by Nicola Casarini
Chinese companies made record bids for foreign acquisitions in the first quarter of 2016, focusing especially on agriculture, manufacturing and tourism. But while such investments have been met with open arms in Europe, regulatory resistance is stiff in the United States. With Chinese firms eager to gain Western technology, brands and customer bases, the European Union is likely to benefit, writes GIS Guest Expert Nicola Casarini.
A decade ago, Chinese investment abroad was almost nonexistent. Today, China is one of the world’s top three sources of foreign investment. According to financial data provider Dealogic, Chinese firms put up some $102 billion to buy foreign companies between the beginning of the year and mid-March 2016. This includes the mega-bids for Swiss agrochemical firm Syngenta by China National Chemical Corporation (ChemChina) and for Starwood Hotels & Resorts by a consortium led by Chinese insurer Anbang. Anbang’s $13 billion bid ultimately failed, but the numbers are still eye-popping. For comparison, Chinese companies spent $106 billion overseas throughout the whole of 2015.
The value of Chinese firms’ offshore assets is set to triple from about $6.4 trillion in 2015 to nearly $20 trillion by 2020, according to a joint report by the Rhodium Group, a research company, and the Mercator Institute for China Studies. A growing share of these offshore assets will be in Western countries.
China’s global stock of investment abroad, which includes corporate mergers, acquisitions and spending on start-ups, is expected to grow from $744 billion to $2 trillion by 2020. There is plenty of room to grow. Today China’s stock of outbound investment represents only about 7 percent of gross domestic product. In Germany, the proportion is 47 percent, in the U.S. it is 38 percent and in Japan it is 20 percent.
Growing appetite
Chinese companies undertake cross-border deals for many reasons, including access to resources, expertise, technology and brands, as well as to move up the value chain. A classic example is Lenovo’s acquisition of IBM’s personal computer business, which allowed the Chinese firm to gain global distribution, operational expertise and brand value. Chinese companies are increasingly eager to learn from their global competitors and absorb best practices in areas such as risk management, quality control and information technology.
The Chinese government is actively pushing state-owned enterprises (SOEs) to acquire resource, mining and energy assets abroad, in an effort to feed the country’s growing appetite for just about everything. Plummeting commodity prices are making some foreign companies cheap to buy.
The state-owned firms have capital at hand, while low interest rates make it easier for private companies to borrow. According to Morning Whistle Group, an internet platform for cross-border investment, private companies completed about 77 percent of Chinese mergers and acquisitions (M&A) deals in 2015, while state-owned enterprises accounted for slightly more than 20 percent. The main target sectors were technology, media and telecommunications, agriculture and food, energy and mineral resources.
However, the mega-deals remain largely the preserve of the SOEs, which use M&A to gain a foothold abroad and achieve economies of scale. These firms often follow government directives when investing abroad, receiving institutional support and access to cheap financing in return.
Political backing
After having relied on investment from other countries for years, China has begun encouraging domestic companies to invest and operate overseas. This is all the more important for the Chinese firms saddled with debt, overcapacity and losses – the so-called “zombie companies” – many of them SOEs. Their situation is partly the result of huge investments Chinese authorities required them to make to stimulate the economy after the 2008 global financial crisis crimped international demand. Acquisitions abroad address these problems by offering a better return on capital – which is declining inside China – and by allowing firms to offload some of their debt onto newly purchased companies.
The People’s Bank of China (PBOC) has designed loan schemes to support companies that invest overseas. These dovetail with the country’s huge One Belt, One Road (OBOR) infrastructure initiative, which is meant to help the Chinese economy switch from export-led growth to a system that relies more on domestic consumption and outward investment.
China’s total financial commitment to OBOR is expected to reach $1.4 trillion, and Beijing has set up a number of special funds to finance related projects. One of these is the Silk Road Fund, which has an initial allocation of $40 billion coming from the PBOC’s reserves, the China Investment Corporation (a sovereign wealth fund), the Export-Import Bank of China and the China Development Bank. But the funds are also being used to finance takeovers abroad. When ChemChina bought Italian tire maker Pirelli for $7.7 billion in 2015, the deal was partially backed by the Silk Road Fund.
International harvest
Chinese government ministries are supporting state-owned firms’ foreign investment, especially in energy, mining and logistics. The Ministry of Agriculture encourages Chinese companies to acquire farmland and agriculture firms overseas. Australia and New Zealand are two of the most popular destinations for such investments, because foreigners there can own land outright. Pengxin, a Shanghai real estate and chemical company, is the lead bidder for 77,000 square kilometers of grazing lands controlled by the S. Kidman & Co. cattle empire in Australia, in addition to holdings it had already purchased in New Zealand. In November 2015, Canberra blocked the $257 million sale on security grounds. However, Pengxin has made another bid.
Chinese authorities are also encouraging SOEs to crack the agribusiness industry. In January 2016, ChemChina made a bid for Syngenta, a Swiss agrochemical business. Worth over $43 billion, it is the largest ever attempted overseas acquisition by a Chinese firm. The Swiss firm’s management has endorsed the deal, but the proposed transaction must still be approved by regulators in several countries.
China has 40 percent of the world’s farmers but only 7 percent of the arable land and 6 percent of the renewable water resources. Some experts have concluded that China must expand overseas in order to guarantee its food security. The country’s self-sufficiency in food is eroding as its increasingly wealthy citizens change their dietary habits and consume more meat.
China is still a net exporter of some agricultural commodities, but has become increasingly reliant on imports such as soybeans. Syngenta develops genetically engineered seeds, and its intellectual property could give ChemChina more flexibility in the tightly regulated Chinese market for biotech crops. Moreover, the takeover would help ChemChina expand Syngenta’s business in China and other emerging markets, and give it a foothold in the U.S.
Higher gear
ChemChina is also the parent of China National Tire & Rubber Company (CNTR), which was at the forefront of the Pirelli acquisition. The deal gave CNTR access to the most important car manufacturers around the world. It also gave the firm entry into the replacement market, a segment dominated by the major European and Japanese brands. Buying Pirelli also fit with recent moves by Chinese car manufacturers. Geely acquired Volvo in 2010 and Dongfeng Motor took a 14 percent share of PSA Peugeot Citroen in 2014. Cross-border deals were a natural step for their Chinese suppliers.
After the Pirelli acquisition, ChemChina joined a consortium of investors that made a $1 billion bid for KraussMaffei Group, a maker of equipment that processes plastics and rubber. Once complete, the transaction will be the largest Chinese takeover to date of a German company. With these deals, ChemChina has managed to move up the value chain and build a global economy of scale.
Going places
The tourism industry has become the newest target of China’s strategy. In March, a consortium led by Anbang, a Chinese insurance group, made an offer for Starwood Hotels & Resorts. Eventually, its $13 billion bid was turned down in favor of a $13.3 billion offer by Marriott. (Anbang initially said it would raise its bid to $14 billion, but later walked away.) If it had gone through, the transaction would have been the largest acquisition by a Chinese company in the U.S.
Days before making the Starwood bid, Anbang bought the U.S. group Strategic Hotels & Resorts from private equity group Blackstone for $6.5 billion. In 2014, Blackstone also sold the Chinese company the famous Waldorf Astoria hotel in New York for nearly $2 billion. In the past 18 months, Anbang has spent more than $23 billion, gobbling up international assets in insurance, financial services, real estate and lodging.
According to the China Tourism Research Institute, the number of Chinese outbound tourists rose to 120 million in 2015, an increase of 12 percent over 2014. They spent some $104.5 billion on their trips, 16.7 percent more than the previous year. As Chinese become more affluent, they can now afford to stay in the hotels that their homegrown firms are buying.
Transatlantic contrast
The recent Syngenta mega-bid could face a backlash from regulators, especially in the U.S., where the Committee on Foreign Investment could block the deal if it is deemed to endanger the country’s food supply, and thereby its national security. In February, Fairchild Semiconductor International rejected a $2.5 billion takeover offer from a Chinese-led group, opting instead for a smaller offer from an American rival. The company cited concerns that U.S. regulators could block the deal with the Chinese. The unsuccessful offer was one of at least 10 failed Chinese bids in the last year, according to the New York Times.
The winner in the battle between American regulators and Beijing-backed companies will be Europe, which has clearly become the preferred destination for Chinese investors. According to the China Global Investment Tracker, a joint project of the American Enterprise Institute and the Heritage Foundation, between 2005 and 2016, China invested nearly $164 billion in Europe (including non-European Union countries). During the same period, it invested $103 billion in the U.S.
The Rhodium Group found that between 2000 and 2014, Chinese companies spent 46 billion euros ($52 billion) on 1,047 direct investments (greenfield projects and acquisitions) in the EU-28 countries, with the vast majority of the transactions coming after 2009. The United Kingdom received the biggest share of that amount, with a total of 12.2 billion euros ($13.8 billion), followed by Germany with 6.9 billion euros ($7.8 billion) and France with 5.9 billion euros ($6.7 billion). In 2015, however, ChemChina’s acquisition of Pirelli put Italy in the top position.
Chinese companies show no sign of slowing their investment push. More big deals can be expected in coming years. If the American politicians and regulators continue their stiff resistance to Chinese investment, Europe will see even more money flowing in.
Related GIS Articles:
Source: Geopolitical Information Service
Comment
|
April 27th, 2016
Chinese firms’ spending spree favors Europe over U.S.
by Nicola Casarini Chinese companies made record bids for foreign acquisitions […]
by Nicola Casarini
Chinese companies made record bids for foreign acquisitions in the first quarter of 2016, focusing especially on agriculture, manufacturing and tourism. But while such investments have been met with open arms in Europe, regulatory resistance is stiff in the United States. With Chinese firms eager to gain Western technology, brands and customer bases, the European Union is likely to benefit, writes GIS Guest Expert Nicola Casarini.
A decade ago, Chinese investment abroad was almost nonexistent. Today, China is one of the world’s top three sources of foreign investment. According to financial data provider Dealogic, Chinese firms put up some $102 billion to buy foreign companies between the beginning of the year and mid-March 2016. This includes the mega-bids for Swiss agrochemical firm Syngenta by China National Chemical Corporation (ChemChina) and for Starwood Hotels & Resorts by a consortium led by Chinese insurer Anbang. Anbang’s $13 billion bid ultimately failed, but the numbers are still eye-popping. For comparison, Chinese companies spent $106 billion overseas throughout the whole of 2015.
The value of Chinese firms’ offshore assets is set to triple from about $6.4 trillion in 2015 to nearly $20 trillion by 2020, according to a joint report by the Rhodium Group, a research company, and the Mercator Institute for China Studies. A growing share of these offshore assets will be in Western countries.
China’s global stock of investment abroad, which includes corporate mergers, acquisitions and spending on start-ups, is expected to grow from $744 billion to $2 trillion by 2020. There is plenty of room to grow. Today China’s stock of outbound investment represents only about 7 percent of gross domestic product. In Germany, the proportion is 47 percent, in the U.S. it is 38 percent and in Japan it is 20 percent.
Growing appetite
Chinese companies undertake cross-border deals for many reasons, including access to resources, expertise, technology and brands, as well as to move up the value chain. A classic example is Lenovo’s acquisition of IBM’s personal computer business, which allowed the Chinese firm to gain global distribution, operational expertise and brand value. Chinese companies are increasingly eager to learn from their global competitors and absorb best practices in areas such as risk management, quality control and information technology.
The Chinese government is actively pushing state-owned enterprises (SOEs) to acquire resource, mining and energy assets abroad, in an effort to feed the country’s growing appetite for just about everything. Plummeting commodity prices are making some foreign companies cheap to buy.
The state-owned firms have capital at hand, while low interest rates make it easier for private companies to borrow. According to Morning Whistle Group, an internet platform for cross-border investment, private companies completed about 77 percent of Chinese mergers and acquisitions (M&A) deals in 2015, while state-owned enterprises accounted for slightly more than 20 percent. The main target sectors were technology, media and telecommunications, agriculture and food, energy and mineral resources.
However, the mega-deals remain largely the preserve of the SOEs, which use M&A to gain a foothold abroad and achieve economies of scale. These firms often follow government directives when investing abroad, receiving institutional support and access to cheap financing in return.
Political backing
After having relied on investment from other countries for years, China has begun encouraging domestic companies to invest and operate overseas. This is all the more important for the Chinese firms saddled with debt, overcapacity and losses – the so-called “zombie companies” – many of them SOEs. Their situation is partly the result of huge investments Chinese authorities required them to make to stimulate the economy after the 2008 global financial crisis crimped international demand. Acquisitions abroad address these problems by offering a better return on capital – which is declining inside China – and by allowing firms to offload some of their debt onto newly purchased companies.
The People’s Bank of China (PBOC) has designed loan schemes to support companies that invest overseas. These dovetail with the country’s huge One Belt, One Road (OBOR) infrastructure initiative, which is meant to help the Chinese economy switch from export-led growth to a system that relies more on domestic consumption and outward investment.
China’s total financial commitment to OBOR is expected to reach $1.4 trillion, and Beijing has set up a number of special funds to finance related projects. One of these is the Silk Road Fund, which has an initial allocation of $40 billion coming from the PBOC’s reserves, the China Investment Corporation (a sovereign wealth fund), the Export-Import Bank of China and the China Development Bank. But the funds are also being used to finance takeovers abroad. When ChemChina bought Italian tire maker Pirelli for $7.7 billion in 2015, the deal was partially backed by the Silk Road Fund.
International harvest
Chinese government ministries are supporting state-owned firms’ foreign investment, especially in energy, mining and logistics. The Ministry of Agriculture encourages Chinese companies to acquire farmland and agriculture firms overseas. Australia and New Zealand are two of the most popular destinations for such investments, because foreigners there can own land outright. Pengxin, a Shanghai real estate and chemical company, is the lead bidder for 77,000 square kilometers of grazing lands controlled by the S. Kidman & Co. cattle empire in Australia, in addition to holdings it had already purchased in New Zealand. In November 2015, Canberra blocked the $257 million sale on security grounds. However, Pengxin has made another bid.
Chinese authorities are also encouraging SOEs to crack the agribusiness industry. In January 2016, ChemChina made a bid for Syngenta, a Swiss agrochemical business. Worth over $43 billion, it is the largest ever attempted overseas acquisition by a Chinese firm. The Swiss firm’s management has endorsed the deal, but the proposed transaction must still be approved by regulators in several countries.
China has 40 percent of the world’s farmers but only 7 percent of the arable land and 6 percent of the renewable water resources. Some experts have concluded that China must expand overseas in order to guarantee its food security. The country’s self-sufficiency in food is eroding as its increasingly wealthy citizens change their dietary habits and consume more meat.
China is still a net exporter of some agricultural commodities, but has become increasingly reliant on imports such as soybeans. Syngenta develops genetically engineered seeds, and its intellectual property could give ChemChina more flexibility in the tightly regulated Chinese market for biotech crops. Moreover, the takeover would help ChemChina expand Syngenta’s business in China and other emerging markets, and give it a foothold in the U.S.
Higher gear
ChemChina is also the parent of China National Tire & Rubber Company (CNTR), which was at the forefront of the Pirelli acquisition. The deal gave CNTR access to the most important car manufacturers around the world. It also gave the firm entry into the replacement market, a segment dominated by the major European and Japanese brands. Buying Pirelli also fit with recent moves by Chinese car manufacturers. Geely acquired Volvo in 2010 and Dongfeng Motor took a 14 percent share of PSA Peugeot Citroen in 2014. Cross-border deals were a natural step for their Chinese suppliers.
After the Pirelli acquisition, ChemChina joined a consortium of investors that made a $1 billion bid for KraussMaffei Group, a maker of equipment that processes plastics and rubber. Once complete, the transaction will be the largest Chinese takeover to date of a German company. With these deals, ChemChina has managed to move up the value chain and build a global economy of scale.
Going places
The tourism industry has become the newest target of China’s strategy. In March, a consortium led by Anbang, a Chinese insurance group, made an offer for Starwood Hotels & Resorts. Eventually, its $13 billion bid was turned down in favor of a $13.3 billion offer by Marriott. (Anbang initially said it would raise its bid to $14 billion, but later walked away.) If it had gone through, the transaction would have been the largest acquisition by a Chinese company in the U.S.
Days before making the Starwood bid, Anbang bought the U.S. group Strategic Hotels & Resorts from private equity group Blackstone for $6.5 billion. In 2014, Blackstone also sold the Chinese company the famous Waldorf Astoria hotel in New York for nearly $2 billion. In the past 18 months, Anbang has spent more than $23 billion, gobbling up international assets in insurance, financial services, real estate and lodging.
According to the China Tourism Research Institute, the number of Chinese outbound tourists rose to 120 million in 2015, an increase of 12 percent over 2014. They spent some $104.5 billion on their trips, 16.7 percent more than the previous year. As Chinese become more affluent, they can now afford to stay in the hotels that their homegrown firms are buying.
Transatlantic contrast
The recent Syngenta mega-bid could face a backlash from regulators, especially in the U.S., where the Committee on Foreign Investment could block the deal if it is deemed to endanger the country’s food supply, and thereby its national security. In February, Fairchild Semiconductor International rejected a $2.5 billion takeover offer from a Chinese-led group, opting instead for a smaller offer from an American rival. The company cited concerns that U.S. regulators could block the deal with the Chinese. The unsuccessful offer was one of at least 10 failed Chinese bids in the last year, according to the New York Times.
The winner in the battle between American regulators and Beijing-backed companies will be Europe, which has clearly become the preferred destination for Chinese investors. According to the China Global Investment Tracker, a joint project of the American Enterprise Institute and the Heritage Foundation, between 2005 and 2016, China invested nearly $164 billion in Europe (including non-European Union countries). During the same period, it invested $103 billion in the U.S.
The Rhodium Group found that between 2000 and 2014, Chinese companies spent 46 billion euros ($52 billion) on 1,047 direct investments (greenfield projects and acquisitions) in the EU-28 countries, with the vast majority of the transactions coming after 2009. The United Kingdom received the biggest share of that amount, with a total of 12.2 billion euros ($13.8 billion), followed by Germany with 6.9 billion euros ($7.8 billion) and France with 5.9 billion euros ($6.7 billion). In 2015, however, ChemChina’s acquisition of Pirelli put Italy in the top position.
Chinese companies show no sign of slowing their investment push. More big deals can be expected in coming years. If the American politicians and regulators continue their stiff resistance to Chinese investment, Europe will see even more money flowing in.
Related GIS Articles:
Source: Geopolitical Information Service
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