投英 Tou Ying Tracker 2014THE CHANGING PATTERN OF CHINESE INVESTMENT IN THE UK

IN COLLABORATION WITH

The changing pattern of Chinese investmentGrant Thornton 投英 Tou Ying Tracker 2014

Chinese companies continue to make their mark in the UK, according to our 投英 Tou Ying Tracker 2014. The Tracker identifies the Top 25 fastest growing UK businesses with Chinese parent companies by turnover.

The impressive growth of the 投英 Tou Ying Top 25 companies illustrates soaring Chinese investment in the UK as a key destination of choice for Chinese businesses setting up overseas. This report highlights the key trends in Chinese investment in the UK through analysis of growth rates, new entrants, industry sectors and locations of the Tou Ying Top 25.

About the Grant Thornton 投英 Tou Ying Tracker

The Grant Thornton 投英 Tou Ying Tracker, developed in collaboration with China Daily, identifies the top 25 fastest-growing Chinese companies in the UK as measured by percentage revenue growth year-on-year, based on the latest published accounts filed as at 23 October 2014.

The Tracker includes companies with turnover of more than £5 million and a minimum two-year track record in the UK that are 50% or more owned by an entity in Mainland China.

Simon BevanHead of the China Britain Services GroupGrant Thornton UK LLP

Andy KaDeputy Head of the China Britain Services Group Grant Thornton UK LLP

Grant Thornton 投英 Tou Ying 25 (In alphabetical order)

Company name Sector Region

* Adama Agricultural Solutions UK Ltd Manufacturing South

Agricultural Bank of China (UK) Limited Financial Services London

Bank of China (UK) Limited Financial Services London

* Bank of Communications (UK) Limited Financial Services London

* Blue Star Fibres Company Limited Manufacturing North

* Bluestar Silicones (UK) Limited Lifesciences South

* Bright Food Europe Limited Retail and Consumer London

* China International Capital Corporation (UK) Limited Financial Services London

* China RE UK Limited Financial Services London

China Telecom (Europe) Limited Tech, Media and Telecoms London

China Unicom (Europe) Operations Limited Tech, Media and Telecoms London

* Harvard International Limited Retail and Consumer South

Holroyd Precision Ltd Manufacturing North

Huawei Technologies (UK) Co., Ltd. Tech, Media and Telecoms South

Icbc (London) PLC Financial Services London

* Johnson Security Limited Manufacturing South

Minmetals (U.K) Limited Manufacturing London

* Nexen Energy Services International Ltd. Business Support Services South

* Petrochina International (London) Co., Limited Energy and Utilities London

* Saic Motor UK Holding Co., Ltd. Manufacturing London

Schwing Stetter (UK) Ltd Manufacturing South

Sinochem Europe Holdings PLC Energy and Utilities London

Tp-Link UK Limited Tech, Media and Telecoms South

Unipec U.K. CO. Limited Energy and Utilities London

* WE Are Social Ltd Tech, Media and Telecoms London

* New entrants

Strong growthOur Tracker shows that the top 25 Chinese companies in the UK continue to prosper, contributing over £25 billion to the UK economy in 2013, up from £17 billion in 2012. Overall growth of the top 25 companies in 2013 was a stunning 38% versus 27% in the previous year. Even the lowest growth rate among the Tou Ying 25 was an impressive 8% – ahead of most global economic indicators.

Chinese businesses are also making a substantial contribution to UK employment, with a total of over 4,000 people employed by the Tou Ying 25, compared to 2,600 in 2012.

New playersThirteen new entrants make the Tou Ying Top 25 this year, many of which are relatively new arrivals to the UK. As in the past, the manufacturing and financial services sectors dominate the list, closely followed by tech, media and telecoms.

Alongside these new entrants, this year’s Top 25 nonetheless contains a number of well-established companies in the UK demonstrating similarly impressive growth rates, such as Sinochem Europe, Bank of China, China Telecom, China Unicom and Huawei Technologies.

The Top 25 includes ten companies that are the result of past acquisitions compared to just five last year, while 15 are the result of organic

growth of greenfield Chinese investments. This resurgence in M&A activity compared to last year’s Top 25, including large transactions such as the acquisitions made by state-owned Bright Foods, coincides with a period of intense activity for keystone Chinese acquisitions in Europe. In total, 34 deals were completed by Chinese companies in 2013, with a value of £2.4 billion. Chinese outbound investment is expected to increase steadily over the next decade.

Last year less than half of the Top 25 had set up in London, demonstrating the success of other UK regions in attracting inward investment. However, our 2014 Tracker shows a shift back to a greater concentration on London and the South.

Sector diversification

Financial services [6]

Retail and consumer [2]

Tech, media and telecoms [5]

Manufacturing [7]

Business support services [1]

Energy and utilities [3]

Lifesciences [1] 0 5 10 15 20 25 30

North

Midlands

South

London

2013 2012

15

8

3

2 2

12

8

Regional patterns

What do these results tell us about the changing pattern of Chinese investment in the UK?

A changing landscapeThe main focus of Chinese companies expanding into the UK and Europe has in the past been primarily to invest in established heritage brands, such as Weetabix, MG Rover and luxury yacht maker Sunseeker, or in UK-based technology and intellectual property. This expertise has often been exported back to China for use in the domestic market and elsewhere. SAIC Motor’s investment in the Longbridge MG plant and the design and technology behind the Rover 75 and subsequent relaunch as the Roewe 75, is just one example of this.

A more recent trend has seen China-based businesses

establishing smaller-scale ‘reconnaissance’ operations to build their understanding of the UK and European markets. This has proved a successful formula for companies such as TP Link, which set up its consumer electronics brand from scratch in the UK, recognising the difficulties in generating brand recognition in the market without a physical presence.

However, our 2014 Tou Ying Tracker highlights the emergence of some interesting new strategies both by State-owned and private Chinese companies. It appears that China may be changing tack.

A more strategic approachChina has the opportunity to invest £105 billion in UK infrastructure by 2025 with energy, property and transport the biggest recipients, according to the Financial Times. The Chinese Government is providing significant support for companies to expand and invest overseas through the State Asset Supervision Committee, responsible for all state-owned Chinese enterprises.

London is now also seen as Europe’s leading trading hub for the Chinese renminbi, following the Industrial and Commercial Bank of China’s decision to issue an offshore bond in the UK for the first time last year.

China Investment Corporation’s ten per cent stake in Thames Water, a minority shareholding in the new Hinkley Point nuclear power station, and SAIC’s investment in its UK technology centre at Longbridge suggest a more long-term, strategic approach to overseas investment to maintain China’s position as a key local player. This is in addition to the redevelopment, by Chinese developer Advanced Business Park (ABP), of the Royal Albert Docks in East London into a major new business park aimed

at attracting the European HQs of Asian businesses and the One Nine Elms hotel complex investment by Dalian Wanda, as well as potential future Chinese investments at Heathrow and in HS2. Rather than a source of heritage brand acquisitions, it appears that China increasingly sees the UK as an effective springboard to internationalise its own businesses as it builds a platform to take its goods and services to market globally.

This is borne out by the number of State-owned companies on this year’s Tracker list – 18 out of 25 – as well as the growing number created through significant acquisitions – ten companies in 2013 compared with just five in 2012.

The success of a number of the entrants in this year’s Tou Ying Tracker, particularly in the

telecoms and financial services sectors, such as Bank of China, China Telecom and China Unicom also demonstrates the strategic importance of a support network to enable global operations for existing and new Chinese businesses in the UK and beyond.

It will be interesting to see whether this trend towards a more asset-driven approach to investment in tangible assets with more predictable revenue streams and reliable returns continues over the long term.

Springboard for global growthOur Tou Ying Tracker 2014 analysis demonstrates the emergence of more mature, genuinely global privately-owned Chinese businesses that are increasingly upping their game and competing on the international stage.

Huawei is one such example, having developed a significant footprint in the UK where its mobile phones compete successfully alongside established Western consumer brands. Similarly, TP-Link’s success in establishing its products with the UK’s major retailers has seen it capture a major slice of the domestic and home office wireless products market, fuelling rapid growth.

Alongside this now relatively well-established expertise in consumer electronics, are we beginning to see a greater focus on service-based businesses? Global social media marketing agency, We Are Social, is a

notable addition to this year’s Tou Ying Top 25 and perhaps indicative of growing Chinese interest in UK creative industry prowess.

In spite of these changes, however, it seems that the attractions of established brands has an enduring appeal for Chinese investors. The recent sale of Pizza Express to Beijing-based Hony Capital highlights another trend - the rise of Chinese private equity buyers looking to acquire assets across Europe. This is part of a

new generation of homegrown investment firms on the look out for overseas companies they believe they can help expand in their domestic market – emulating the traditional approach of the state-owned companies.

As the power and resources of Chinese-based online brands such as Alibaba continues to grow, will we see these groups making more audacious acquisitions of Western media groups?

Merging business cultures?Chinese businesses are increasingly adapting to UK business culture as they expand globally. Some, such as Lenovo are adopting English as the common global business language. Our ‘Thoughts of Chairmen Now’ book, revealed that Chinese senior executives are listening carefully to Western approaches to understand them better and blend them with their own where appropriate.

With China clearly seeing the UK as a destination of choice for overseas expansion, we are likely to see further

convergence of Chinese and UK business practices, particularly with the growing influence of a new generation of Western-educated Chinese business owners and entrepreneurs. It will be fascinating in the years ahead to see whether we all end up playing the same game or whether this creates new business models and cultures drawing on the best of both worlds.

Will the UK remain open to Chinese business?In addition to the obvious benefits of time zone and

language, the UK boasts an attractive tax regime for

overseas investors,

with a corporation tax rate currently at 21% and dropping to 20% from April 2015. It is an increasingly popular holding company destination for Chinese companies wanting to set up and expand globally, recently overtaking the Netherlands as a destination of choice in this respect. The UK also increasingly competes with Luxembourg, historically the most popular jurisdiction for establishing a legal entity to take advantage of looser tax and corporate structure requirements.

The UK Government has also taken steps to position the UK as a hub for innovation through R&D tax credits and its patent box regime. David Cameron’s charm offensive visit to China last year and a number of high profile trade delegations may also be paying off.

A relaxation of the immigration and visa processes for those coming from China to the UK has also increased the attractiveness of doing business in the UK. A survey by the European Union Chamber of Commerce in China found that Chinese companies rated labour laws, human resource costs, and immigration rules as the biggest obstacles to operating in Europe. Legal and cultural obstacles to Chinese investors in Europe, as demonstrated by the difficulties experienced by state-owned COVEC over its involvement in an ill-fated and as-yet-unfinished major road building project in Poland, are gradually being overcome in the UK.

There is no doubt that the UK has positioned itself as well and truly ‘open for business’ to foreign direct investment and, as a result, has become a favoured destination for Chinese business compared to some other major markets. The US, for example has been more

reluctant to allow investment in tangible infrastructure assets due to qualms over national security, instead encouraging overseas investors to hold dollar financial instruments.

The UK is also seeing a revival in its M&A market – Pfizer’s takeover bid for UK-based AstraZeneca earlier this year, although ultimately aborted, is symptomatic of the increased appetite for inbound UK M&A. The Latest Grant Thornton International Business Report on M&A shows 31% of businesses worldwide plan to expand through M&A over the next three years, so it is perhaps not surprising to see the number of companies in our Tou Ying 2014 Tracker representing growth through M&A doubling to ten compared to last year.

Question marks over EU membershipThe UK’s membership of the EU currently brings obvious attractions to potential Chinese investors looking to access the wider European market and workforce. Fears over a potential UK exit from the EU could therefore cause concern and potentially lead to Chinese companies diverting or postponing investment.

Whilst there is currently considerable public debate about UK membership of the EU, it is worth noting that all the leaders of the UK coalition government, opposition Labour party and Scottish government support continued membership of the EU combined with economic reform to increase its competitiveness. The Conservative party has said it will hold a referendum on EU membership if it wins the next election in May 2015. The Labour Party has expressly ruled out a referendum. Historically, public opinion is supportive of EU membership and business organisations are vociferously supportive of continued membership.

If there is a referendum and the UK electorate opts for an EU exit, this would take some time to implement, given the need for a lengthy referendum campaign and, if it comes to it, a phased exit process, allowing plenty of time to plan for change.

On the other hand, there may be benefits to Chinese companies in steering clear of the eurozone environment, so a UK outside the EU may continue to be an attractive proposition. A raft of double tax treaties would be likely to continue and companies may find other ways to set up business effectively in the UK to continue to access the EU market. Indeed, the free-trade agreement approaches favoured by Norway and Switzerland while remaining outside the EU, may suggest a viable future alternative model providing the UK with access to the single market.

The period in the run-up to the UK general election next year may prove a defining one for UK attitudes to Europe and we await the outcome with interest.

The true heroes of ChinaWe congratulate the Tou Ying 25. Their performance is exceptional. We expect the key themes from this year’s Tracker to continue as Chinese companies place less emphasis on brand acquisition in the UK and focus on internationalising their own brands. A greater emphasis on infrastructure and business support demonstrates a keen appetite for investing for the long term. This coincides with the growing maturity of UK-based Chinese businesses, which are increasingly aligning their business practices with their European peers to compete on the global stage.

Vs

Tou Ying 2014tracker in brief

38%

Growth

13 entrants

1510acquisitions

organic growth£25 billion+ combined revenues

Over4,000employees

2012 - 2013

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