Looking at Chinese outbound investment a decade ago, much of the focus would have been on the country's investment in regional Asian markets and resource-rich developing countries, aimed at fuelling its remarkable growth.
And it is certainly true today that investment in these regions – particularly Africa – continues to grow. China’s demand for resources is still very high, and its FDI into Africa in 2012, according to China's Information Office of the State Council, was $2.52bn – a 20% growth on 2009.
Switch in focus
However, the story of China’s expansion outside its own market is now much more diverse. After years of strong growth, the country's market is maturing and slowing down. Chinese brands – and the Chinese government – are now embracing the next step and moving into other markets.
According to a study by greenfield investment monitor fDi Markets, between 2009 and 2013, western Europe was the largest regional recipient of Chinese outward investment, receiving 569 projects. There has been a switch in focus to developed markets for investment in the drive for global market influence and brand awareness. This is overtaking China’s demand to invest in resources.
Part of the reason for this change is that China itself has opened up, exposing domestic firms to greater competition. The government has seen how some state-owned sectors struggle to compete with more fluid and flexible private enterprises, and has begun to promote the development of private firms and their expansion into other markets.
At the China Outbound Conference in London in October 2014, much was made of the growing expansion of investment into the UK from some of China’s largest firms. This includes telecoms company Huawei’s decision to open a flagship office in London and to invest more than £1.3bn ($1.94bn) in the UK over the next five years.
Even China’s banks are beginning to get involved, with ICBC’s website recently announcing its arrival as “the first time a bank branch of a mainland Chinese bank has been authorised in the UK since the founding of the People’s Republic of China in 1949”.
Changing the mix
Similar investment is occurring in other parts of Europe, Asia-Pacific and the US, as part of a government drive to reform China's economy along more mixed public and private lines. “This year, China’s private enterprises already have a very big proportion of trade. Some 40% of China’s outbound investment is made by private enterprises,” said Zhang Jianping, director of the National Development and Reform Commission, China’s top international economic think tank, at the China Outbound Conference.
He continued: “In the future, we’ll have a mixed economy, so China’s state-owned enterprises will become transnational companies. This type of reform will also promote China’s private economy going global.”
The government’s policies also backed up these claims. New regulations introduced in September 2014 by the Ministry of Commerce in China mean that most domestic firms no longer need to get approval from the ministry for investing abroad, but instead just register with local authorities. Only some specific sensitive sectors or countries need full approval, meaning that Chinese firms can invest abroad far more easily.
And for many large Chinese firms, including Huawei, e-commerce firms such as Alibaba and Baidu and consumer tech companies such as smartphone maker Xiaomi, it is clear that investment abroad is about developing into a global brand beyond the Chinese market. However, China’s firms also realise that with a strong renminbi, government backing and strong capital reserves, acquiring companies to enter a market abroad is perhaps far easier than developing their own.
Time to acquire
In fact, many of the biggest deals for outbound investment from China involve Chinese firms acquiring foreign firms – thereby giving them access to already established brands, expertise and technology.
And while this was occurring previously in sectors such as resources and energy, the shift recently has been towards a more diverse range of companies. Examples include the sale of UK restaurant chain Pizza Express to Beijing-based Hony Capital in 2014 and the acquisition of Netherlands-based commodity trader and agribusiness firm Nidera for $2.9bn by the China National Cereals, Oils and Foodstuffs Corporation. Nanjing’s Sanpower also took a 90% stake in UK clothing retailer House of Fraser for more than $800m in 2014, and in recent years there has also been the acquisition of cereal brand Weetabix by Shanghai’s Bright Food for more than £1.2bn.
These acquisitions are not completely without benefit for the firms and the countries in which they operate – the company receives an injection of capital and its brand gets exposure to the Chinese market. But it is certainly good for China, as it helps to increase financial – and therefore political – influence on the global stage.
China’s outbound investment is not all about acquisitions, however, and there are signs that outbound investment in services is also growing as China’s private enterprises mature. Examples include Fosun investing in Club Med, Tencent investing in gaming and social media in South Korea, and Alibaba investing in Singapore Post.
“Most of the acquirers are private companies; all are investing in people-driven businesses. The investments are really global, driven by the needs of their businesses. It is a sign of the growing internationalisation of the top management teams in these businesses that they feel ready to make these moves... Expect a lot more,” writes Gordon Orr, director and chairman of McKinsey Asia, in his Asia business blog.
What is also intriguing about new investment from Chinese firms is their desire to compete with European companies on features such as quality and design. Chinese car firm Qoros scored the highest crash test rating in the Euro New Car Assessment Programme with its Qoros 3 saloon, developed in its Munich design centres and engineered in Austria. Meanwhile, Chinese clothing firm Bosideng – a mid-market retailer in its own country – launched a high-end range and a first overseas store in London in 2012 to compete with firms such as Hugo Boss.
It seems then that as China’s domestic market diversifies and matures, so does its variety and type of investment, of which more is surely on the way.