Setting sail on a quest for overseas M&As(2)

Going-out

China's strategic focus was to attract foreign investment in the 1990s. Foreign investment and outbound direct investment have now struck a balance in the first decade of the 21st century. This decade will see massive overseas mergers and acquisitions by Chinese enterprises, said Eddie Chan, vice-president of Invest Sweden.

Having witnessed the growth of Chinese ODI over the past 10 years, Chan has been involved in more than 100 overseas M&As. In his view, the complexity and the professional level of Chinese enterprises in dealing with these cases has been of an international standard. The volatile international economic situation presents tremendous opportunities for forward-looking companies with strategic vision.

"Overseas investment by Chinese entrepreneurs will still focus on developed countries. We will see a number of cross-border investors in the future emerging in China," said Chan.

However, along with the fast outward-going pace come doubts about the efficiency and profitability of these projects.

Shi Ziming, commercial counselor at the Ministry of Commerce's department of outward investment and economic cooperation, said 77.6 percent of the non-financial enterprises have profited from their overseas investments while 22.4 percent reported losses.

Volvo, for example, which was acquired in 2010 by Geely Group, suffered a net loss of 243 million kronor ($38 million) in the first six months of this year. In contrast, it generated a net profit of 1.2 billion kronor in the same period of 2011.

According to Chan, the overseas M&As of Chinese enterprises possess a uniqueness, unlike internal mergers within countries in the West. Chinese companies bring not only capital but the opportunities to explore the Chinese market. "It is a brand new business cooperation model," he said.

"Capital can immediately play a role when the money is there but full exploration of the market will take some time to complete," he added.

"The return period in investment in Volvo has not yet begun but, with its plant completed in China, Volvo will gradually expand the market and see a rise in sales," said Chan who was involved in the Geely-Volvo purchase.

"They (overseas M&As) are the right direction for Chinese enterprises to go in. Despite a temporarily adverse situation, they will eventually see a silver lining," he said.

While Chinese companies are anxiously looking for shelter in overseas markets, European countries are also eager to seek opportunities from the rapid economic growth in China.

After Sweden and the UK became the first two countries to establish investment-promoting offices in China a decade ago, European countries have since set up more than 30 similar bureaus. "There are basically no countries that haven't done it," Chan said.

Local governments in many countries including the UK and Spain have also set up a representative office in China to promote their own regions' investment opportunities.

Countries have their own preferences for industrial investment and targets. The comparatively developed countries in western Europe and Scandinavia are hoping to carry out cooperation with China in high-tech areas by virtue of their technical superiority, whereas those in southern, central and eastern Europe now mainly focus on light industry and agriculture.

A recent survey by accountancy and management consultancy firm Ernst & Young showed that Europe is still the first choice for future overseas investment by Chinese entrepreneurs. "Europe is the cradle of the Industrial Revolution (1750-1850), as well as the presenter and practitioner of the concept of sustainable development. Compared with North America, the overall policies are more open. This is what Chinese investors really need," Chan said.

"In Sweden, for example, although there is a decline in investment flow from China this year, the quality of cooperation keeps growing in such areas as new energy, the automobile industry, mobile communications and the advanced manufacturing field," said Chan.

The United States is also a favorite destination for Chinese investors. "In 2012, Chinese investment in the US will double the amount of last year and it will keep doubling for some time to come," said Harley Seyedin, president of the American Chamber of Commerce in South China.

"Certainly, I think, especially now, there are tremendous opportunities for Chinese investors in the fields of resources, energy, airspace and acquisition of companies with advanced technology. Right now US companies need cash and investment.

"Chinese companies can learn from their partners... and invest in US companies and then bring their products back to China to meet the huge market."

Chinese investment in the US jumped 38.5 percent from a year earlier to $1.81 billion in 2011. Meanwhile, China's overall outbound direct investment was $74.65 billion last year, according to the 2011 Statistical Bulletin on China's Outbound Direct Investment jointly released by China's Ministry of Commerce, National Bureau of Statistics and State Administration of Foreign Exchange in August.

The first eight months saw Chinese investment in the US increased 18.2 percent from the same period a year earlier, according to the ministry.

"Chinese investment in the US is likely to reach $3 billion or $4 billion in 2012 and the potential is $10 billion in the future. Several substantial Chinese companies are now in talks to invest in coal mining in Montana with an initial $2 billion to $3 billion and export the coal to China," Seyedin said.

Jennifer Zimdahl Galt, consul general of the American consulate in Guangzhou, said the US will be a very attractive investment destination for Chinese investors owing to its favorable economic environment, mature and open market as well as the efforts of SelectUSA, an agency established by US President Barack Obama in 2011 that seeks to highlight many advantages the United States offers as a location for business and investment.

Seyedin countered any fears of increasing Chinese investment in the US and said: "We are wide open to Chinese investment and there is no way for China to have all our products and there is no way for China to have all our technology because the Chinese economy and innovation is only about 20 years old."

Seyedin did not see hurdles for Chinese investment in the US and said: "The problem is to understand the market, the culture, the tax structure and the legal system. The first and the most important step for Chinese companies to make is to hire an accountant, a lawyer and people understanding both cultures. If they do all these things right, most of them will succeed".

Despite having an optimistic outlook on China's overseas investment, Arthur Wang, a global partner with McKinsey & Co, said there are still challenges facing Chinese managers in their overseas operations.

Apart from the traditional obstacles such as cultural differences, one of the major issues is to find the right balance in the elasticity of managing overseas units.

To that end, Chinese companies need to raise a group of top and middle management with international business experience and language skills. "At the moment, the lack of such talent is the biggest challenge facing ambitious Chinese investors," Wang said.

Victoria Tang, associate director-general of InvestHK, said with an excellent service system in finance, law, accounting, insurance and branding, Hong Kong can play the role of a platform to assist mainland investors in meeting various demands and achieve their "going-out" strategies.

Meanwhile, she said, Hong Kong has talent resources with global vision and knowledge of the mainland market and can be a "drill ground" for Chinese enterprises with global ambitions.