Focus on deals high up value chain
Chinese companies are preparing for a wave of investments in Europe in engineering and technology as part of an effort to find new markets and gain greater control of global supply chains, according to bankers and industry experts.
This comes amid exhortations from Beijing encouraging Chinese companies to “go global” and put down roots overseas rather than rely on exports. Clive Whiley, chief executive of financial services group Evolution Securities China, says many Chinese companies view Europe as a better place to expand than the US on grounds of what they believe to be a “less protectionist attitude” to inward investments by China.
The Chinese groups are targeting businesses with expertise in machinery, materials and specialised components, fields where many European businesses occupy strong positions.
Mr Whiley says Chinese companies find the idea of buying these businesses a good way to “complement their expertise in low-cost manufacturing with skills higher up the value chain”.
In the six months to the end of March 2011, Chinese businesses invested $64.3bn in Europe in acquisitions, trade deals and loan agreements. This was more than double the comparable figure over the previous 11 quarters. Engineering and manufacturing have been a key focus, according to London bank Grisons Peak.
Recent moves by Chinese businesses into Europe included January’s $2bn acquisition by China National Bluestar of Elkem, a Norwaybased supplier of high-purity silicon for the solar power industry. Blue-star has also bought a former Courtaulds factory in the UK, which is a centre of expertise in carbon fibre technology.
Bluestar is keen to use some of the know-how from the European businesses by transferring technology to Chinese plants.
Another rationale to these moves is that gaining access to specific groups of customers would be difficult to address through Chinese companies’ own efforts, says Richard Orders, head of Asia at US investment group Moelis.
Many Chinese companies see European deals as a “short cut to a customer base”, he adds. Businesses around the world might, for instance, be comfortable with buying high-tech equipment from a European supplier, whereas they would be less likely to do so if the supplier was Chinese and had a less established track record.
One case of a Chinese enterprise buying in Europe mainly to reach a new group of customers was the 2007 purchase by Northern Heavy Industries, a Chinese machinery company, of NFM, a leading French supplier of specialised tunnelling equipment to companies working around the world on underground railway projects.
The UK seems to have prompted a special interest. “A lot of Chinese businesses believe that Britain has some interesting privately owned engineering businesses that are under-valued,” says one UK banker.
Dynex Semiconductor, a British leader in specialist electronic devices for controlling electric motors, was bought three years ago by China South Locomotive and Rolling Stock, one of China’s two biggest makers of railway vehicles.
One of the motivations was to use some of Dynex’s technology in the manufacture of motors for high-speed trains in China.
Paul Taylor, Dynex’s chief executive, says the deal has benefited the UK company. “The Chinese owner has been very supportive and has helped us to move into a new market [China] which previously we’d have been unable to address.”
Some observers have warned of the possibilities of Chinese deals in Europe foundering because of a lack of understanding by the Chinese owners of European business practices.
Several Chinese investments in the Germany machine tool industry have failed to meet their owners’ original aspirations, says Helmut Hammer, president of Berlin consultancy H&C Hammer.