April 5, 2011 4:43 pm

A real opportunity for the west as China looks abroad

On Saturday March 5, about 3,000 people gathered in Beijing’s Great Hall of the People to debate and approve the Chinese government’s economic and social plan for the next five years. The topics under discussion were many and varied, but Chinese overseas investment was high on the agenda.

Chinese foreign exchange reserves already amount to nearly $3,000bn. In five years’ time, they could be nearer to $6,000bn. That is a truly staggering amount, at least some of which has to be deployed over the next decade. And there is a growing belief among the Chinese authorities that investment in western companies is one of the most rewarding ways to use this growing cash pile.

This is not a new trend, but it is gathering momentum. Between 2005 and 2009, the Chinese spent $145bn on overseas acquisitions. Last year, the figure was more than $50bn. In 2011, investment outside China is likely to be significantly higher, and over the next five years the figure will almost certainly increase exponentially.

Western companies can respond to this phenomenon in two ways: they can embrace it or ignore it. To date, there has been a bit of both. Governments and corporates have tended to eye Chinese mergers and acquisitions ambitions with suspicion. Acquisition processes can be lengthy, and some countries have stringent rules, limiting the extent of Chinese involvement. Against that, there are notable successes, such as the acquisition of Volvo, the Swedish carmaker, by Chinese automobile manufacturer Geely last year, or the purchase of Cifa, the Italian concrete-pumps maker, by Zoomlion, the Chinese machinery group.

Intriguingly, both acquirers challenge the common perception that Chinese outbound investment is conducted only by the state. Geely is a private sector company; Zoomlion is owned by the Hunan provincial government. This is not a coincidence; rather, it illustrates the way Chinese M&A is evolving. The state will remain important, but it is not the only cash-rich entity in China. Private sector companies are growing in number, wealth and influence, while regional governments are also highly liquid and keen to invest overseas.

Chongqing province, for example, has openly stated it would like to spend $5bn a year on international acquisitions. Located in south-west China with a population of 30m, Chongqing is just one of 30 provinces in China and has already started investing overseas, spending £20m ($32m) last year on Precision Technologies, a machine-tools business in Yorkshire, and a considerable amount on farmland in Brazil. Even sovereign wealth funds and other large investors are searching for overseas investments, opting for minority holdings in companies they hope will deliver stable long-term returns.

In other words, companies in the west will face a broad choice of potential Chinese partners, each of which has a slightly different agenda. Some are keen to acquire companies outright, some prefer partnerships and some favour minority investments. Some want to be more involved in daily operations, while others are happy to delegate. But what unites them all is the desire to spread their wings.

China has made enormous advances over the past decade but is still anxious to develop its knowledge and understanding of the corporate world. Political and business leaders want to refine their management skills, buy technological expertise, improve research and development, acquire brands and learn how to market them.

And, of course, they need to invest in resources to fund the ongoing industrialisation of the country. They have been making progress on this for several years now – primarily in Africa and Latin America. But the most effective way for them to acquire knowledge is to form partnerships with those who possess it – mostly western companies.

Far from being a threat, this should be seen an extraordinary opportunity for the west.

Many European and US companies already have a foothold in China. Multinationals, including Procter & Gamble, Coca-Cola and Starbucks, are well established there; numerous others are either selling to the Chinese or helping them construct the country for the 21st century. Still more see China as a new frontier, somewhere they need to be to realise the full potential of their business.

But western companies do not have to make large capital commitments to take advantage of what the country has to offer. They can think more laterally and allow the Chinese to invest in them. Many of the more sophisticated domestic enterprises have learnt to understand cultural nuances, corporate social responsibility and the need to preserve local jobs wherever possible. They also know takeovers or strategic partnerships work best when both sides see the benefit.

They are willing to explore options, ranging from outright acquisitions to joint ventures or minority stakes. Western companies with the foresight to grasp what Chinese investment can offer can derive meaningful benefits. They can leverage their distribution network and reduce costs – tapping into the biggest and fastest-growing market in the world while diversifying their manufacturing and research and development capabilities.

There is a slogan that is common currency in China today: “Zou chu qu”. It means walk outside – or look beyond your own backyard for inspiration. The Chinese have started to do just that, creating a real opportunity for the west. Those who turn their backs on it will be forgoing the opportunity to move their business forward into one of the most influential markets of the 21st century. Those who embrace it will be positioning themselves for a stronger, more rewarding future.

The writer is chairman, Asia ex Japan, of investment banking at Nomura

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