Mergers & Acquisitions

Why China is investing heavily in Europe

Philippe Le Corre and Alain Sepulchre consider the reasons behind the surge in Chinese investment in European companies and assets, which offer legal security and some of the best technologies worldwide

PUBLISHED : Sunday, 15 May, 2016, 1:00pm
UPDATED : Sunday, 15 May, 2016, 1:00pm

For long a laggard, Europe has become a preferred arena for China’s outbound investment in the West. Over the past few years, it has consistently attracted both state-run and private Chinese enterprises looking for investment opportunities, despite the historical, geographic, legal, linguistic, societal and cultural complexities of such a move.

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Unlike trade and tourism, investment is about a long-term commitment best associated with a stable and legally secure environment. Whereas during the first decade of the 21st century, there was little significant Chinese investment in Europe, the figures since 2010 show a real surge. According to a report published jointly by the law firm Baker & McKenzie and the New York-based Rhodium Group, the total stock of Chinese investments in Europe went from US$6 billion in 2010 to US$55 billion in 2014. Bruegel, a Brussels-based think tank, estimates the distribution of Chinese outbound foreign direct investment flows as follows: 19 per cent of total Chinese foreign direct investment took place in Europe (stock: US$13.9 billion) and 13 per cent in North America (stock: US$11.4 billion), which has also become an important recipient.

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Chinese FDI in Europe increased by 44 per cent in 2015, and could jump dramatically this year, especially as top investor ChemChina is expected to acquire Syngenta, the Switzerland-based agri-business group, in a US$43 billion deal. In 2015, the same ChemChina purchased one of the world’s most famous tyre manufacturers, Italy’s Pirelli, for US$7.7 billion. Another major Chinese investor in Europe is Dalian Wanda, which acquired Britain’s yacht maker Sunseeker for £320 million (HK$3.6 billion) and is involved in massive property developments in Britain and France.

Five key reasons can explain why Europe has become more attractive to Chinese investors.

First, the debt crisis in 2008 was a crucial moment, when the Chinese government started buying eurobonds as well as investing in infrastructure companies at extremely competitive valuations – one good example being Greece’s Piraeus port. It is now almost entirely run by China’s Cosco Holding, after it acquired a 67 per cent stake from the Greek port authority.

Second, countries like Germany, Italy, France and the UK offer a unique selection of small and medium-sized enterprises with some of the best technologies worldwide. For Chinese companies in fields such as autos, food, energy, transport, luxury brands, entertainment and travel, it represents a way to transfer know-how to their home country and build world-class enterprises.

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Third, one could certainly argue that relations between China and Europe are much less competitive and confrontational than the US-China relationship. Unlike the United States, where the Committee on Foreign Investment in the US looks at national security issues in certain areas and transactions, European countries do not have such a mechanism.

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Fourth, though these FDIs are the result, in most cases, of individual business decisions, they have been clearly ramped up by Beijing’s political decision to deploy capital outside its borders from the late 1990s (the “going out” policy). In the case of Africa or Asia, it is primarily about natural resources; in the case of European countries, it is about acquiring brands, technology and expanding China’s footprint, with massive financial assistance from state-run and commercial banks, and sovereign funds.

Fifth, the rise of Chinese transactions also had a lot to do with bilateral relations between China and individual European countries. The top recipients of Chinese FDI – the UK, France, Germany, Italy and Portugal – all have their own set of relationships with China. Sixteen countries now meet China on a yearly basis under a mechanism called “16+1” .There is no doubt that the Chinese government has been good at playing one country against the other, and using FDI as a tool. Once, European countries were fighting for a share of the Chinese consumer market; today, they are competing for a share of Chinese capital.

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Nonetheless, this European wave of Chinese investments faces numerous challenges.

First, human resources have been a complex issue to Chinese investors. Just like Japanese companies in the 1980s, they have often found it hard to relinquish power to European managers. In those cases, European employees have a “cosmetic” role. In other instances, they tend to manage their European assets too loosely, with senior staff from Beijing talking to their subsidiaries of vague ambitions, for instance on “synergies”.

Second, job creation is still relatively limited. Due to the lack of transparency, it is very hard to determine how many Europeans are actually employed by Chinese companies. Our estimate is 40,000.

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Third, many Chinese investors are state-driven and have easy access to cheap credit. Moreover, they see their investment overseas as a way to diversify away from the dwindling earnings at home or a way to push money out of China. Thus, too often, they spend freely but not effectively. Most wineries have been acquired at extravagant valuations.

Fourth, in Europe as in some other major economies, debate is intensifying between national governments and civil societies over the long-term benefits of welcoming Chinese investment.

Fifth, China’s communications and public relations – whether in politics or business – is not always good and this can affect Chinese FDI in Europe. For example, many people in Germany and Italy – two of the top recipient countries of Chinese FDI – still have negative perceptions of China.

Finally, many complain in Europe about the lack of reciprocity in China itself in a large number of sectors, such as finance, telecoms, media, logistics and health care. There is hope in the EU that progress on a bilateral investment treaty – if signed this year or next – would improve the situation. But the shift in Beijing’s growth model should lead to a steady outflow of capital that will probably result in China surpassing Japan as the largest net creditor.

Philippe Le Corre and Alain Sepulchre are co-authors of the newly released book China’s Offensive in Europe