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Print[Ferro-alloys.com]As the world tries to recover from the financial crisis, China has once again astonished everyone with its exorbitant and frequent overseas buying.
Shuanghui International Holdings Ltd, China's largest meat producer, offered to buy US pork giant Smithfield Foods Inc. The deal was given the go-ahead from the Committee on Foreign Investment in the United States. If completed, the deal worth $7.1 billion will be the largest acquisition of an American firm by a Chinese company.
Numerous Chinese firms made a name globally by acquiring their more renowned foreign peers. Chinese IT firm Lenovo acquired IBM's PC division in 2005, bringing more brand recognition to Lenovo and an increased market share both at home and abroad. In 2010, Geely, a Chinese automaker based in East China's Zhejiang province, bought a 100-percent share of the Sweden-based Volvo. Volvo's sales volume is expected to hit 800,000 units by 2015. This year, China National Offshore Oil Corp Ltd acquired Canadian oil and gas company Nexen for $15.1 billion. CNOOC's oil and gas output is expected to increase by 20 percent and its proven reserves may grow by 30 percent after the Nexen purchase.
As more Chinese companies clamor to go global, the country has vaulted to become the world's third largest overseas investor in 2012, a significant jump from the sixth spot in 2011.
Nevertheless, Chinese Vice Premier Ma Kai said outward investment by Chinese companies is still in a nascent stage. Ma's remarks came in his keynote speech at the 17th China International Fair for Investment and Trade, which opened on September 8. The CIFIT has been held in Xiamen, a coastal city in Southeast China's Fujian province, annually since 1997.
"Chinese companies lack competitive experience when going global," said Ma.
Ma's viewpoint was echoed by experts and industry insiders who attended the CIFIT. The Chinese Government, they say, needs to make overseas investment easier and better understood to companies that wish to seek markets outside of China.
Branching out
Even though global foreign direct investment contracted 17 percent in 2012, China still became the world's third largest investor, after the United States and Japan, according to a report jointly released by the Ministry of Commerce, the National Bureau of Statistics and the State Administration of Foreign Exchange at the 17th CIFIT. China's outward FDI rose 17.6 percent year on year in 2012 to a record high of $87.8 billion, while global FDI slid 17 percent last year amid uncertainties confronting the world economy, according to the 2012 Statistical Bulletin of China's Outward Foreign Direct Investment.
The trend hasn't stopped this year. In the first seven months of 2013, China's outward FDI in the non-financial sector totaled $50.55 billion, up 19.7 percent year on year. Chinese investors made direct investments in 3,275 foreign companies in 156 countries, according to the MOFCOM.
Huo Jianguo, President of the Chinese Academy of International Trade and Economic Cooperation, a think tank under the MOFCOM, said that the surge in outward FDI was mainly driven by domestic enterprises eager to tap overseas markets and profit from using global resources. "Debt crises and slowing growth in developed economies opened up great opportunities for Chinese enterprises to invest abroad, and the appreciating yuan helped the process," Huo said.
Zhao Zhongxiu, Vice President of the Beijing-based University of International Business and Economics, said globalization has been a buzzword for Chinese companies since 2003. Many Chinese companies, with massive amounts of cash in hand, think the time is ripe to expand overseas after the financial crisis roiled the world and led to fire sale prices of some cash-strapped foreign companies, said Zhao. "There are two types of Chinese companies that want to go global—big state-owned companies that wish to acquire foreign technologies and resources, and the more nimble small and medium-sized private firms that look for business opportunities in overseas markets," he said at a sideline of the 17th CIFIT.
Wu Liang, Administrative Deputy Editor in Chief of the Economy & Nation Weekly magazine, said that "going global" is more than a buzzword for Chinese firms: It's an absolute imperative if they want more say in the world's IT revolution. "The IT revolution changed the world, with the Internet reshaping industrial structures and a reshuffle of the global value chain. If Chinese companies fail to seize overseas opportunities during this process, they will lag further behind their foreign peers."
In terms of where Chinese firms like to invest, experts say it depends on what their objectives are.
Anne Marion-Bouchacourt, Group Chief Country Officer for Société Générale China, said emerging markets may have a lower threshold for Chinese companies, but in order to be the best player in the industry, it's necessary for Chinese firms to compete with the best players in mature markets like the United States and the European Union.
Tough road ahead
Despite soaring outward FDI figures, risks and challenges loom. Li Yizhong, Deputy Director of the Committee for Economic Affairs at the National Committee of the Chinese People's Political Consultative Conference, the country's top political advisory body, said risks might come from social unrest in the invested country, market turbulence and cultural clashes.
Li said the Chinese Government should formulate a national plan to support ambitions for overseas expansion to make it easier for companies to do so. Chinese companies also need to strictly obey laws and regulations in the investment destination countries, especially in terms of intellectual property protection and labor laws, he said. "Having a talent pool specialized in globalization is also a vital factor."
Li also said companies should always pursue win-win outcomes instead of only considering their own gains. A good example is Geely's purchase of Sweden-based Volvo, he said. "Geely promised not to lay off workers, not to shut down factories and not to move factories from Sweden," said Li. "This ensured a smooth purchase."
Zhao warned of a "glass door" that exists in overseas investment, something that Chinese companies should be cognizant of. "You can see through the 'glass door,' but you can't go through it. You have to understand the hidden rules behind the written ones. That's why Chinese companies should do more research before going global," Zhao said. "You can never be too careful."
But many Chinese companies, especially state-owned enterprises, have had their ambitions for overseas acquisitions thwarted in recent years. State-owned CNOOC failed to buy American petrochemical corporation Unocal for $18.5 billion in 2005, a deal that foundered on US allegations of national security concerns. On October 8, 2012, the US House of Representatives Intelligence Committee issued a report alleging that Huawei and ZTE, two Chinese telecom companies, posed a possible threat to US national security. The committee even urged the US Government and the private sector to boycott the two companies. In 2012, US President Barack Obama blocked a wind farm project by Sany Group, China's largest machinery maker, again on national security grounds. Li attributed those setbacks to mounting protectionism that surfaces when economies are in the doldrums.
Carolyn Ervin, Director for Financial and Enterprise Affairs with the Organization for Economic Cooperation and Development, however, said skepticism toward state-backed companies are not specially targeted at Chinese ones, but state enterprises in general. "A large part of the reason that countries are skeptical against state-owned companies is that they are concerned with their relationship with the government, such as unfair advantages in financing, hiring and resources," she said. To that end, China is working closely with OECD countries to make itself better understood, she said.
Marion-Bouchacourt agreed, saying that integration is the most important factor in overseas expansion. "It's all about building a partnership in a way that is acceptable and understandable."
Li said the Chinese Government should ease away from state-owned enterprises in order to address the concerns of foreign governments and should provide privately owned companies with more access to financing. Finally, if companies were the only decision makers regarding overseas expansion, they would be more rational, said Li.
Learning from failures is also extremely important for Chinese firms with a bent toward global expansion, but most failed cases are not disclosed to the public, said analysts during the 17th CIFIT.
Zhao said there are far more failed cases of overseas acquisitions than successful ones. "People love to flaunt successful cases but avoid talking about failures. This is a very serious problem," he said.
"Chinese companies should carefully study those failed cases and learn from them."
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