SMEs power new wave of European investment in China
European firms are bringing fresh investment to China, including Hong Kong, and this time it is SMEs seeking to expand into new markets
"We are looking for losers." So went the slogan for a campaign launched by Dutchman Oscar Venhuis and his French partner to promote their new online marketing firm Weblaa late last year. The idea was to find the company with the worst website in Hong Kong and build them a new one free of charge. Unfortunately, their European humour failed to translate and they ended up the losers, receiving just one expression of interest.
"Perhaps the community here does not take this kind of joke too well," Venhuis says. But he has had the last laugh. Weblaa has quickly become a winner for the pair as they take advantage of the growing demand from companies to get in touch with clients online.
Weblaa helps clients, from one-man operations to big conglomerates, design websites, set up e-commerce platforms and launch social media campaigns to promote their products and services. Already, the company is looking like it has a big future.
"We didn't really expect any profit when we set up our office in September, but we are actually very busy now, with 15 to 20 projects in hand," Venhuis said.
Weblaa is one of a growing number of companies created by Europeans seeking opportunities in the East. According to locally based Europeans, a new round of investment is heading to China and Hong Kong in what has been described as a "third wave of capital migration".
But unlike previous European investment in Asia, which was dominated by big business and state-owned enterprises, the new wave is being fuelled by small and medium-sized enterprises, which may be unknown today but could become multimillion-dollar brands tomorrow.
While overall foreign direct investment in China continued to fall in the first two months of this year, investments from the 27 member states of the European Union climbed 34 per cent to US$1.21 billion - the first rise in more than two years.
In Hong Kong Invest Hong Kong - the organisation that helps foreign firms move into the city - said the number of EU companies setting up offices in Hong Kong had jumped by at least 10 per cent in the first quarter.
"There are lots of inquiries from small companies across all sectors and countries, and they come to Hong Kong for different reasons," said Simon Galpin, director general of Invest Hong Kong. "Some want to focus in the Hong Kong market where customers have a high-disposable income; others - especially in the digital media sector - come to Hong Kong for its global reach."
The third kind of firm, he says, are business-to-business service providers which seek to use Hong Kong as a base to help Chinese corporations go global. "So they have different motivations."
While France and Germany still make up the biggest European business sector in town, companies from Bulgaria, Romania, Turkey, Poland and Scandinavia are taking root in Hong Kong too, in areas from wine trading to multimedia communications.
"These countries in central and eastern Europe underwent tremendous political and economic reform in the '90s, during which a lot of uncompetitive businesses were closed down, state-owned enterprises privatised, and then a new species of businesses - one with lots of vibrancy and dynamism, came out of it," said Vincent Piket, head of the office of the European Union on Hong Kong and Macau.
In the four years to 2011, the total investments held by EU states in Hong Kong increased by 38 per cent to €124 billion (HK$1.26 trillion) - even beating the €101.5 billion of investment that EU countries hold in China.
"A lot of European companies set up holding companies in Hong Kong to manage their investment in China, not only because of simpler procedures and requirements, but because Hong Kong-registered companies can save tax on the funds they transfer out of the mainland through a double-taxation arrangement," Galpin said.
Foreign companies in China must pay a 10 per cent withholding tax for dividend and interest payments repatriated to their overseas parents. But if the money goes through a regional headquarters in Hong Kong, they pay just 5 per cent.
It's therefore not surprising to see that while the number of European companies on the mainland fell, more European companies established themselves in Hong Kong than on the mainland last year. While 60 companies from the 17 countries that use the euro currency set up shop in Hong Kong, the number of euro-zone companies on the mainland declined by 16 per cent on the previous year to 1,698.
Including all European countries inside and outside the euro zone, Europe beat North America and the Asia-Pacific region as the top source of new businesses in Hong Kong last year.
"Europe's economy hasn't been growing for two years, and it is likely to remain flat as well this year," Piket said. "However, with the sovereign debt crisis largely behind us now, more companies - especially the small ones - will look for opportunities in the east."
Piter De Jong, senior representative of the Banking Working Group of the EU's Chamber of Commerce in China, also expects more small and medium-sized enterprises to come to China.
"It marks Europe's third wave of overseas investment," De Jong said. "The first two waves were made some 20, 30 years ago from first the state-owned enterprises and later big private corporations. Now it is the turn for SMEs."
According to De Jong, SMEs recently looking to enter China included small car-parts suppliers, green technology firms and consumer goods distributors.
"Some European carmakers asked their suppliers back home to come to China," he said. "European distributors are also coming to set up their networks."
SMEs make up more than 98 per cent of all companies in Europe and they account for 70 per cent of the EU's jobs and gross domestic product. More importantly, they are considered the chief source of creative ideas and technological innovation.
For example, Finnish video game company Rovio - which is seeking to list in Hong Kong later this year to capitalise on its smash hit Angry Birds - started up with just a handful of staff. London games firm King.com is emerging as another success story in the same industry with its mobile game Candy Crush, which broke through 10 million daily active players earlier this year.
Outside the game arena, research-intensive SMEs are also the main drivers in health care, biotechnology and medical technology. The European Union is well aware of the power of SMEs, which is why the European Commission proposed to earmark €2.5 billion to help SMEs develop both at home and overseas.