, they could also be unpredictable, for no fault of their own, because they had to get clearance from their government”.
However, now Chinese ODI was easier for Chinese firms since “the Chinese government is supporting this current extension of overseas direct investment by increasing the threshold, above which Chinese firms need to seek government approval for an investment, to €1bn”. Furthermore, Mr Fautz added, China and the EU are discussing an investment treaty abolishing restrictions on trade and foreign direct investment, which will help to make China “an entirely normal country” when investing in the EU.
Mr Fautz supported Mr Sullivan’s point by also noting that increasingly the Chinese are not interested in purchasing 100% of target firms, but are now more flexible, being happy to be minority shareholders. In answer to the question of where this change was coming from, Mr Fautz felt that there were four sources of this change in acquisition strategy away from full ownership. Firstly, China understands that Western management has great expertise in the area of corporate governance which China feels it can best absorb by partnering with Western firms as opposed to owning them.
Secondly, there was a feeling among Chinese firms that European corporate culture is similar to Chinese corporate culture. This gives Chinese investors the confidence to take minority positions in European firms, safe in the understanding that management will pursue strategies aligned with the approach of Chinese management. Then, there is the fact that Western brands are immensely popular in China and so China is seeking to invest in their popularity without undermining their inherent “Westerness” by buying them outright. Finally, Chinese firms want to establish synergies, that is to say, build partnerships, which balance the respective strengths and weaknesses of Chinese investors, with the weaknesses and strengths of the Western firms they are buying into.
Returning to the point that there are strong similarities between the long-term value creation investment approaches of both Europe and China, Mr Fautz explained that he had spoken to a corporate that had been looking foran acquisition. Being a firm operated in alignment with the interests of its stakeholders, the target company had asked the unions whether they wanted a private equity firm, or a Chinese corporate to invest in them. The workers actually said they wanted the Chinese corporate investor because it was felt that whereas the private equity firm would invest and sell, the Chinese corporate would be committed to the firm for the longrun, and invest to stay.
The point was made that generally speaking there is now a change of mindset towards China as a partner. In the past, people were uncertain, maybe because China was seen as something of an unknown quantity. Now China is opening up and looks forward to building long-term strategic partnerships, which is why, for example, they are also very interested in allowing the respective management to become shareholders.
Mr Fautz quoted the aphorism that “China used to be the manufacturing base for the World, but in the future the World will be the manufacturing base for China”. However, he then concluded by pointing out that this has already come true, with China investing overseas in factories that now produce goods more cheaply than on mainland China.