Chinese companies must seize the golden opportunity to invest in Europe

The 15th EU-China Summit offers an excellent opportunity to reflect on Chinese Premier Wen Jiabao's speech in 2004, in which he stated: "China and the European Union are highly complementary economically".

Not only has China become Europe's largest trading partner over the past decade, this year Europe is also the main destination for overseas investment by Chinese companies. Furthermore, Europe is set to remain very attractive for Chinese investors as slowing growth in China will force Chinese companies to move up the value chain, looking to increase efficiency rather than simply boost revenues. This makes an ideal situation for cross-border investment between the two sides.

The outbound investment trend is just starting as indicated by the A CAPITAL Dragon Index, which tracks Chinese outbound investments. The index shows that Europe attracted 95 percent of non-resource investments from China in the second quarter of 2012. Last year was already a strong year with $10.4 billion (7.9 billion euros) invested in Europe by Chinese firms. This year is set to become a record year. During the first half of 2012, Chinese investments amounted to $7 billion, a 63 percent increase compared with last year.

This is obviously good news for Europe. As demonstrated through many investments over the past couple of years, Chinese companies are investing in European industrial companies that have unique technologies or famous brands. If the deal is strategically structured for both sides, having a Chinese shareholder can give European companies a unique access not only to the vast Chinese market, but also more financing options.

Yet, while we believe there is an abundance of opportunities for Chinese companies in Europe and equally for European companies in China, overseas investments remain difficult and risky. It is therefore of the utmost importance that these deals create value.

Our strong recommendation is to go against the typical investment model in which Chinese companies were only looking to take over companies and tend to make transactions on their own. This approach has brought about more failures than successes.

We therefore recommend avoiding four common pitfalls:

Short-term strategy. Too often, we see Chinese investors rush for investment opportunities before having proper consultations with their technical, public relations, management and legal advisors. These advisory services, if used correctly, can significantly reduce risks.

Going for bankrupt firms. Professional investors understand that trying to turn around a bankrupt company struggling in a low growth environment is far riskier than investing in a profitable firm. Low prices do not necessary lead to adding value. This tactic often fails.

Going alone. We recommend to always co-invest with local partners, who are more aware of where the opportunities and the real risks lie. Through this partnership, the interests of all parties are really aligned and focused on long-term value creation rather than just on closing the deal. All parties should also communicate effectively during the entire investment period.

Going for a takeover. In general, Chinese investors are not very experienced in managing foreign companies, especially if they are people-centric organizations or in the technology sector. Pursuing a takeover means Chinese investors are left alone managing entities 10,000 kilometers away from their base. We recommend going step by step, starting with a minority deal to "test the waters", reducing the risks by leveraging the partners' experience, benefiting from the synergies and achieving common successes.

Cross-border deals are extremely challenging and complex since investors basically need to be local in both places, while, at the same time, having a unified team to be a real bridge between both cultures.

Finally, the current perception - rather than the reality - that the eurozone is not able to solve its sovereign debt difficulties blurs the investors' judgment. Too often in China, Europe is wrongly perceived as bankrupt and inefficient, and investors are then very surprised and frustrated when they realize that there are so many established companies that could be bought without paying an inflated price. Many world-leading companies in Germany, Scandinavia, Italy, France, the UK and Eastern Europe are performing well despite tough market conditions. The same happens with the perception of China in the West. Chinese companies are not well known internationally and investments by Chinese firms may sometimes lead to political or public concerns. This often leads Chinese firms to pay unnecessary heavy premiums, as seen recently in some energy and food related deals. This is not a sustainable practice for Chinese or any investor.

Therefore, it is absolutely critical for Chinese firms to raise their corporate profile, for their chairmen or chairwomen to improve their public image, to communicate their strategy, their objectives and their ways of making decisions effectively to overseas audiences. This will create trust and this trust will be a solid asset for future global expansion.

We are confident that Chinese investments in Europe should continue strongly as markets welcome Chinese investments, valuations are reasonable, and Chinese companies need to move strategically to improve their added-value in terms of technologies, brands and access to customers. Indeed, China and Europe have never been as well-suited to work together to build a strong partnership as they are today.

The author is founder and managing partner of A CAPITAL, a Europe-China growth capital fund. The views expressed here are not necessarily those of China Daily.

(China Daily 09/20/2012 page7)