One of the most recent phenomena in

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1 The first objective is the acquisition of material and immaterial resources which are not available in the domestic markets. The second is gaining access to stable supplies of natural resources and raw materials, and the third is the relocation of mature productions in low cost labour countries. The last objective is gaining direct control on some distribution channels in the most promising markets for Chinese exports. This is Why China is Investing Abroad GLOBALISATION by Stefano Chiarlone One of the most recent phenomena in China s economic integration is the increase in foreign direct investments by Chinese companies. These companies are beginning a campaign of international expansion, encouraged by the go global program recently relaunched by the Chinese government. After a decrease in 2002 (2.5 billion as compared to 6 billion in 2001) and in 2003 (1.8 billion), direct Chinese _One of the motivations for Chinese investments abroad is gaining access to stable supplies of natural resources and raw materials. Two examples of this are PetroChina, who acquired companies in Asia and Africa, and Baosteel. investments have started to grow again in 2004 (3.6 billion). Initiatives of paramount importance are also being planned for These investments represent a small percentage of Chinese GDP (the stock of $37 billion in 2003 was 2.6% of the GDP) or of incoming foreign investments (recently, over 50 billion per year), but they are not negligible for a developing nation, where not all companies have managerial expertise and adequate means for stable expansion abroad, and a significant share of the major technological companies is owned by foreign multinationals. One of the main reasons for selecting a foreign investment is the presence of particular advantages that may be helpful Contrasto_Imagechina (2)

2 THIS IS WHY CHINA IS INVESTING ABROAD for a company to overcome the problems linked with operation in a foreign market. In the case of China, these advantages are initially to be found in other developing markets or in manufacturing plants that can be relocated in China in order to benefit of low cost labour. Another reason is the demand for resources: a company may invest abroad to acquire resources (material or immaterial) that are not available at home. In this case, a company from a developing country could invest in a more economically developed country. Finally, in the case of China one cannot overlook the fact that some foreign investments are driven by political choices or by the desire to create national champions in each of the sectors considered to be strategic. These aims are favoured by the availability of foreign currency reserves (those in dollars exceed $600 billion) that stimulate investments also in order to reduce the pressure on the revaluation of the Reminbi. An important motivation is gaining access to stable supplies of natural resources and raw materials. As early as 1995, China National Petroleum Company invested over $750 million to form a joint venture with the government of Sudan to produce oil. Subsequently, PetroChina, Sinopec and China National Offshore Oil Company acquired companies in Asia and Africa. Other projects have been carried out in the metal sector, where Shougang and Baosteel, iron and steel producers, stand out. Their investments were aimed at the acquisition of both technological expertise (Shougang acquired an American company to improve its technology as early as 1988) and productive capacity, (e.g. the joint venture between Baosteel and Hamersley for a 20- year supply of iron ore and the one between Baosteel and Companhia Vale do Rio Doce for the feasibility study on a steelworks in Brazil). It is likely that these investments will continue because the transformations in world industry and lifestyle changes have increased the shortage of raw materials and have led to an energy deficit in China. There are various reasons behind Chinese investments in other developing countries. The first is the search for low cost labour and the relocation of mature productions, like the acquisition of textile companies in Nigeria by the Shanghai Huayuan Group Corporation in Another example is the industrial conglomerate China Worldbest Group, with two textile factories in an industrial area of Eastern Thailand and other _In the automotive sector developing countries are used to offset the reduced demand on the domestic market. Companies like Haier, a household appliances company, have distribution chain abroad. Huawei, the largest Chinese manufacturer of telecommunications equipment, began its development in Africa and the Middle East. Contrasto_Imagechina (3)

3 GLOBALISATION DIRECT INVESTMENTS TO FOREIGN COUNTRIES FROM THE PEOPLE S REPUBLIC OF CHINA flows (mln USD) % of gross fixed investment , , , , n.a. stock (mlnusd) % of GDP , , , ,6 Source: UNCTAD, World Investment Report 2004; DIRECT INVESTMENTS TO FOREIGN COUNTRIES TO THE PEOPLE S REPUBLIC OF CHINA flows (mln USD) % of gross fixed investment , , , , , n.a. n.a. stock (mlnusd) % of GDP , , , ,6 Source: UNCTAD, World Investment Report 2004; CUMULATIVE INVESTMENT BETWEEN 1979 AND 2002 (% OF TOTAL) Hong Kong, China 43,62 USA 8,93 Canada 4,67 Australia 4,61 Thailandia 2,30 Russia 2,21 Peru 2,15 Macao, China 1,96 Mexico 1,79 Zambia 1,44 Cambodia 1,34 Brazil 1,28 South Africa 1,28 South Corea 1,15 Viet Nam 0,91 Japan 0,88 Singapore 0,77 Myanmar 0,71 Indonesia 0,70 Mali 0,62 Mongolia 0,61 Germany 0,55 New Zeland 0,52 Egipth 0,52 Oman 0,51 Papua New Guinea 0,48 Nigeria 0,47 Tanzania 0,44 Kazakhstan 0,42 Laos 0,39 Source: Ministry of foreign trade of the people s republic of china

4 THIS IS WHY CHINA IS INVESTING ABROAD For Chinese companies, investing in a developing country is an intermediate stage necessary to gradually gain managerial and commercial expertise in less competitive environments and to train for trading in the West Contrasto_Imagechina _The search for well-known brands, but also the extreme need for advanced technologies, still scarce in China, are behind the acquisitions, like the TCL majority-owned joint venture with the French company Thomson. factories for bicycles (Ghana), video recorders (South Africa) and household appliances (Iran). Other investments of the same type include those aimed at avoiding export quotas and excise duties, as in the case of the investment in Cambodia by the textile company Guanda Import and Export. Developing countries are also used to offset the reduced demand on the domestic market due to the high level of competition from Chinese and international manufacturers. In the automotive sector, for example, productive capacity and promotional costs are growing because of the strong presence of leading western companies. A few Chinese manufacturers, like Brilliance China in Egypt and others in Ghana, are relocating where they can secure alternative sales (as already happened in the electronics sector, e.g. Konka and TCL). Furthermore, many companies that started trading by supplying unbranded products to multinationals or to distribution chains, are now trying to develop their own brands and to move up the value chain. Investing in a developing country is an intermediate stage necessary for a company to gradually gain managerial and commercial expertise in less competitive environments and to train for trading in the West. Huawei, the largest Chinese manufacturer of telecommunications equipment, began its development in Africa and the Middle East, gradually strengthening its managerial, financial and technological expertise, before facing the competition in more advanced markets. Chinese companies often follow this strategy in the infrastructure and plant engineering sectors, as well. The major Chinese players, including China State Construction Engineering Corp, China Harbour Engineering Company and China National Machinery & Equipment Corp, have grown strong abroad, mainly in Asia, Africa, Eastern Europe and South America, while are still struggling in western countries. In advanced markets, it is necessary to obtain adequate distribution chains, either through greenfield investments or acquisitions. Haier, a household appliances company, has established a commercial presence in Varese (and also acquired some Italian production companies). Other Chinese companies are bound to make similar investments in Italy or in Europe and some will try to acquire existing companies, due to the long and complex 92

5 GLOBALISATION process of building ex-novo distribution networks. For example, in the fragrance industry, Li Ka-Shing acquired Marionnaud, the leading chain in Europe. Other investments are aimed at the acquisition of brands in order to ensure a premium price for products that can be produced at a lower cost in China. TCL (TV sets) acquired the German company Schneider in order to use its brands and distribution network; for example, it is already using that brand in China to promote its mobile phones, creating the perception of higher quality. The TCL majority-owned joint venture with the French company Thomson allows it to use the name Thomson in Europe and RCA in the United States. The Shanghai Automotive Industry Corporation, second largest Chinese manufacturer of automobiles, is negotiating an agreement with MG Rover. These acquisitions are not, however, driven only by the search for wellknown brands, but also by an extreme need for advanced technologies, still scarce in many Chinese companies. China has already invested in this area, setting up Research and Development centres in Western countries (Konka in Silicon Valley, Haier in Germany and in the United States, Huawei in Sweden). It is likely that even the acquisition of the personal computer (PC) division of IBM by Lenovo, Chinese leader in PC production, was triggered by both motivations, even though that division does not appear to be rich in industrial secrets, and also by the possible future contacts with IBM s service division. Italy is not among the top thirty recipients of Chinese investments. Only the creation of new market outlets and the acquisition of technologies and/or internationally important brands could motivate investments in Italy. From this point of view, it could be possible to encourage greenfield investments in Italy for the creation of headquarters and European distribution networks. Acquisition-wise, the most suitable Italian targets are companies with wide distribution networks, perhaps in the doldrums or suffering from generation gap problems, therefore acquirable at more moderate prices, as with Schneider. As for technology, it cannot be ruled out that Chinese companies will try to acquire companies in the machine tools sector in order to gain well-known brands. In fact, China has grown a great deal in this sector, but quality-wise is positioned on inferior segments. It is more likely, instead, that the Chinese would try to acquire Italian brands in the Made in Italy sector (house system and person system). These would be useful to upgrade the perception and the technologies linked to their production. However, the fact that the majority of direct Chinese investments have been made by large companies linked to public property, is not favourable for investments in Italy. Our small and mid-sized companies could be considered not worth the investment. Nevertheless, it should not be forgotten that sell-off to Chinese investors does not necessarily mean that production would be mainly kept in Italy. It is more likely that only the manufacturing plants working for the European market would remain in Italy, where delivery times are crucial (as suggested by the wide presence of Chinese companies involved with Italian prêt-àporter) or transport costs are too high, together with the Research and Development centres (or Style centres for fashion) and distribution. Everything else would probably be located in China. 93