Conference Report:
Chinese Direct Investment in Europe
Data, Patterns and Strategies

Magnus C. M. Brod, GIGA Institute of Asian Studies

Organized by the GIGA - German Institute for Global and Area Studies - Institute for Asian Studies (GIGA-IAS) in cooperation with the German Federal Association of Mergers & Acquisition, this international workshop on Chinese direct investment in Europe was held in Hamburg, June 28–29.

The workshop was organized into four topical sessions:

1) Chinese Investment in Europe – Overview of Studies and Data Problems

2) Chinese Companies’ Investment and Management Strategies

3) Geographical and Sectoral Patterns of Chinese OFDI in Europe

4) Implications of Chinese OFDI for Host Countries

Margot Schüller (GIGA-IAS) welcomed the participants on behalf of the GIGA German Institute of Global and Area Studies and introduced the program and the expectations of the conference organizers. Given the variety of representatives from different European universities and research institutes as well as speakers and discussants from governmental and private business consulting agencies, Kai Lucks (German Federal M&A Association) in his welcome address stressed the excellent opportunity for mutual learning and the need for closer links between researchers and practitioners in order to achieve a broader picture of the development of Chinese investment in Europe.

1. Session

		The first session began with the presentation “Chinese Investment in Europe – Research Topics and Data Challenges” by Margot Schüller. She gave an overview of research on the workshop topic by scholars from different countries. Most of the studies she referred to explained Chinese investment in Europe with the overall goal of market and asset seeking and involvement in research and development (R&D). Eastern Europe was preferred as a “backdoor entry” to the EU market and as a manufacturing site.
She pointed out that one of the main difficulties in doing research on Chinese OFDI was the lack of reliable data on Chinese investment. Official statistics from China on OFDI in Europe only give a very preliminary impression of the general trend, while foreign direct investment (FDI) databanks are incomplete.In the second part of her presentation Margot Schüller introduced the results from her questionnaire-based survey (conducted together with Magnus Brod) of European investment agencies. This survey allowed for some insights on the evaluation and monitoring 2 of Chinese companies in Europe by governmental agencies. One of the findings was that the monitoring of job creation and production activities by Chinese companies in Europe is carried out by only a small number of governmental agencies. Another finding was the fact that Chinese OFDI is concentrated either in traditional investment locations in Europe or in new specific R&D centers, some of them located in Eastern Europe.

In his presentation “Challenges Faced by Chinese Companies When Expanding into 1st Tier Markets,” Kai Lucks explained the current structure of Chinese cross-border merger and acquisition (M&A) activities according to, first, the need to access natural resources and, second, the exploration of new markets. While Africa and Latin America are attractive< locations for Chinese mining and energy companies, Europe’s importance for M&A transactions has increased because of many high-tech small and medium-sized enterprises (SMEs) and due to the fact that the US economy is facing many problems. Analyzing M&A transactions in recent years, Kai Lucks was critical of the underlying principle of “digesting rather than investing”, and noted that the transparency of those processes is often lacking.

Focusing on the challenges posed by Chinese investment, Nikolaus Schrader (Freshfields< Bruckhaus Deringer) offered insights on the recent development of Chinese M&A in his presentation “China’s Outbound M&A – Opportunities and Challenges for Chinese Investment in Europe”. He explained that the preferred targets for Chinese companies are not countries in Europe, but Asia, the USA and Australia. The strategic focus of Chinese investments is on mining and access to resources. In addition, Chinese companies aim to acquire brands, management skills and technology, but due to the complex market environment, they face many difficulties when entering Europe. However, many companies are not aware of the need for professional advice and underestimate the complexity of transactions in Europe.

In the discussion of the papers in this session, the problem of a mismatch of expectations by European consulting companies with regard to actual Chinese OFDI expansion was observed. This was stressed by the discussant Franz Nienborg of PricewaterhouseCoopers. He emphasized that official policy announcements and M&A activities often do not correspond. Other topics of discussion were related to the “typical” Chinese behavior in M&A deals, the weaknesses of Chinese companies in terms of international management skills, and the negative impact of the “asset stripping” of foreign high-tech companies on the part of Chinese investors.

2. Session

The focus of the second session was on Chinese Investment and Management Strategies. Yun Schüler-Zhou (University of Hamburg, GIGA-IAS) presented her preliminary findings in her presentation ”The Parent-Subsidiary Relationship in Chinese Subsidiaries Located in Germany”, based on a survey of the management strategies of Chinese headquarters in relation to their subsidiaries in Germany. The key question of the research was how much autonomy Chinese companies grant their subsidiaries, with four different areas of management decisions that reflect the degree of autonomy being measured. One of the findings was that the extent of autonomy is strongly related to the specific knowledge of the subsidiary. Another outcome was that a high level of autonomy is granted in personnel and marketing decision-making, and a low level of autonomy in financial and manufacturing decisions. The most important finding suggested that state ownership does not have a negative impact on subsidiaries’ autonomy in general.

In his discussion of the presentation, Christoph Lattemann (University of Potsdam) pointed out that subsidiaries in Germany often pursue a high level of autonomy in operational 3 decision-making. In most of the M&A cases regarding machine-tool companies, the German management personnel was retained, while in greenfield investment, Chinese management personnel were often introduced.

In his presentation, “The Global Financial Crisis and the Strategic Orientation of Chinese TNCs”, Dylan Sutherland (University of Nottingham) focused on the relationship between government, companies and the financial system in China. He analyzed why the Chinalco/Rio deal was ultimately not concluded after a lengthy negotiation. This case study is an example of a failure of China’s resource-seeking strategy, despite financial backing by national banks for international acquisitions. In her discussion of the presentation, Francoise Nicolas (IFRI) questioned the role of the state and the capital market. She argued that even private firms from China are influenced by the government, whilst state-owned enterprises (SOEs) are not entirely “government run”, as often assumed. Agreeing with the assessment that European firms have become more vulnerable due to current financial problems, she argued that Chinese investors, too, have become more cautious with regard to further outbound investment.

Most of the participants assumed that more Chinese M&A deals can be expected due to the global financial crisis and the weaker bargaining position of many European companies looking for foreign investors. Participants expected that, backed by the immense foreign exchange reserves and using the sovereign wealth fund as an intermediary, the state-led “going global” policy will be intensified. This intensification will be driven by the state sector’s interests rather than by companies’ internal expansion strategies, as argued by Dylan Sutherland.

Michael Rose (Lovells) focused his presentation, “The Impact of Cultural Differences on Chinese Acquisitions in Germany”, on the many problems that often occur during the M&A transaction process in deals with companies from Mainland China, Hong Kong and Taiwan. Next to the language barrier, which slows down the process due to the need for translation, Rose stressed the challenge of cultural differences between Chinese and Western companies. He pointed to the slow decision-making processes of Chinese management due to complex hierarchies as an example. In order to take these cultural issues into account in business negotiations, he stressed, flexible time management, experienced advisors, and an open attitude towards cultural differences are necessary.

A more optimistic view of Chinese M&A processes was presented by Thomas Wu (MSM Consulting) in his presentation “Chinese-German M&A: Determinants of Success and Failure”. He predicted a substantial increase in the number of deals in the next five years as the result of enormous efforts made by the Chinese government in the support of Chinese companies’ efforts to go global. Thomas Wu claimed that government agencies have a clear strategy in term of sectors and segments attractive for Chinese investment. According to Thomas Wu, the five-year plans are important guidelines, representing the official mediumterm strategies in different industries. In the last five-year plan, investment in networks, technology, the chemical industry, bio-sciences and pharmaceuticals as well as renewable energy were given high priority. He stressed that this strategic behavior on the part of governmental agencies and companies contrasts sharply with the strategic weakness of many European countries and the current weakness of companies due to the global financial crisis.

In his discussion of the presentation, Kai Lucks stressed that the acknowledgement of these challenges was an important step for German and Chinese contractors. He underlined that the mission for M&A consultancies was to serve as bridge builders, knowing that both partners 4 were different. This topic was taken up in the discussion by other participants, who pointed to the similar problems European companies entering China in the early 1980s were faced with.

3. Session

The third session concentrated on the geographical and sectoral patterns of Chinese investment in Europe. Sergey Filippov (UNU) presented his paper “Market Entry Strategies of Chinese Companies in Europe”. He stressed that the internationalization of Chinese companies is different from that of investors from developed countries. While Western companies go abroad on the basis of having superior technologies or distribution networks, Chinese companies often lack such attributes. One option for the latter to gain access to knowledge and distribution networks is the establishment of strategic alliances with European companies, based on the common goals of two or more partners. The engagement in strategic alliances is regarded as being easier than investment in Europe. Statistical data on strategic alliances are, however, rather sketchy and often pose a huge challenge to research on this topic, allowing only for the description of general trends. Sergey Fillipov mentioned several important cases of strategic alliances made by Chinese companies since the 1990s. He presented a case study on the privately owned company Chery Automobile Co. Ltd. as an example of a catch-up model. He defined this strategy as Europeanization, i.e., Chinese companies entering the European market in order to gain access to assets such as know-how or technology.

Anke Turner (Sal. Oppenheim) asked about the impact of strategic alliances and investment on European companies in her discussion of Sergey Filippov’s presentation. She also pointed out that a large number of strategic alliances with companies from Europe have failed in the past, but that Eastern Europe might become an easier backdoor entry for Chinese companies oriented towards the European market. The example of Chery Automobile demonstrates that the Chinese automobile industry’s entry into the European market was based on experience gained in Africa. All four major Chinese automobile players began going global after that they had gained experience in strategic alliances with Western companies in China.

Based on a questionnaire-based survey among Chinese MBA students at the CEIBS, Wolf Kersten (CEIBS, BTBU) offered insights on the “Locational Choice of Chinese Companies in Europe.” He pointed out that investment decisions by those business leaders surveyed in China are influenced by cultural aspects and the idea of going for the cheapest price and are often based on stereotypes about Europe. The managers interviewed had very little knowledge about Europe and were not familiar with strategic risk management in general. Other findings of the survey correlate with previous comments on the dominance of trade operations in Europe. The choice of investment location was mostly based on a market-seeking strategy.

In his comments on the presentation, Duncan Freeman (Free University of Brussels) pointed to the general lack of understanding of Chinese companies’ decision-making processes with regard to their choice of location in Europe. More studies that differentiate between the investment decisions of Chinese companies with different ownership structures and different geographical and sectoral backgrounds are needed.

4.Session

The final session concentrated on the implications of Chinese OFDI for host economies, with speakers and a discussant from various European investment agencies and private consulting companies. Ulrike Handtke (Germany Trade and Invest) gave a presentation entitled “Chinese Investment in Germany”; this was complemented by Stefan Matz’s (Hamburg Business Development Corporation) presentation, “Chinese Companies in Germany – Local Policy Incentives and Chinese Companies’ Business Success.” The two 5 (Länder)level. Ulrike Handtke pointed to imports as a trend barometer for Chinese investment, which is concentrated on sales and marketing. Although the problem of valuable data exists, a focus by Chinese investment on industrial machinery can be observed. Ulirke Handtke also pointed to the establishment of headquarters in Europe, which are followed by R&D investment and value-added services.

There are more than four hundred Chinese investment companies in Hamburg, according to Stefan Matz, and the first one was established in the 1980s. The majority of these companies are state owned, but there is a growing trend of private firms “going global”. Privately owned companies are usually small, with up to three employees. Policies to attract Chinese companies to Hamburg rely not only on the city’s historical links with Shanghai but also, for example, on road shows by the Hamburg development corporation in China. These present the city’s companies and its locational advantage. Mr. Matz pointed out the increasing competition for Chinese investors among the cities in Germany and at the European level. With regard to the impact of Chinese investment on the local economy, he pointed to job creation as an important benchmark.

In her presentation “Do German Companies Feel the Heat of Chinese Competition?” Christina Stercken (EAC-Consulting) presented the preliminary results of a company survey. One of the main findings was that Chinese companies are faced with growing competition on the domestic market and have started to increase their R&D investment in order to survive. Due to this domestic situation, the pressure on companies’ to go global has become stronger. As a result of strong support from the Chinese government, especially within the framework of the current stimulus package, it can be expected that Chinese firms will become stronger on the international market and create more competitive pressure for German companies. For the latter to stay ahead of Chinese firms, it will be necessary for them to continue investing in R&D and technology development.

After a lively discussion of the various policy measures for attracting Chinese investment on the one hand and the problem of defining Chinese investment in Europe on the other, Ulrich Marthaler (UK Trade and Invest) and Carsten Boyer Thøgersen (Invest in Denmark) gave a presentations entitled “Monitoring Chinese Investment in the UK and Denmark”. The main point they made was that while there has been substantial growth in Chinese OFDI since the 1990s, the data quality is too poor to make realistic forecasts about future developments. Both speakers stressed the negative impact of media reports on the development of Chinese investment in Europe.

In the final discussion the possibilities for future cooperation among the participants was seen as an important further step. It was felt that a second workshop should include companies and scientists from both China and Europe. Collaboration between European scholars was regarded as relatively easy, but the inclusion of representatives from governmental agencies and businesses should also be taken into account. At the same time, future research should focus on areas important for businesses and be of scientific relevance. The cross-fertilization of research with additional business perspectives was seen by some participants as being very important. One area of such research could be an analysis of key players among the Chinese companies investing abroad and of state agencies supporting Chinese OFDI.

Participants voiced the need for an in-depth analysis of Chinese investment activities in Europe. So far only a small number of studies which deal with the different aspects of Chinese investment in various European countries exist. To enhance further studies a solid database is needed; this would require a joint approach among the EU countries for statistical 6 reporting, assessment and monitoring by their national investment agencies. In addition, a companies, and research papers would also be very useful for policy makers, government investment agencies, private companies and scholars alike. The idea of an “Invest in Europe” website and information portal was also discussed.

Special thanks for making this conference possible go to the China Goes Global Project (Harvard University/Rollins College/University Potsdam/ Alexander von Humboldt Foundation), PricewaterhouseCoopers and to Metzler Investment GmbH/Metzler Asset Management.