For a closer look at the interplay between China and the EU, their companies and nationals, as well as what’s needed from both sides to strengthen China-EU ties, TheLINK sat down for an exclusive interview with CEIBS Professor of Strategy and International Business Klaus Meyer, who is also Director of CEIBS Research Centre for Emerging Market Studies.
TheLINK: There has been a lot of discussion, over the past few years, about what appears to be an increasing number of Chinese making their mark by investing overseas. How significant is this trend, how has it evolved and is there any difference between how Chinese invest in Europe and how they invest in other parts of the world?
We’ve seen a big increase of Chinese outward investment over the decade, especially in overseas acquisitions. Very often they were driven by motivations such as the search for technology and brands with the aim of strengthening the acquirers’ business in China. This is different from the traditional motivation for foreign direct investment, which is about selling overseas.
So, there were a lot of acquisitions that were motivated, ultimately, by the desire to strengthen market position in China, and maybe develop global presence later on. It was about first building the capabilities of the firm, rather than building export markets abroad. That’s specific to how the Chinese invest in Europe. If you look at Chinese investments in South-East Asia or in Africa, they have different motivations. In South-East Asia, it’s typically more traditional market-seeking type of investment. In Africa, in Latin America, or in Australia, it’s very often for natural resource seeking or infrastructure investments. Those types of investment we have not seen in large numbers in Europe. There were some investments in infrastructure construction projects but as far as I know, they’ve not been very successful because the European regulatory environment for infrastructure projects is very different and approval processes are very complicated. This is difficult territory for Chinese infrastructure businesses to navigate.
Increasingly we also see investment driven by financial motivations, portfolio investment. Wealthy Chinese entrepreneurs want to diversify their risk and therefore invest overseas. Sometimes that includes some individuals who want to establish a second home base as their children study abroad. Some of these investors buy real estate abroad; others buy equity stakes in local companies without getting involved in the management.
TheLINK: How do unexpected devaluations of the Chinese currency, for example those two drops that took place back-to-back this August, impact the decisions made by Chinese who invest abroad?
Both the portfolio investors and the strategic asset seeking investors from China tend to have long-term perspectives. Compared to an American investor, they’re less concerned about the next quarterly results because they don’t have to answer to external shareholders. That means if the euro is weak, that is an acquisition opportunity. And if the euro goes further down in the short term, that’s a risk they are willing to take.
Also if, for example, they want to bring technology from Europe to China, the market opportunity for that technology in Europe is only part of the value they expect from the deal. They want to bring the acquired knowledge back to China to enhance their competitive position at home. This type of investment, if anything, should increase because of the weak euro.
As for portfolio investments, as long as we have successful entrepreneurs in China with money to invest, especially people who make money through real estate, they will also be interested in buying real estate in Europe. It’s a matter of portfolio diversification, and it’s also about learning how the real estate market works in Europe. So, I would expect the Chinese investment in Europe to continue.
TheLINK: The globalisation of Chinese companies has now become THE catch phrase that’s on everyone’s lips. How are they doing? Have they learnt any lessons along the way?
They have learnt some lessons over the past 10 years. Initially they made a few bad purchases because they didn't know how to do due diligence very well, didn’t have experience with working with professional advisors, legal advisors, financial advisors that help you do due diligence, and they didn’t have experience with M&A. This was ten years ago. By now, they have, generally speaking, become more savvy in terms of how they negotiate deals and how they do due diligence. Although, just this week (late September), I read that Lübeck Airport in Germany, which was recently taken over by a Chinese entrepreneur, filed for bankruptcy protection. This sort of thing continues to happen to overly confident entrepreneurs.
We’re also seeing sequential acquisitions by the first wave of companies that went abroad. For example Shanghainese business group Bright Foods has done several acquisitions in Australia and New Zealand, and recently acquired the famous cereal brand Weetabix in the UK. Another business from Shanghai, the ShangGong Group has become a world leader for sewing machines. They made their first acquisition in Germany in 2005, and went through various ups and downs until the finally made it a success story. In 2013, they acquired two more high tech sewing machine companies in Germany that they now integrate with their earlier acquisition. And the latest news is that they took 26% equity in a knitting machine company, also in Germany. Similarly, the Weichai Group made several acquisitions starting with a purchase in Italy, one in France before they went to their biggest deal so far, Kion in Germany, one of the biggest deals in Germany. Clearly, important learning processes are going on here. Once a company does their second, third, or fourth acquisition, they have learned from the experience and get better at managing an acquisition.
During its first acquisition, a Chinese company typically doesn’t have much experience in international business, and thus is bound to have problems in integrating the target company. They will often use an arms-length relationship to minimise the cross-cultural conflicts and also to prevent the people-embedded capabilities of the organisation being acquired from walking out the door. That’s why in cases where technology is being acquired, a hands-off approach is often very sensible.
TheLINK: When is a more hands-on approach needed?
Generally speaking, if you take over a company that is almost bankrupt or is really losing money, that company is badly in need of restructuring so you have to be proactive. If you acquire a company that is well run, one that at the very least is not losing money, then you can take a much more gradual approach. If you trust the local management team or find someone who can serve as the interface between the company being acquired and the company making the purchase, it may work. Finding the right person is a critical issue, but once you do then you can run it at arms-length. If the company is struggling, then the owner has to become more involved.
Also, if you have a second or third acquisition and need all the various parts to work together, that can be a challenge. In 2013 ShangGong group, which I mentioned before, took over an essentially bankrupt competitor of their earlier acquired German business. They then had the challenge to integrate the two German companies. In a situation like that, you cannot take a hands-off approach.
TheLINK: Let’s now shift from the corporate world to the macro level. When you think of the EU-China economic and trade relationship, what are some of the most interesting aspects, some interesting facts that people may not immediately think about or grasp?
One of the interesting things, when looking at EU trade with China, is that different EU countries have different trade relationships with different emerging markets. If you look at the variations across countries you see that Germany, the UK and the Nordic countries do much more business with China than the Southern-Eastern European countries. Germany has the strongest China-orientation in terms of export. In 2014, Germany accounted for 46% to 48% of EU exports to China, depending on whether you read EU or Chinese statistics. Seen from the German side, 6.6% of German exports go to China, compared to the UK at 5.1% and an EU average of 3.5%. So in terms of exploiting opportunities and working with China on the European side, Northern European countries have been more successful than Southern European countries.
TheLINK: For European companies thinking about exporting to China, what factors should they bear in mind?
The Chinese imports from Northern Europe are often driven by the trust in technological quality and reliability, durability, precision – the sort of traits that are typically associated with German and Swiss products, and to some extent Nordic countries. Let’s hope the recent VW software scandal will not dent that! In terms of fashion, design, prestige, French and Italian brands especially are very well positioned in the minds of Chinese consumers.
The opportunities and challenges look quite different from an East European to a Southern European perspective. Companies from those countries face the challenge to build brand name, these countries are not well known in China, and Chinese customers do not associate any particular attributes to those countries.
Switzerland is a special case. They are very China-export oriented. Switzerland apparently exports more to China than UK or France, for example. In terms of positioning, their position is similar to Germany. As of summer 2014, the Swiss have a free trade agreement with China. Thus, in some industries, Swiss companies would have an advantage over a German competitor because tariff barriers are lower.
TheLINK: What’s next in terms of trade and investment for both sides? How can they enhance their existing relationship?
Ideally we would like to move towards a more balanced relationship where trade flows and investment flows are balanced in both ways. So, we don’t want to have big imbalances – both for EU as a whole and for specific countries. We need to develop the institutional framework to promote that. Some form of free trade agreement would be suitable, but given the complexities in the differences in the EU, one shouldn’t be overly ambitious in terms of how detailed that should be. Bringing down tariffs is the key thing that needs to be achieved.
There are also some things that need to be addressed in the area of investment protection. From a European perspective, law enforcement is more of an issue rather than the existing legal framework. There is a perception, among many foreign investors, that law enforcement is unequal. We need to make sure there is a level playing field in China, in both action and perception.
Meanwhile, the Europeans need to get their act together and solve the major issues facing them, for example the economic issues surrounding Greece. In many ways, Europeans are inward looking in the sense that they are putting all their energy into solving intra-European issues rather than thinking in terms of the global stage, especially on the political sphere. Businesses probably have a more global perspective than policy makers. Partly that’s because every country wants to get its own special deal with China, rather than coordinating amongst each other. There is too much national pride in small countries. When it comes to doing business in China, Europe is stronger if it acts as one Europe and not lots of different decision makers at different levels, with everybody doing their own thing. When it comes to negotiating with China, it's important that Europe speaks with one voice.
Another key issue is that Europe is overregulated in ways that harm entrepreneurship. They have so many standards that actually make it more difficult to do business. In my view to some extent economic growth is slow in Europe because of overregulation. So, when it comes to improving the relationship, Europe needs to do its own homework in terms of economic policy.
Overall, the potential mutual benefits in the EU-China relationship are huge. Key players on both sides know the value of making this work. But there is also a need to further enhance the understanding on how these so very different societies really work, and thus a sensitive approach is needed on many issues.