If
China cannot beat Europe, it will acquire it
There
is no problem in Chinese companies buying abroad — but Beijing sets
up big obstacles at home
John Gapper
OCTOBER 26, 2016 by:
John Gapper
Four dishes and one
soup, with no alcohol. This was the meal symbolically consumed by Xi
Jinping, China’s president, on a visit to Hebei province in 2012 as
part of his crackdown on corruption among party officials. There
should be no lavish hospitality or edible bribery, he signalled.
Foreign companies
that want to acquire businesses in China face a similarly strict
diet. There are few dishes on the menu and they are hard to swallow.
It is quite unlike what Jörg Wuttke, president of the EU Chamber of
Commerce in China, calls the “banquet” to which China is treated
abroad.
Now, though, Germany
may be calling a halt to its banquet or removing some of the dishes.
It this week withdrew approval for a €670m takeover of
chip-equipment maker Aixtron by Fujian Grand Chip, an investment
fund. Together with regulatory delays to ChemChina’s proposed $44bn
takeover of Syngenta of Switzerland, this suggests Europe is taking
another look at the bill.
Caution is
justified, not because there is anything wrong in Chinese companies
buying abroad, but because Beijing sets up heavy obstacles for
foreign companies doing the same in its own market. They range from
legal limits on foreign ownership to a web of regulations and
informal barriers.
Germany’s small
and medium-sized companies are not the only target. Dalian Wanda has
been on the buying trail in Hollywood, and HNA Group this week bid
$6.5bn for 25 per cent of the Hilton Hotels chain. Chinese companies
are no longer happy simply to manufacture clothes, toys and
electronics and leave the clever stuff to others.
Some of these deals
will end the same way as Japan’s acquisitions in the late 1980s,
also encouraged by high asset prices and cheap money at home.
Japanese companies overpaid for assets that they did not know how to
handle and ran into trouble. But Germany shows why the surge in
Chinese direct investment should be taken seriously.
Business with
Beijing
Nearly $40bn in
Chinese acquisitions pushed back by west
Deals for
agribusiness Syngenta and Germany’s Aixtron latest to face scrutiny
Second thoughts
about the Aixtron deal follow a series of acquisitions of German
companies with advanced manufacturing technology. Kuka, a maker of
industrial robots, was bought by Midea, a Guangdong manufacturer of
household electronics, for €4.5bn this year. Chinese companies have
also bought German makers of concrete pumps and machine tools.
There is no mystery
as to why it is happening. The Made in China 2025 plan unveiled last
year calls for China to move into advanced manufacturing in 10
industries, including machine tools and robotics, aerospace, medicine
and information technology. If it cannot beat advanced companies in
Germany or the US, it will acquire them.
This is not
inherently sinister. It has advantages over China’s former tactic,
which was to spark “indigenous innovation” by making European and
US companies that wanted access to its home market form joint
ventures with Chinese companies and transfer their technology as the
price of entry.
The Chinese
acquirers of German and US companies have to pay a hefty premium for
sophisticated technology that they can then adopt. It is a more
appealing approach than, for example, the way that Siemens, Kawasaki
and Alstom had to share secrets to gain contracts for China’s
high-speed rail network.
Nor is there any
problem with China’s vaulting ambition. It cannot simply stay where
it was as light manufacturing shifts to countries with lower wage
rates, such as Bangladesh. It does not undermine the security of the
west with its acquisition of expertise in robotics and advanced
machine tools.
The irritation is
that investment flows are becoming unsustainably one-sided. China’s
economic rise and accession to the World Trade Organisation in 2001
opened a large trade gap, with China turning into the world’s
biggest exporter of goods. Germany and other advanced economies used
not to have to worry about imbalances in mergers and acquisitions,
but now they do.
WTO accession was
intended to bring global companies more access to China, and did so
in sectors such as carmaking. But China maintains a plethora of
formal and informal limits on foreign ownership in healthcare,
logistics, telecoms and other industries. China Oceanwide was free
this week to buy Genworth Financial, a US insurer, for about $2.7bn,
but overseas insurers still have only a tiny market share in China.
Ownership limits had
a legitimate purpose: to prevent China’s industries being trampled
in a stampede of inward investment. But its rapid economic advance in
the past 15 years has not led to much liberalisation: even when laws
are relaxed, provincial governments and local officials favour
Chinese companies in myriad ways.
Germany is in a
tough spot, lacking any broad mechanism to control China’s advance:
the EU has no equivalent of the Committee on Foreign Investment in
the US, which investigates sensitive takeovers. The EU has pressed
China to allow European companies easier entry but Beijing is a hard
bargainer and the imbalance suits it well.
It cannot last.
Either China serves more or US and European banquets will shrink.
Regulations will be changed and deals will be blocked. Then everyone
will have to live on less.
john.gapper@ft.com
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