This has been the year that Chinese companies have truly gone global. Collectively, they have announced more than US$ 170 billion of acquisitions abroad during the first nine months of 2016 – more than in any previous year.
Not all will succeed, and not all have been welcomed with open arms by politicians, regulators or the companies being targeted for purchase. Concerns are understandable when a country quickly becomes such a force in global mergers and acquisitions: I am old enough to remember anxiety about Japanese acquisitions in the 1980s.
But it is important to remember that there is a strong commercial rationale behind China’s overseas acquisitions and that these investments actually present substantial opportunities to the companies and economies in question.
Brands, technology and growth prospects
While Chinese enterprises certainly need access to the brands, technology and sometimes growth prospects they can find in international markets, they also have a lot to offer. Chinese capital can provide welcome cash injections, but a Chinese investor also brings valuable experience of operating in the vast, complex Chinese market that is critical to many firms’ growth plans.
As volumes of Chinese outbound M&A surge and begin to involve household names, the headlines and the scrutiny are not surprising. There have been some eye-catching deals this year, including:
ChemChina’s US$ 44 billion bid for Swiss agrochemicals company Syngenta, by far the biggest overseas acquisition ever attempted by a mainland Chinese company (the deal is still awaiting regulatory approval);
The US$ 5.6 billion purchase by Qingdao-based Haier of General Electric’s household appliances business; and
White-goods manufacturer Midea’s drive to take over Kuka, a leading German robotics company, for EUR 4.5 billion (about US$ 5.1 billion).
The initial impetus for China’s overseas M&A drive, 20 years ago, came from Beijing. The imperative then was for Chinese companies to venture beyond China in a bid to become globally competitive.
The wave of activity over the past couple of years, though, is the product of much more mundane drivers: the sheer size of the Chinese economy; the shift towards consumption, services and private-sector activity; and China’s slower growth trajectory.
First, consider the scale of China’s economy.
China’s Real Gross Domestic Product in 2015 was 30 times the size it was in 1978. During 2015 alone, it grew by an amount similar in size to the entire economy of Switzerland.
It is only natural that this growth has been accompanied by an expansion in China’s corporate universe: many more companies now have the kind of scale, confidence and experience to make and implement big acquisitions which they may have lacked just a few years ago.
Influencing outbound investment
Second, China’s economic rebalancing is influencing its outbound investment.
What was once a closed, state-led economy dominated by heavy industry, construction and exports is now much more driven by domestic consumption. Today, service-sector activity accounts for more than half of China’s GDP. The manufacturing sector is moving up the value chain and becoming more technologically sophisticated. And privately-owned businesses make up 60 percent of China’s output.
This shift has changed what Chinese companies are buying, and who is doing
A decade ago, China’s M&A forays overseas were mainly about securing the supply of natural resources and energy. This mirrored the appetites of an economy that was ratcheting up double-digit annual growth rates and manufacturing goods for export around
Now, the mix of target industries is much wider. Consumer-related goods and services (entertainment, white goods, healthcare), high-technology industries (robotics, automotives), and information technology have moved higher up the shopping list, in line with China’s overall economic rebalancing.
At the same time, the profile of those doing the buying has changed.
Ten years ago, a typical overseas Chinese acquisition involved a giant state-owned enterprise bidding for, say, raw materials assets in Australia.
Now, it is more likely to involve a private-sector company seeking to purchase an e-commerce player in Singapore, a Hollywood film studio or a robot manufacturer
In other words, China’s focus has shifted from buying what the country needsto what it wants; from basic resources to assets that meet the demands of an increasingly affluent consumer society.
Finally, China’s slower growth is also a catalyst for overseas acquisitions. After years of red-hot expansion, the “new normal” for China involves growing at a more modest, more sustainable pace. We forecast growth of 6.7 percent this year and 6.5 percent in 2017. This has fanned Chinese corporates’ desire to move beyond their home market in search of growth and diversification.
In that way, Chinese CEOs are no different from their counterparts in other parts of the world. Japanese companies, for example, have for years been actively expanding outside of Japan and its mature, low-growth economy.
So concerns that China seeks to exercise undue influence through its overseas acquisitions or that these are driven by a desire to move capital offshore are misplaced. Rather, this remarkable surge in activity is the result of an economy that is maturing – both in size,
and in the range of its appetites – and of companies that are motivated by a simple commercial rationale.
China’s M&A activity – just like its evolving economy – is simply moving towards a
(The writer is the Head of Global Banking and Markets, Asia-Pacific, HSBC)