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Friday,Jan 22, 2016

From: China Daily 01/22/2016

It’s not just Chinese state-owned and private enterprise behemoths grabbing the headlines for their overseas acquisitions; smaller companies are making waves, too

China’s most important holiday, the Lunar New Year, is drawing near, but entrepreneur Shu Wenbin has no intention of relaxing and taking time out to party. Instead, it’s his busiest time of the year.

Apart from meetings with potential partners across China, the general manager of Continental Interior Design and Construction Ltd also plans overseas trips to the United States and other markets to seek out business opportunities he may able to seize after the holiday.

"China’s real estate and construction industries have slowed down in the past two years, new residential and commercial projects are seeing sluggish growth, and investment prospects are uncertain," he says.

"Overseas markets, especially in Southeast Asia and South America will be new growth points. Prospects in European and US markets are also good."

Shu’s company, which offers interior design and construction services, started its overseas business in 2012 through its partners, big state-owned enterprises operating overseas. The company has about 150 employees and annual revenue of about 300 million yuan ($45.5 million; 41.8 million euros), of which about 20 percent is from overseas.

It used to enjoy about 30 percent annual growth on average, but in the past two years, with slower growth in the construction sector and rising labor and material costs, searching for new opportunities globally has become an attractive option.

"We are planning to set up a company and operate directly overseas, and I want half of the company’s revenue to come from overseas by 2017," Shu says.

His company is typical of Chinese small and medium-sized enterprises that are increasingly going global at a time when the government is accelerating economic restructuring and easing restrictions on overseas investment.

Headline-grabbing mergers and acquisitions by Chinese enterprises of totemic companies in the West suggest an invasion, but it was only in 2014 that China’s outbound investment reached $140 billion, for the first time overtaking inbound investment of $120 billion, according to the Ministry of Commerce. President Xi Jinping predicted in 2014 that China’s outbound investment will reach $1.25 trillion over the next decade.

This trend is set to accelerate. The 2015 Report on Chinese Enterprise Globalization, published by the Beijing-based Center for China and Globalization(CCG) , says that in 2014 and the first six months of 2015, the annual number of newly increased outbound investments (686) was about six times the average number (121) from 2008 to 2013.

"We are on the verge of a big wave of Chinese companies going global," says Wu Jianmin, China’s former ambassador to France. "In the past, it was mainly big companies that were interested in going global, but now so are smaller and medium-sized companies. Many companies have realized that if they don’t look for opportunities globally, they will probably die in China finally."

In 2015, Chinese companies made nonfinancial direct investments of $118 billion in 5,085 companies in 153 countries and regions, a year-on-year increase of 14.7 percent, according to the Ministry of Commerce.

Wang Huiyao, director of the Center for China and Globalization(CCG), says in about 63 percent of the cases, Chinese companies’ overseas investments are between $100 million and $1 billion.

"The number of smaller outbound investments (below $100 million) is growing fastest, as private companies and SMEs are playing a bigger role," he says, adding that, in 2014, private companies’ outbound investments saw a year-on-year growth of 295 percent, and they made up of 69 percent of the total number of cases.

Xiao Qiang, director of the China Small and Medium-Sized Enterprise Institute, says most SMEs that the institute has helped go global have annual revenue of between 50 million yuan and 400 million yuan and an employee headcount below 2,000.

He says of the total, SMEs’ outbound investments account for 30 percent of the value and 80 percent by number of cases.

Long Yongtu, former vice-minister of commerce, says the trend of Chinese companies going global is irreversible. China’s corporate and private bank deposits amount to more than 138 trillion yuan, and the abundance of capital makes it easier for Chinese companies to invest overseas.

"Globalization is to allocate resources globally. If Chinese restructuring is conducted with a global scope, its economic transformation would be less painful and is more likely to succeed," he says.

Wang Chaoyong, founder and CEO of ChinaEquity Group, a Chinese venture capital institution, says there are three ways for Chinese companies to go global: products, industrial capacity and capital.

"I have observed huge changes in all these three," he says. "In the products, I have seen quality, added value, and brands have improved greatly. In capacity going global, a big feature is that, be it a state-owned company or SME, they cooperate and form clusters to explore overseas markets."

For capital going global, Chinese investors in the past would typically buy US treasuries, European government bonds or some blue chips, but now private equity and venture capital have become the main avenues for capital going global.

"The number of overseas mergers and acquisitions is also increasing rapidly, through which many companies are able to get overseas products, technology, sales channels, design, and so on," he says.

A recent example is Shenzhen Ellassay Fashion Co Ltd, a high-end female clothing company, which bought a Hong Kong company that owned the German fashion brand Laurel for 11.18 million euros ($12.1 million) as part of its global expansion. The takeover would see Ellassay own Laurel’s design, pricing and production rights at all its stores on the Chinese mainland.

A recent report from Dealogic, an international information provider on investment deals, says Chinese outbound M&A volume increased for the sixth consecutive year to a record $111.9 billion in 2015, breaching the $100 billion mark for the first time.

A recent report from Boston Consulting Group shows the changing trends in Chinese overseas M&As. From 1990 to 2014, about 40 percent of M&As were in energy and resources. But in recent years, only about 20 percent have involved energy and resources, while about 75 percent were in technology, brands and market share.

Manufacturing is an important sector that has drawn the attention of Chinese entrepreneurs, who are encouraged by Made in China 2025, China’s national strategy to upgrade its manufacturing sector.

Figures from the Ministry of Commerce show that, from January to November 2015, outbound investment in the manufacturing sector was about $11.8 billion, a year-on-year increase of 95.4 percent, with $5.89 billion going to equipment manufacturing, a year-on-year rise of 117.3 percent.

"Germany and the US, whose manufacturing is most advanced, have become targets for Chinese companies," Wang at the Center for China and Globalization says.

Joyson Electronics, an auto parts company in Ningbo, Zhejiang province, is a typical investor in Germany’s high-end manufacturing. The company was established in 2004, and since 2011, has acquired four German companies in auto, software, robot and auto parts sectors. It has now about 20 production and sales bases and four research centers globally, and is a supplier for top car brands including BMW, Audi and Mercedes-Benz.

"SMEs should go global instead of just doing business at home, otherwise you would be sifted out. Overseas M&As could be a good way, " says Wang Jianfeng, president of the company. He says in 2009, when it first tried to sell auto parts overseas, the company met with many difficulties.

"It was impossible for Chinese SMEs to enter the overseas high-end auto and electronics industry then, but after we acquired a German company in 2011 the situation started to change," he says.

Long, the former vice-minister of commerce, says an important platform that will accelerate Chinese companies going global is the Belt and Road Initiative, a development strategy proposed by the Chinese government in 2013.

The initiative refers to the New Silk Road Economic Belt, which will link China with Europe through Central and Western Asia, and the 21st Century Maritime Silk Road, which will connect China with Southeast Asian countries, Africa and Europe.

"The world needs China’s investment. It is estimated that for infrastructure of countries along the Belt and Road to reach the global average level, at least $8 trillion in investment will be needed," he says.

According to the Ministry of Commerce, in 2015, Chinese companies invested $14.8 billion in 49 countries along the Belt and Road, a year-on-year increase of 18.2 percent.

Stephen Phillips, chief executive of the China-Britain Business Council, says the advantage of SMEs are that they are nimble and have entrepreneurial management teams good at seeking out opportunities.

"The SMEs are a very important part of the internationalizing process, and there’s almost a subtitle of SMEs, that they are almost born to be global, so those that have got great technology, or very innovative, they can actually be international companies more or less from day one," he says.

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