Overseas acquisitions by Chinese companies bolster national plan to play catch-up
Hongyi Lai says its dazzling investments, such as in oil and gas, nevertheless face challenges
Over the past few years, China has become a major new player in global investment outflows. Since 2012, it has been the third-largest outward investor, just behind the US and Japan. Last year, its outward foreign direct investment hit US$101 billion, up from US$88 billion in 2012.
In tandem with this surge has been the aggressive global quest by China's oil and gas companies. From 2011-13, upstream merger and acquisition deals by China's national oil and gas companies and smaller firms accounted for 27 per cent, 18 per cent and 38 per cent respectively of China's outward foreign direct investment; a sizable share. In response, some analysts sounded the alarm that the Chinese were buying up the world and pocketing oil and gas stakes around the globe.
China has made quite a journey from 1992, when the Communist Party first urged firms to "expand overseas investment and multinational management". The turning point came in 2008, when outward foreign direct investment nearly doubled, to US$55.9 billion from a year earlier, whereas that of major Western countries declined.
Chinese corporations have expanded overseas to access international markets, avoid intense domestic competition, reduce production costs, and obtain advanced technology and valuable raw materials.
Two considerations are important for China's oil and gas merger and acquisition projects: acquiring raw materials such as oil, oil sands and gas fields; and acquiring strategic assets such as advanced technology and management, valuable equipment and facilities, distribution networks and brands.
In a study undertaken by myself and two other University of Nottingham academics, we found that the China National Petroleum Corporation (CNPC) showed a greater interest in natural resources whereas China Petroleum & Chemical Corp (Sinopec) overwhelmingly focused on strategic assets.
Why the different focus? According to our study, CNPC, whose main strength is in exploration and extraction, could use its strength in the upstream business to seek natural resources such as oil and gas fields in their international merger and acquisition projects. On the other hand, Sinopec could consolidate its primary position in the downstream business by obtaining distribution networks and technology.
Since 2002, China's national oil and gas companies have made much headway through investing abroad. First, the annual merger and acquisition investment grew rapidly from 2002 to 2010 - CNPC's increased from US$216 million to US$3.1 billion, while Sinopec's soared from US$394 million to US$12.4 billion.
Second, both invested across the globe. Two-thirds of CNPC's deals were in Southeast Asia, the Middle East and Central Asia, and a third were in Africa, South America, North America and Australia. Meanwhile, three-quarters of Sinopec's deals were in the Middle East, Central Asia and Russia, Africa and South America, and a quarter in North America, Southeast Asia and Australia.
Third, both giants have netted significant strategic assets as well as oil and gas fields. For example, in 2005, CNPC bought shares in PetroKazakhstan for US$4.18 billion. This deal enabled it to access the Canadian company's oil and natural gas reserves. At the time, it was the largest overseas acquisition ever by a Chinese company. In 2009, Sinopec bought Swiss oil exploration company Addax Petroleum, gaining Addax's valuable assets in Africa.
The largest ever merger and acquisition deal by a Chinese company was inked by the China National Offshore Oil Corporation in 2013, when it bought the Calgary-based Canadian energy giant Nexen for US$18.2 billion including debt. This came after its 2005 failed bid for US oil group Unocal.
Nevertheless, such deals do encounter challenges. First, some can face trouble in politically unstable areas. Take Sudan for example. China's fortunes were reversed after enjoying years of exclusive deals with that nation when conflict broke out. Last year, as fighting between government and rebel troops intensified in South Sudan, China's oil production dropped by nearly a third. In January, Beijing had to send 180 peacekeepers to stabilise the area and protect its oil interests.
Second, managing the newly acquired companies can be tricky. There have been reports of difficulties in retaining existing staff and reconciling Chinese and international management.
Third, Chinese international merger and acquisition investment remains small compared to that of the leading Western countries. In 2013, China's cumulative outward foreign direct investment was US$614 billion, less than one tenth that of the US. Thus, China still has a long way to go before becoming a true global leader in outward foreign direct investment.
Hongyi Lai is an associate professor at the School of Contemporary Chinese Studies, University of Nottingham, UK. The opinions here are the author's own