China Conference

As SMEs in China aggressively ramp up investments in Europe and US, pundits urge them to consult experts for smoother ride

Chinese companies spent nearly US$46 billion in the US on new businesses and acquisitions from 2000 to 2014, data shows

PUBLISHED : Monday, 02 November, 2015, 7:21pm
UPDATED : Monday, 02 November, 2015, 7:32pm

Mainland China’s small and medium-sized enterprises (SMEs), which make up about 98 per cent of businesses in the country, are becoming more aggressive in investing abroad, putting their expansion efforts on the fast track.

“Over the past one to two years, a lot of Chinese SMEs have increased their investments overseas,” Zhang Gao-bo, the founding partner and chief executive at financial services group Oriental Patron, said at the Power Dialogue segment of the South China Morning Post’s China Conference in Hong Kong on Monday.

Zhang expects this trend to continue as more SMEs learn to be as savvy as larger Chinese enterprises in using mergers and acquisitions, as well as joint ventures, to significantly grow their operations.

With the participation of more SMEs, Chinese outbound foreign direct investments (OFDIs) are expected to ramp up in the United States and the European Union member-states over the next few years.

Chinese companies spent nearly US$46 billion in the US on new businesses and acquisitions from 2000 to 2014, according to data from research firm Rhodium Group.

Strong protection of intellectual property rights, a large talent pool and so-called innovation clusters, such as California’s Silicon Valley are the major draws in the US for Chinese companies, according to a report by the research firm.

It said Chinese companies “now spend hundreds of millions of dollars every year on research and development activities in the US”. They also provide new financing sources for US start-ups, it added.

Annual investment by Chinese companies in EU member-states soared to 14 billion euros (US$15.4 billion) last year from virtually zero in 2000, according to a separate report on Chinese OFDIs in Europe by Rhodium researchers Thilo Hanemann and Miko Huotari.

Germany’s advanced manufacturing capabilities were the biggest attraction for Chinese investors as automotive and industrial equipment accounted for more than 65 per cent of total Chinese investment since 2000.

In recent years, the industry mix for those investments has broadened to include information technology equipment, finance and business services, as well as consumer products.

Lawyer Tong Mao, a specialist in cross-border acquisitions at Squire Patton Boggs in Beijing, said on Monday that Chinese SMEs will increasingly need the advice of experts to help them navigate regulatory and legal minefields in overseas markets.

Tong cited as an example the trouble encountered by Huawei Technologies, China’s biggest manufacturer of telecommunications equipment, when it sought to acquire companies in the US over the last decade.

Huawei had to withdraw from a US$2.2 billion deal in 2007 to take over US networking equipment maker 3Com and a smaller US$2 million purchase of technology firm 3Leaf Systems in 2010.

Tong said Huawei had failed to notify the proper authority about its acquisitions. Those deals are within the purview of the Committee on Foreign Investment in the United States. The inter-agency body is tasked with assessing the national security implications of mergers, acquisitions and takeovers that could result in foreign control of any US business.

Both Zhang and Tong said they expect Hong Kong to provide more Chinese SMEs with valuable support in terms of legal infrastructure, financing and potential partnerships to pursue strategic international investments.