Staying under the radar
In the face of US and its allies blocking high-profile investments, Chinese companies should look to make smaller, low key investments and acquisitions
Chinese direct investment in the United States plunged by an estimated 83 percent in 2018 according to a report released this month by the international law firm Baker McKenzie. The fall was blamed on the impacts of the US-China trade frictions and the extending of the range of investments that the Committee on Foreign Investment in the US has the right to review and reject. The situation is also looking bleak for 2019 with US actions against Huawei, including the pressure being applied by the US administration on Australia, Canada, New Zealand, United Kingdom and Germany, to limit Huawei's business expansion in the supply of 5G telecommunications networks. So where next for Chinese companies wishing to invest overseas?
Given the political climate in the US, I believe that Chinese companies will have to be patient and not try to do too much investment until the political heat starts to dissipate and maybe there is a recession in the US which will make them more willing to engage. But I would also encourage Chinese companies to hold on to their global ambitions with strong resolve to "ride out" the uncertain and bumpy times. Perhaps they might have to "go global" a bit more slowly for a while. But I still believe there are lots of good opportunities for Chinese investment in European (especially Eastern European) and Southeast Asian countries, as well as other countries participating in the Belt and Road Initiative.
Why? Because the underlying, fundamental reasons why both China and its partner countries can benefit from overseas investment from China still remain valid. China needs to gain access to overseas technologies and R&D capabilities to help continue the process of upgrading the Chinese economy and capacities. At the same time, Chinese investment can bring overseas companies access to the huge market in China. Chinese investment can also help foreign companies take their innovations from the laboratory into reliable, mass-market products by using the proven skills Chinese companies have in developing the process technologies required to manufacture new products at large scale and affordable prices. Chinese companies can also bring the capacity, experience, and financing to undertake the large infrastructure projects in sectors such as energy, transport that so much of the world, including Europe, needs. And in the new, digital economy Chinese companies such as Alibaba, Tencent and Byte-dance can use overseas investment to bring their innovative services and business models to other countries.
By looking for smaller, politically "low key" investments and acquisitions that can still be important in gaining access to advanced technologies and know-how, rather than attempted takeovers of high-profile brands, they can stay away from politically controversial investment and stay under the radar while building relationships with potential partners and those interesting in selling their companies.
In the UK, for example, this means focusing on smaller companies and startups, as well as relationships with research institutes technologies such as artificial intelligence, next generation semiconductors and biotechnology. Huawei, for example, acquired the Centre for Integrated Photonics with 45 R&D staff in the UK in 2012. It has more than doubled the number of scientists and engineers employed at the site, invested millions of pounds, and integrated its acquisition to become the core of Huawei's global photonics chip development, with the chips produced at scale at a new manufacturing facility in Wuhan.
In Germany, meanwhile, there are many opportunities for Chinese investments in medium-sized companies. Many of these companies need a larger partner to help them scale up and gain access to the Chinese market and beyond. They are also run by a generation of entrepreneurs who are getting older and want to retire, but whose children are not interested in taking over. A good example of the potential is Sany Heavy Industries' acquisition of family-owned Putzmeister, the German maker of machinery for pumping concrete. The investment helped Sany break into new markets in Europe and the US and become a global leader in the sector. More recently there has been increased political debate about Chinese foreign investment in Germany. The leading German industry association described China as "strategic competitor" in a recent report. But it also recognized the benefits, noting that German supply chains are now closely integrated with China's and the export opportunities of the Chinese market are so vast that any economic disengagement from China would entail enormous costs. Because of this, I expect opportunities for Chinese investment in Germany to remain fairly open.
Recent statistics also suggest there is untapped potential for investment in Central and Eastern Europe. In 2018 Chinese investment grew by 185 percent in Hungary, 355 percent in Croatia and 162 percent in Poland, albeit from a low base.
There are also many potential opportunities for Chinese investment in Southeast Asia. This is driven in part, by the huge demand for infrastructure and Chinese companies' skills and experience in building and operating ports, railways and roads. But there are also opportunities to make acquisitions. Mergers and acquisitions in members of the Association of Southeast Asian Nations along the 21st Century Maritime Silk Road reached a new high last year, representing a quarter of the total Chinese cross-border M&As along the Belt and Road. A good example is Alibaba's acquisition of the Southeast Asian e-commerce company, Lazada, which with an infusion of Chinese investment and know-how has now become the largest e-commerce operator in Malaysia, Vietnam, Thailand and the Philippines.
Despite all the instability, and the political and trade frictions, then there are still attractive opportunities for Chinese companies to invest abroad. But to be successful, investors will need to be more flexible and visionary to navigate the unprecedented level of global uncertainties we are now living through. And Chinese investment in the US could well remain substantially blocked for the next two or three years. Fortunately, as I have indicated there are opportunities elsewhere for Chinese companies that are willing to rethink their strategies and look for new types of investments in Europe, Asia and beyond.
The author is professor of international management at Judge Business School of University of Cambridge. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.
(China Daily 01/30/2019 page13)
