By Sondre Ulvund Solstad
Apr. 19 – Chinese companies increased their investments in Europe by as much as 21 percent in 2012, solidifying its position as the main destination of Chinese Outward Foreign Investment (ODI). In total, Europe was the recipient of US$12.6 billion of Chinese investment last year, which now represents approximately 33 percent of all Chinese ODI.
The rationale for increasing investment in Europe is attributed to a convergence of multiple factors. The current problems affecting European economies have led many enterprises to be in need of fresh capital, as regional sources of capital have dried up. In addition, lingering uncertainty over future growth prospects has led valuations to remain moderate.
“Many Chinese investors regard Europe’s current weakness as an opportunity to jump in,” noted Mr. Loesekrug-Pietri, managing and founding partner of A Capital, referring to the unsettling effects of the current sovereign debt issues and low growth rates in the region.
At the same time, the Chinese leadership’s proclaimed intent to transition into a consumer-focused and value-added economy is also a factor in increasing European investment. China’s plans for economic reform were reflected in a sharp increase in outward direct services investment (up 165 percent last year, totaling US$11 billion). This increased focus on services has mainly benefitted Europe, who last year received 51 percent of total Chinese ODI in the services sector, recording a 27-fold increase of over US$5.4 billion year-on-year.
Chinese firms also have intrinsic motives for investing in the region. According to an investigation published by researchers at the Technical University of Munich on the motives of Chinese firms investing in Germany, Chinese firms mainly invest to gain access to technology, enlarge product portfolios, secure their market position in China, and to gain a strategic foothold in Europe.
This conclusion has been complimented by many European companies courting Chinese investors in the search for greater access to the booming Chinese market, especially in light of the initiation of consumption-oriented reforms. In one recent example, Danish high-end stereo and television manufacturer Bang and Olufsen signed a “strategic partnership” deal with two Chinese investors in 2012, aimed at facilitating distribution in the China’s first and third-tier cities.
The Technical University of Munich’s investigation of German companies underlined the soundness of such an approach.
“In many cases, the experience has been a very positive one for the German companies involved. The investors’ strong financial footing has helped them safeguard jobs and production capacities, advance the development of their technologies and gain access to the Asian market,” said Professor Isabell Welpe, the Chair of Strategy and Organization at the University.
Europe was also the primary destination of non-resource oriented investments last year, with 61 percent of all non-resource merger and acquisition deals, and an impressive 86 percent of all industry related transactions.
Another reason for Europe’s dominant position as a Chinese investment location is the perception of European countries as more welcoming towards Chinese investors, particularly towards state-owned companies (SOEs).
SOE companies represented 93 percent of all Chinese investment in Europe last year, increasing by US$3.38 billion. In contrast, SOE investment in North America dropped by more than US$700 million in 2012 on a year-on-year basis, as many SOEs continued to see the region’s major economies as less than welcoming of their participation. Overall, SOEs were responsible for 85 percent of total Chinese ODI last year, up from 72 percent of ODI in 2011.
Chinese ODI is expected to grow in the years to come, with analysts predicting that it will equal foreign direct investment in China as early as 2015.