Nation's companies to invest more heavily in Europe's service industries

In what many analysts see as a healthy indicator of China's economic transition away from exports and toward consumption, Chinese outbound investment rose to $77.2 billion (59.5 billion euros) last year, a 14-percent increase from the previous year's tally of $68 billion, according to the Dragon Index, the first index to track Chinese outbound investment globally.

The index, published quarterly by A Capital, a Euro-Asia growth capital fund, measures the growth of Chinese outbound investment stock relative to China's gross domestic product.

"This is a good indicator," says Andre Loesekrug-Pietri, chairman and managing partner of A Capital. "(And it shows China's) necessity to buy overseas skills, brands and technology."

Europe led all regions and continents as the preferred destination for Chinese outbound direct investment last year, with 33 percent of all Chinese overseas funds being funneled toward the continent. That figure is more than double the amount of ODI into the US. Europe also made up 51 percent of all service sector investments and led in non-resources investments, attracting 61 percent of all non-resources merger and acquisition deals, according to the Dragon Index.

"It is a trend that Chinese firms will be involved in more outbound investment, but compared with the US and the European Union, China is still at an early stage of outbound business and they have many things to learn," Loesekrug-Pietri says.

The ongoing overseas investments trend is largely the result of the Chinese government's encouraging major state-owned enterprises to look abroad. But Loesekrug-Pietri says the trend is also an indication that Chinese businesses are acquiring an overseas presence.

"Chinese GDP growth is slowing down while Chinese companies still seek quick development. Therefore, they need more share outside the Chinese market," he says.

According to the Dragon Index, deals for resources, such as minerals, remained the driving force behind Chinese ODI, with about $243 billion, or 58 percent of total ODI, devoted to such deals. Deals in the service sector saw the largest growth in 2012, up 165 percent to $11 billion from $4.8 billion in 2011. China had its largest service sector deal last year when Dalian Wanda, the movie-theater conglomerate, made a $2.6 billion purchase of AMC Entertainment Holdings Inc, the second-largest US chain that has about 5,000 screens in the US and Canada.

Loesekrug-Pietri says the amount of ODI into resources will remain stable for the foreseeable future, but added that more investments will be in service sector industries.

"The investments into Europe are expected to remain strong as European valuations remain moderate due to low-growth perspectives. There are no regulatory hurdles similar to (the Committee on Foreign Investment in the US) and no obstacles between Chinese investors and the European economy, particularly in sectors associated with urbanization."

China will undergo rapid change over the next five to 10 years in consumption patterns, in the retail industry and in how Chinese companies market their brands. And with European countries leading the way globally in many industries, such as automobiles, brand marketing, and renewable energy, Chinese investors will easily find opportunities there, Loesekrug-Pietri says.

Close ties between Europe and Africa are another advantage Chinese investors can learn from, says Loesekrug-Pietri. Africa is seen as a huge pool of opportunities by Chinese investors, though doing business on the continent poses many challenges.

For instance, the HNA Group, China's fourth-largest airline conglomerate, in October completed its acquisition for a 48-percent stake in Aigle Azur, a Paris-based private airline, as part of HNA's international flight network expansion.

With the acquisition, France's second-largest airline will expand on routes from France to North and West Africa as well as to other regions in Africa while integrating resources from HNA to expand its flight network across Asia, Europe and Africa.

"I see more Chinese firms like the airline company investing in Europe or with Europeans because they want to use their experience of doing business in Africa. There is more strategic interaction between Chinese investors and European companies targeting Africa," he adds.

Another trend identified by the Dragon Index is that minority share deals outpaced mergers and acquisitions in value, totaling 58 percent of all Chinese ODI. Loesekrug-Pietri says most of the Chinese takeovers globally, so far, have not fared well because they have been recognized as aggressive in light of China's overseas expansion. Chinese companies face many challenges after an acquisition, most notably in streamling management and staff and swaying public and employee union opinions, he says.

Chinese overseas investments are now targeting more high-end brands and technologies, making the competition for acquisitions more intense. In minority transactions, Chinese companies are cost-effectively gaining a partnership.

"When more foreign companies came to China two decades ago, they needed Chinese partners to understand the culture, recruit talent and build a good relationship with local government. It's a similar story for Chinese companies investing overseas today, which is less aggressive but smarter," he says.

zhaoyanrong@chinadaily.com.cn

(China Daily 05/24/2013 page21)