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Print Edition> Business
UPDATED: November 22, 2010 NO. 47 NOVEMBER 25, 2010
Rushing to Invest Overseas
Chinese companies expand abroad to establish a global foothold in foreign markets

VISIONS OF VOLVO: Li Shufu, Board Chairman of Geely Automobile Holdings Ltd., speaks at a press conference on March 28 after signing an agreement to purchase Volvo from Ford Motor Co. (WU WEI)

"Competition for assets has become a lot tougher, and deals are no longer just about cash, but about what else an investor can bring to the deal," said Ernst & Young global mining and metals leader Mike Elliott.

Elliot said the most successful Chinese companies in the M&A market this year understand this and have used access to debt finance, new technologies and equipment and supplies with lower operating costs as additional incentives.

Although China's current focus is mostly on countries with low political risks, Elliott said he has seen investor interest shifting to new regions like Latin America and Africa.

"Mining asset prices in developed countries like Canada and Australia have been bid up, which means assets in some higher-risk, new-mineral countries are of good value, providing a great opportunity for Chinese companies looking for lower-cost assets," he said.

A welcomed trend

As Chinese firms try to widen their geographic scope, their efforts are being warmly greeted by the rest of the world. Many financially distressed Western companies are expecting that Chinese buyers will come to their rescue. Most importantly, the Chinese investments came as a powerful boon to boost local employment and tax revenues, said Vice Minister Chen.

Chinese companies generated $10.6 billion in tax revenues and created 438,000 jobs outside China in 2009, said the MOFCOM report.

Among the most ambitious firms was the Suntech Power Holdings Co. Ltd., China's largest solar panel maker. In early October, it launched its first U.S. manufacturing plant in Arizona and it plans to create more than 1,000 local jobs in the United States where the employment landscape remains bleak.

"We are on the way to grab a 20-percent market share of the burgeoning U.S. solar industry this year, up from 15 percent in 2009," said Shi Zhengrong of Suntech.

Besides this, Chinese investments have played a significant role in accelerating infrastructure construction and resources development of target countries, as well as improving living conditions of local residents, said Vice Minister Chen.

Since 2000, Chinese companies have built around 70 million square meters of houses, 60,000 km of railways and power generating units with an installed capacity of 3.5 million kw in Africa. Meanwhile, China has extended $11.2 billion in credit to African countries in the past decade.

In another move, the China National Petroleum Corp. made headways into oil exploration in Sudan. The company now boasts more than 3,000 km of oil pipelines and an annual refining capacity of 5 million tons in the African country. Those projects helped establish a modern oil industry in Sudan and injected fresh steam into the local economy, said the vice minister.

No guarantees

While Chinese firms continue revving up their deal-making machines, their success is far from guaranteed. Managerial expertise and cultural sensitivity needed to build a global scale cannot be achieved overnight. Regulatory hurdles are also casting an ominous shadow over their prospects.

A painful lesson was learned from the headline failure of Chinalco's $19.5-billion investment proposal with Australian miner Rio Tinto in June 2009.

Of the failed deals worth at least $300 million since 2005, some 65 percent were due to foreign regulation, 9 percent to an unfavorable market environment and 4 percent to higher bid prices of competitors, said the MOFCOM report. And quite often, the target assets are just too difficult to run for Chinese managers with little cross-border experience, it added.

The Chinese machinery manufacturer Tengzhong stunned the world last year when it proposed to buy the road-hogging Hummer brand from GM. But given its inexperience with auto-making, suspicions proliferated about how it could turn around a brand that even GM failed to rescue.

"Outbound investment needs to be tied closely to the corporate strategy and the fundamentals of the business at home. This is a basis for target identification," said Honson To, partner in charge of transactions and restructuring at KMPG China. "An internal ability to fully understand and assess a potential target is a hallmark of world-class deal making and something that many Chinese companies are still developing."

The good news is there appears to be an increased deal-making prowess on the part of Chinese businesses. Many have started outgoing forays with smaller acquisitions or simply gathering core technologies, said Xing Houyuan, a senior researcher at the Chinese Academy of International Trade and Economic Cooperation, a think-tank affiliated with MOFCOM.

Among the most visionary investors was Beijing Automotive Industry Holding Corp. (BAIC), the fifth largest automaker in China. In December 2009, it paid $200 million for intellectual property rights to certain sedan models from Saab, a premium Swedish auto brand. The deal, coming as a boost for the Chinese company in pursuit of its own brand models, is expected to save it five to six years of research.

Chinese companies are increasingly hunting down opportunities before the recovering prices put their target assets out of reach, said Xing.

But they must have a clear long-term strategy and should fully understand the target customers, as well as the local legal environment, she said.

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