Why Chinese companies invest in Europe’s traditional industrial sectors
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Chinese companies have been acquiring a stake in, or took over many companies in Europe and particularly in Germany, among several textile relevant companies in mechanical engineering and textile machinery manufacturers. The recent collaborative in-depth study by German Technical University Munich (TUM) and Munich Innovation Group reveal the motivations of Chinese investors and how they treat their acquisitions or how they act after the stake taking
The basic facts
The first conclusion the study draws, is that Chinese investment activity is driven by a desire to gain access to the state-of-the-art technology. The fear that the new Chinese owners or partners will be draining their newly acquired companies of knowledge cannot be confirmed, on the contrary, there is a productive collaboration in R&D activities. Chinese companies seem to make the acquisition to expand their product portfolios, to strengthen their position in China, and to gain a lasting foothold in Europe.
The study “China is investing”, based upon a detailed analysis of 50 Chinese companies and their acquisition trail, reveals further that the focus of such Chinese investments was on electronics, mechanical engineering, regenerative energy sectors and international conglomerates. Since the Chinese companies release rather little information, the researchers had to rely on economic databases, commercial register entries and patent applications. The latter proved to be particularly resourceful, for instance by studying the geographical distribution of patent applications, researchers were enabled to draw conclusions on the target markets, and when a Chinese parent company and its German subsidiary jointly file an application, it can be assumed that a joint development project is underway. The research team detected almost similar acquisition behaviour of Chinese companies across all sectors.
What are Chinese companies looking for in Europe?
Chinese companies were all seeking high value intellectual properties and there were only very few cases registered where the new owners were relocating the knowhow to Asia. Instead, so the findings, more than 75 % of them chose to strengthen the German R&D departments and in many cases, the German management team has been retained. The economic downtrend in Europe will certainly enhance Chinese acquisitions also in the future
Of the acquisitions made and studied, these acquisitions served around half of the companies to add new technologies to their product portfolio. Some of these investments were prompted by a desire to extend the buyer’s value chain by integrating upstream or downstream development and production steps.
Chinese companies in the mechanical engineering and electronics industries were seeking to strengthen their position on the Chinese market, but they have set their sights also on German and European markets. The new owners are making use of their acquisitions to extend their R&D capabilities, to establish new sales locations and to expand their customer and logistics networks. An example is Huawei who invests in a new European R&D centre in Munich (D) to better respond to the requirements of German customers and to enhance growth Huawei created joint ventures and co-operations, among Motorola, Symantec, Siemens and Telekom. To protect its knowhow, Huawei puts weight on patent registration in Europe (in Germany around 30 %) and in the USA. Thus, Germany is advanced to the third most important investment location – after China and the USA – for Huawei.
Some Chinese companies are less concerned on transferring intellectual property or building up their business in Europe. They are foremost interested to observe and gain insights into European and American markets. A German or European location offers also the nicety to avoid EU customs and import regulations.
Professor Isabell Welpe of TUM’s Chair for Strategy and Organisation states: “Per se, Chinese acquisitions do not pose a threat. In many cases the experience has been positive for German or European companies. The investors’ strong financial footing has helped them in turn to safeguard jobs in production, to advance the development of their technologies and to gain access to Asian markets”. It has to be added that most of the final contracts signed consist of a binding clause to preserve the acquired company over a certain defined time.
Additionally, the Chinese government has an important role in the acquisition and cooperation behaviour since it defines the goals of the targeted industries and economic regions. The Chinese government has established detailed country and industry maps of all relevant industries and, as we all know, there are direct and indirect subsidies and financing by government agencies.
The authors of the study expect that Chinese acquisitions will grow, this does not mean in great numbers but rather that the transaction prices will increase. The location Germany brings also added value and investment in F&E locations, projects and co-operations will be on the rise. The total investment available in Chinese for acquisitions, co-operations and joint ventures is estimated at minimum USD 450 billion.
What are the inherent risks of Chinese investments?
The study defines that the highest inherent risk in Chinese takeovers is the protection of intellectual properties. Innovation and technological competence are the core capabilities of the high tech location Germany and Europe. To keep this core competence the protection of intellectual properties is mandatory.
In mechanical engineering, mostly Chinese state owned companies show the greatest interest in German technology. In 2008 China’s mechanical engineering sector was noted as the largest in the world. Today there are also some Chinese companies leading with innovations in certain subsectors. By consequence this means also that the competitive pressure on Chinese mechanical engineering companies is increasing. It is also a proven fact that intellectual property rights are gaining popularity ( for strategic reasons) within the Chinese industrial community for Chinese innovations. TextileFuture has reported on this development, According to the study this might lead to a conflicting situation for German and European companies when they want to find out if there are already existing patents in some sectors. If Chinese registered patents are not already registered in the US and Europe, the patents’ details are only available in Chinese language. This fact would need a costly translation for the searching company to find out if the field of activity might touch the envisioned patent process of an individual European or German company. The study warns that the development might lead in the future to the fact that Chinese companies will make use of patent infringement against German and European companies. It might take a few years before this becomes evident, but the possibilities cannot be excluded.
Other decisive factors
In addition, companies usually dispose of intangible values (IP), and this is what Chinese firms have realised because the knowhow of collaborators and patents amount today to more than 80 % of a company’s value and these are determining the price of a company to be acquired. It is a stronghold of German and European companies and another positive aspect for Chinese to acquire such a company. Chinese companies are in need to develop a higher technological basis (higher added value) and therefore Chinese companies invest not only in European acquisitions but they enhance R&D expenses and those are leading to more registered Chinese patents.
Innovative technologies and added value are occupying also a key role in the actual five year planning of the Chinese government. According to the study, these are sustainable factors to add value to the Chinese economy, leading to more employment and those lead to higher wages and in turn to a growth of the domestic demand and these factors allow to the Chinese economy a sustainable growth and independence.
It is also evident that the restructuration of the Chinese economy is pronounced by the government but it works only if Chinese companies are undertaking the necessary tasks. There is a growing number of Chinese companies investing in Germany and Europe or these are considering such projects, however many of those are unknown to the targeted German and European companies. The study identifies 50 of such Chinese companies and on the basis of a focus on the development of investments and patent registrations.
It is noteworthy that worldwide Chinese overseas investments totalled in 2010 EUR 237 billion and the investments made effectuated that year reached EUR 51.4 billion (EUR 39.5 billion). And there were 13000 Chinese enterprises investing in over 16000 foreign companies. Around 1.1 million people were working for Chinese foreign companies, thereof only 29 % were holders of a Chinese passport. The “Going Global” policy of the Chinese government has been pushing up the yearly direct Chinese foreign investments from 2002 2.6 billion to the before mentioned figure, in 2005 and 2008 they doubled yearly. The figures are impressive, but in comparison to the size of China they are insignificant. This might change drastically in the future and could lead to an overflowing of traditional industrialised countries, with all the consequences resulting for their economies.
Before, China practised the policy of inviting foreign direct investment in China. It is clear that both measures serve to integrate China into the economic globalisation. Foreign direct investment in China allowed the nation to preserve the necessary economic resources, such as capital, technologies and raw materials. Another propelling factor was China’s membership to WTO, the World Trade Organisation in 2001.
In China the NDRC, the National Development and Reform Commission, is planning and steering the Chinese policy on foreign direct investment. The commission is also responsible for various other policy sectors, such as social and economic, as well as climate policies. The control of Chinese foreign direct investment is in the hands of the Ministry of Trade, thus it is obvious that each of such investment needs a permit when a company is planning such a step.
The study (146 pages) “China is investing” forming the basis of this TextileFuture’s report is available in German only. It can be downloaded with supporting tables and more details from the website of the Technical University Munich indicated below.