Private push

Increasing number of Chinese companies spreading their wings abroad, especially in Europe and Africa

China's private businesses are poised to take a more dominant position on the world stage - until recently State-owned enterprises have been at the vanguard of the world's second-largest economy's moves into international markets, particularly in resources and raw materials.

But already in the first six months of this year, four of China's top 10 outbound M&A deals have been by private companies, compared with just one during the same period last year.

The most high profile of these was perhaps Shuanghui International Holdings' $4.7 billion acquisition of Smithfield Foods in the United States in May.

According to a new report by international business adviser KPMG, The Dream Goes On: Rethinking China's Globalization, which will be published in English soon, some 75 percent of respondents predicted major international advances for China's private sector over the next five to 10 years.

According to the report, within three years, a third of private companies will set up an overseas sales network, around a quarter will establish offices abroad and about 15 percent will establish factories overseas.

Some private enterprises are being driven overseas because of the increasing costs of doing business in China with rising wage costs and the higher value of the Chinese yuan.

But of those interviewed in the report only 8.2 percent did it for costs reasons alone. Seeking out new markets (cited by 19.2 percent), building international marketing networks (16.6 percent) and becoming an internationally competitive global company (15.7 percent) were more important factors.

The report concludes that, in fact, many Chinese private companies have reached a "tipping point", at where "going out" is an effective way to upgrade and transform their business.

"Many Chinese enterprises have realized that outbound investment is not just a way to achieve geographical expansion or acquire natural resources. Once enterprises have reached a certain stage of development, outbound investment is a way to breakthrough development bottlenecks," the report concludes.

Oliver Rui, professor of finance and accounting at China Europe International Business School in Shanghai, agreed with KPMG's findings and says that what is forcing them abroad is that their old business model no longer works.

"They can no longer just be OEM players producing low design, low margin goods because the domestic markets they serve now want brands and higher quality products."

He said that China has exceeded a per capita income of $8,000, which has been a global benchmark when consumers demand better products and services.

"In Shanghai and in other parts of eastern China that is now $20,000. That is why you see many companies from there looking to make acquisitions," he said.

"They are increasingly going to go out to Europe and the United States to acquire brands and research and development capability that will strengthen their position in their own markets."

According to the Ministry of Commerce, private companies now account for up to 70 percent of ODI in some of China's more prosperous eastern provinces.

One province the KPMG report highlights is Jiangsu, which is seen as a hotbed of Chinese private companies stepping up their global efforts.

At the Economic and Technology Park at Yangshe, 60 kilometers from the center of the province's capital Suzhou, Xu Weimin was an early pioneer of the efforts of Chinese companies to go overseas.

The 60-year-old is president of Jiangsu Dongdu Textile Group, which has a turnover of 8 billion yuan ($1.3 billion) and 26,000 employees, 10,000 of which are located in Southeast Asia.

"If China's economy wants to develop to a higher level, Chinese companies need to speed up the pace of going international, which is becoming a necessary and vital step for every company," he said.

A former local State-owned enterprise, it began selling overseas in 1993 and is now one of China's top 50 exporting companies.

He said that although a third of its garments are made overseas in Vietnam, Malaysia and, in particular Cambodia, any company setting up overseas operations to save costs would be misguided.

"People think going global will help solve problems such as labor shortage and rising labor costs. We had thoughts like that at the beginning but even 20 years later we haven't made those costs savings.

"Going global is more for Chinese companies to participate in international competition, to find target markets in an overseas environment and get to know that market."

Xu, who spends two-thirds of his time abroad and works on behalf of the government advising Chinese companies about their overseas efforts, says the main problem with trying to achieve costs savings by establishing bases abroad is that Chinese manufacturing is among the most efficient in the world.

"From our own experience, if you invest in Southeast Asia the overall efficiency level is around a third of that in China. Companies from other countries are also trying to move to these locations so there is a lot of competition for resources."

In the conference room of his offices on the 16th floor of International Trade Tower on Suzhou's Xihuan Road, Wang Zhiming, vice-director of the Suzhou Bureau of Commerce, said local private businesses are not afraid of going abroad since they have had long exposure to multinational businesses.

Nearly 300 sq km of the city is taken up by the Suzhou Singapore Industrial Park, which has attracted more than 3,000 overseas enterprises, including 77 Fortune 500 firms.