A survey on China's overseas investment

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Last updated at: (Beijing Time) Thursday, February 26, 2004

A survey on China's overseas investment

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Zhan Xiaoning, a senior official with the United Nations Conference on Trade and Development, said: " China is not only one of the leading recipients of foreign direct investment (FDI) in the world, but also has grown into a capital exporter." China's overseas investment took a leap forward in the last decade. But Chinese enterprises still face a long way ahead in their march toward the world market.

The last decade witnessed a leap forward in China's overseas investment. Statistics released by the United Nations Conference on Trade and Development (UNCTD) revealed that China's overseas investment stock came to US$35 billion by the end of 2002, as against US$ 3 billion in 1991.

In the past two years, Chinese enterprises began large-scale mergers and acquisitions (M&A) activity overseas. Each of them involved millions or tens of millions of US dollars. This shows that Chinese transnational companies are growing rapidly and participating in global competition.

Asia absorbs the most Chinese overseas investment, followed by North America, Africa and South America. Finally comes Europe, and its investments are concentrated mainly in the central and eastern parts of the continent.

Despite of the leapfrog growth, China's overseas investment stock is still quite low compared with that of the United States, Japan and other developed countries. Calculated even on the basis of the US$35 billion figure released by the UNCTD, China's total overseas investment is equal to only 1 percent that of Japan and 5-1000ths of the United States.

The global gross transnational direct investment stood at US$653 billion in 2003. China's overseas investment, calculated even at an annual number of US$5 billion, was less than 8-1000ths of the world's total. It was approximately equivalent to the level reached by Britain and France in the late 19th century.

However, it was not until the early 20th century that the overseas investments of Britain and France began to surge. China's overseas investment, still in its take-off process, will not have major influence on the world.

Four types of China's overseas investment

Type I Greenland investment

This means investment in the establishment of solely funded subsidiaries or joint ventures. This is especially pronounced in the fields of home electric appliances, electronics, and light and textile industries. Haier, TCL and Gree all have their production lines set up beyond China. A number of non-governmental businesses in developed areas like the Pearl River Delta and the Yangtze River Delta all began to channel their capital overseas.

Type II Transnational mergers and acquisitions

This practice is very common internationally but flourished in China only in recent years. It can be summed up in four categories in terms of objective or method.

The first is resources exploitation. China National Offshore Oil Corporation (CNOOC) is an example, which has become the biggest offshore oil producer in Indonesia by buying off the stakes of some local companies there.

The second is the extension of production and marketing worldwide. This is the most common case. Examples are Shanghai GM and TCL. The former bought 10 percent shares of GM Daewoo and the latter purchased the bankrupt Schneider��a leading German electronic company for auction.

The third is reverse contracted processing. Wanxiang Group, one of the top Chinese companies in automotive parts industry, bought up UAI, an American automotive parts producer facing delisting in NASDQ, at a cost of US$2.8 million. This deal pulled Wanxiang's marketing cost down dramatically as UAI buys US$25 million worth of brakes from Wanxiang every year.

The fourth is the acquisition of technologies. This is a good way to get access to the world's state-of-art technologies by buying off the companies that possess these technologies.

Type III Investment in R&D

Huawei Technologies, a leading China-based hi-tech enterprise in communication industry, has established eight regional R&D headquarters and 32 branches overseas. It holds the most patents in developing countries. As a name brand from China, it has its trademark registered in 86 countries and regions around the world. It makes a success story about possessing independent intellectual property rights gained through overseas R&D investment.

Type IV Strategic integration

This refers to attainment of the objective of the grouping of strong points and transnational development through alliance with transnational companies in certain aspects. Take TCL again for example. Its merger with French company Thompson in color TV and DVD business pushed the annual sales of its color TV to 18 million units, which is ranked first in the world, and takes up 10 percent of the world market share. This makes it possible for TCL to use Thompson and RCA brands and marketing network and to possess a highly efficient manufacturing center in each major market in Asia, Europe and America. This was achieved much faster than direct investment without the need to merge and acquire giants like Thompson.

Although there are still problems with China's overseas enterprises, the overall achievements of China's overseas investment are remarkable. On the one hand, they have helped expand the production capacities and markets for these businesses and have thus created more job opportunities and increased exports. On the other hand, they have improved the international image of the enterprise brands. What's more, overseas investment has broadened the financing sources for enterprises. All of this has created important conditions for the global expansion of these Chinese enterprises.

Three strategies for "going global"

Under the general trend of economic globalization, resources, commodities, capital and talents all flow around the world. China must also take the world market as its center stage and create a batch of its own large transnational companies, only in this way can it have its foothold and development in global competition.

To further expand overseas investment by Chinese enterprises, it is essential to study and promote the following three major strategies:

First, besides resources exploitation, manufacturers are encouraged to invest in developed countries.

Generally speaking, the manufacturing industry should be set up in countries where labor cost is relatively low. But this is only one aspect of the matter. What developed nations transfer out is mainly their low-end manufacturing sector, they keep the high-end manufacturing industry and core products in their homelands. They remain the chief commodity markets and major sources of technologies. If we do not rest content with working permanently for others, we must have go to compete in developed countries.

The labor cost in developed countries is indeed much higher. But their productivity is much higher, too. The labor productivity of the US manufacturing industry is 23 times than that of China and the average annual wages for its workers are about US$30, 000.

Considering that the gap between China and Europe is not big in terms of labor productivity and workers' wages, Europe's investments mainly flow to the United States, rather than to Latin America where labor cost is even lower; foreign investments in China's manufacturing industry are concentrated mainly in the Yangtze and Pearl River Delta, not in China's western region where labor cost is even lower.

As a result of investing in production in the United States, Haier has developed the most high-end wine cabinet in the US market and rapidly improved its own brand. It would not have reaped such a quick return if it had invested in the establishment of plants only in developing countries. In fact, the United States, especially its local governments,

encourages investments from outside. Some of their free services and favorable policies are even better than those offered by the development zones in China and can be fully utilized.

Second, transnational mergers and acquisitions (M&A) or shares investments are encouraged.

The transnational investment around the world in the future will take the forms of equity replacement, share buying and holding, and selling, or the auction of a whole enterprise. This makes it possible to get the products, brands, marketing channels and talents all from the enterprise purchased. A group of Chinese businesses have tried hard for this and have achieved remarkable results.

In this respect, transnational investment banks and the four biggest accounting firms can be turned into best account. Ten transnational investment banks, such as Golden Sachs, Morgan Stanley, Merrill Lynch, Citibank and Credit Suisse First Boston, offer consulting and operation services for 85 percent of the world's transnational mergers and acquisitions. They show great interest in cooperation with Chinese enterprises.

Third, strategic alliance is encouraged.

This mainly refers to alliance with the world's leading transnational corporations, labs and universities. Strategic alliance is more complicated than transnational mergers and acquisitions. The forms to be taken depend on the need and goal for the development of enterprises. Its aim is to take advantage of each other's strengths. For Chinese enterprises, this strategy helps them get market access, selling channels, R&D resources, etc. that they can hardly gain by other forms. There are many opportunities in this regard. For example, the nano-technology center of University at Albany has entered into cooperation with IBM, Siemens, and several others. It has repeatedly proposed cooperation with Chinese businesses, which merits discussion.

It is predicted that more Chinese enterprises will be successful in their operations abroad, and overseas investment made by them will be further accelerated.

(The above article taken from Global Times was written by He Weiwen, a former commercial counselor with the Chinese General Consulate in New York and was edited by People's Daily Online. )

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