Outward foreign direct investment is a new feature of Chinese globalization, where local Chinese firms seek to make investments in both developing and developed countries. It was reported in 2011 that there was increasing investment by capital rich Chinese firms in promising firms in the United States. Such investments offer access to expertise in marketing and distribution potentially useful in exploiting the developing Chinese domestic market.
After three decades of opening up and reforming, China has been through rapid changes from a planning economy to a market economy. According to the IMF, China’s 2013 GDP is US$9.18 trillion, after the United States (US$17.37 trillion) but far ahead of Japan (US$4.9trillion), the third largest economy.
Since 2005 when Levono acquired IBM’s ThinkPad, Chinese companies have been actively expanding outside of China, in both developed and developing countries. In 2013, Chinese companies invested US$90 billion globally in non-financial sectors, 16% more than 2012.
Between January 2009 and December 2013, China contributed a total of $161.03bn in outward FDI, creating almost 300,000 jobs. Western Europe was the largest regional recipient of Chinese outward FDI, with Germany receiving the highest number of FDI projects for any country globally.
There are two ways Chinese companies choose to enter a foreign market: organic growth and Merge & Acquisition (M&A). Many Chinese companies would prefer M&A for the following reasons:
- Fast. M&A is the fastest way for a company to expand into another country by acquiring brand, distribution, talents, and technology. Chinese CEOs has been used to growing at 50%+ speed and do not want to spend capital.
- China market. China has become the world’s second largest economy. Many Chinese acquire foreign companies and then bring their products/services to China, anything from premium cars to fashion clothing to meat to Hollywood movies.
- Cheap capital access. The huge Chinese domestic market help many Chinese companies accumulated financial capital to do M&A. Chinese government also provides long-term, low-interest capital for companies to expand abroad.
- Low risk. M&A helped Chinese companies avoid risk of failure of organic growth as they got an established company with everything in place.
- Cheap labor. Some companies may move part of the manufacturing in high labor cost countries to China to reduce the cost and make the product more attractive in price.
- Trade and policy barrier. Chinese companies in many sectors face quota limitation and high tax, which prevent them from being competitive in foreign markets.
- Depressed assets. 2008-2010 global economic crisis created liquidity problems for a lot of western companies and reduced their market value. Chinese companies believe it is a great opportunity for them to buy these depressed assets at discount. China’s direct foreign investment in non-financial sector growth from US $25 billion in 2007 to US$90 billion in 2013, more than three times.
At the beginning, state-owned enterprises dominate the foreign acquisition and most of the money goes to oil and minerals. Since 2005, more and more private companies start to acquire non raw material foreign companies. Below is a list of Chinese companies’ M&A deals;
- In 2005, Lenovo acquired IBM’s PC business Thinkpad at US$1.25 billion.
- In 2007, China PingAn acquired Fortis Insurance International at US$2.7 billion.
- In 2010, Geely acquired Volvo at US$1.8 billion.
- In 2011, Hainan Airline acquired 20% of NH Hotels at US$600 million.
- In 2011, China Bluestar acquired Norway’s Elkem at US$2 billion.
- In 2012, Sany acquired Germany’s Putzmeister at $US420 million.
- In 2012, Wanda acquired AMC Theater at US$2.6 billion.
- In 2012, Wanxiang acquired A123 at US$450 million.
- In 2012, China Investment Fund (New China Turst, China Aviation Industrial Fund and P3 Investments) acquired 80.1% of International Lease Finance co. from AIG at US$5.28 billion.
- In 2013, Shuanghui acquired Smithfield at US$4.7 billion
- In 2013, Fuxing acquired France’s Club MedCLM.PA at 540 million Euros.
- In 2013, Fuxing acquired One Chase ManhattanPlaza at US$750 million.
- In 2014, Lenovo acquired Motorola from Google at US$2.9 billion
- In 2014, Wangxiang acquired Fisker at US$150 million
However, the fast growth and M&A deals did not change consumers’ low quality and low price perception of Chinese goods and brands. According to market consecutive researches by The Monogram Group, a Chicago-based advertising agency, in 2007, 2009, 2011 and 2012, American consumers’ willingness to purchase Chinese products across all categories except PC remained the same or became worse during 2007 -2012. The only sector that American’s were more likely to purchase is PC, maybe due to the brand building of Lenovo.
Moreover, many M&A deals have been proven to be failed because companies underestimated the challenges and failed to restructure the company.
Case 1: Shanghai Auto acquired 48.9% of Korean Ssangyong at US$500 million in 2004, making it the most ambitious acquisition in Chinese auto industry at the time. Shanghai Auto wanted the brand and technology to expand its footprint in China. However, the cultural difference, the objection to transfer the technology and the failed sales of new SUV model put Shanghai Auto’s ambition of expansion in jeopardy. It caused huge conflict between Ssangyong employees and Shanghai Auto as things didn’t go well as planned. And the 2008 global economic crisis put Ssangyong on a survival mode, let alone expansion. After the negotiation with the labor union to reduce wages failed, Shanghai Auto decided to exit from Ssangyong and didn’t get a penny back for their US$500 million investment.
Case 2: In 2004, TCL, the largest TV manufacturer and one of the fastest growing companies in China, acquired TV business including Thomson and RCA brand from Thomson Electronics of France to form a joint vendure called TCL-Thomson Electronics (TTE). For the coming two years, the company recorded huge loss, especially in Europe. Several factors contributed to the failure.
- Failure of Due Diligence. Right after TCL acquired Thomson’s TV business, the TV market shifted to LCD technology, put Thomson out of date. As CEO of TCL, Dongsheng Li, said in 2012 “They betted on the wrong thing where the market would go. They thought Thomson’s DLP could be the best choice.”
- Lack of understanding of rules and regulations. According to the book “Resumption of Trading” by Chong Chen, soon after acquisition, Thomson found it in a situation that they couldn’t recruit the talents they wanted and can’t fire ones they didn’t want.
- Underestimate of the challenges in cultural difference. Xuesong Tong, vice president of TTE, said in an interview with “China Operation” newspaper in 2005: “The French look down upon their Chinese boss. For example, they wanted to share the design model with TTE, but French just dislike it even though it is a popular one in US market. Also, French feel superior in their language and don’t want to speak English, which created huge problem in communication. It takes hours to discuss simple issues and can’t reach agreement.”
- According to Scott Markman, president of Monogram, Chinese companies often moved their business model to developed countries and it doesn’t work. Thomson has the problem, they are very good and distribution and operation in China but France and Europe is a totally different world.