Investing abroad remains tough task
Mainland firms face political and commercial obstacles in expanding through mergers and acquisitions
The mainland's push for companies to 'go out' and invest abroad by buying foreign firms is facing political and commercial obstacles that could hinder Beijing's goal of raising total outward investment to US$60 billion in the next five years.
Behind the push by Chinese companies and the government was a desire to find new markets, secure supplies of oil and other natural resources, and acquire advanced technology in line with the mainland's growing economic might, analysts said yesterday.
'It's a long-term strategy for domestic companies to seek opportunities overseas. They need to transfer their manufacturing bases to countries with cheaper labour. They need to go abroad to build up their brands, cultivate new customers and upgrade technology for the purpose of improving global competitiveness,' said Lu Wenlei, an analyst at Shenyin & Wanguo Securities in Shanghai.
The Ministry of Commerce forecasts outward investment will grow at least 22 per cent annually for the next five years with the cumulative total to exceed US$60 billion by 2010. At the weekend, Ministry of Commerce official Li Rongjun reaffirmed that goal, Bloomberg reported.
'Chinese direct investments overseas, which mainly involved setting up offices and expanding in new markets, are now more driven by mergers and acquisitions,' Mr Li told a conference in Beijing on Saturday. 'The government has been supporting the companies to expand and compete in overseas markets.'
China accounted for only 0.25 per cent of global outward direct investment in 2004, ranking 28th in the world, according to the UN. By the end of last year, the mainland's cumulative outward investment reached more than US$51 billion, official figures claimed.
Beijing is clearly pushing investment overseas, and mergers and acquisitions (M&A) abroad. Recent examples include Lenovo's US$1.75 billion acquisition of IBM's personal computer division, Shanghai Automotive Industry's purchase of South Korea's SsangYong Motors and China National Petroleum's acquisition of a Kazakh oil company. There have also been high-profile failures, most notably CNOOC withdrawing its bid for Unocal in the face of opposition from the US Congress and Haier's unsuccessful bid for Maytag.
The relaxation of some capital controls earlier this month will make it easier for companies to invest abroad and could give a boost to M&A activity. China's massive foreign exchange reserves, which recently surpassed Japan's as the world's largest, will also help.
A recent report by the IBM Institute for Business Value and Fudan University's school of management likened the drive to Japan in the 1980s and South Korea in the 1990s, but said China faced more challenges.
'China does not have a centralised government body driving China's globalisation efforts ... Chinese companies will face a much more challenging environment than their Japanese and Korean peers did during their early stages of development,' the report said.
Observers expect M&A activities to be driven by manufacturing companies across several industries, seeking new markets around the globe.
Mainland companies with deep pockets will seek foreign acquisitions, especially large well-known companies, as a quicker route to a global brand.
