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How to Access the Opportunities
from Chinese Outward Investment:
Impact on EU SMEs
Haiyan Zhang 22 Sept. 2014
A project funded by the European Union
www.eusmecentre.org.cn [email protected]
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Purpose
• The EU SME Centre in Beijing is a project funded by the European
Union
• To assist European SMEs to export to China and establish,
develop and maintain commercial activities in the Chinese
market
• Confidential information and advice, and practical support
services
Speaker biography
Prof. Zhang Haiyan holds a MA and a Ph.D. in Public Administration and Management from the University of Antwerp. He is associate professor of Asia/China Business Strategy and Management at the NEOMA Business School and Director of NEOMA Confucius Institute for Business.
He is also visiting professor at different Chinese universities, teaching in international MBA programs about Asian Business Environment and strategic management. His research interests include China’s inward and outward direct investment, high-tech industrial clusters, internationalization of Chinese and overseas Chinese owned enterprises, management issues of international joint ventures in transition economies, etc. He has published in journals such as Management International Review and has contributed to about twenty books. He is co-author of a book about European Direct Investment in China, published by Routledge in 2002.
He has consulted for several trade associations, government institutions and multinational companies in Europe and China on various topics, such as US direct investment in Belgium, strategic management of bilateral cooperation with Chinese local authorities, mergers and acquisitions in China, etc.
Agenda
• Chinese OFDI in the European
Union
• Understanding China’s GVC
• Specific characteristics
• Linkages with Chinese GVCs
• Opportunities and challenges
for European SMEs
Chinese OFDI in the European Union
Overview of China’s OFDI and
recent development
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Recent development of Chinese
OFDI (MOFCOM, 9 Sept. 2014)
• China’s OFDI flows reached US$108 billion in 2013, a
growth of 23% as compared to 2012
• China’s OFDI stock amounted to US$660 billion, which
ranks China 11 most important home country in the world
in terms of FDI stock
• China’s OFDI is highly concentrated in five sectors,
namely leasing and business services, finance, mining,
wholesales and retailing and manufacturing which
accounted for 83% of the total Chinese OFDI stock in
2013
Recent development of Chinese
OFDI (MOFCOM, 9 Sept. 2014)
• M&A became an important form of China’s OFDI, of which
the total value reached US$53 billion in 2013, including
424 projects in different industries
• Private enterprises accounted for 45% of total Chinese
OFDI stock by the end of 2013, while the relative share of
SOEs decreased from more than 80% to about 55% over
last 10 years
• Chinese overseas subsidiaries generated US$1,427
billion of sales in 2013, an increase of 15% as compared
to 2012
• The total number of employees in Chinese overseas
subsidiaries reached 1.967 million, of which 102 thousand
are located in developed countries
China inward and outward FDI
flows (million US$) (1982-2013)
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
Inward FDI Outward FDI
Inward FDI stock: 957 billion US$
Outward FDI stock: 614 billion US$
Source: UNCTAD, 2013
Source: UNCTAD, 2014
338
136
101 95 92 69 60 58
43 37
China became the third most
important investor abroad in 2012
Source: UNCTAD, 2013
Outward FDI flows in 2013, billion US$
Source: UNCTAD, 2014
China outward FDI flows (million US$) and its
share in the world total IFDI (1979-2011)
-
1.00
2.00
3.00
4.00
5.00
6.00
7.00
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
Flows % of world totalSource: UNCTAD, 2013
Geographic distribution of China’s
outward FDI stock (2012)
Source: MOFCOM, 2012
China’s OFDI in Europe/EU and
key features
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New developments in China’s
M&As Europe
• Privately owned enterprises have surpassed SOEs to
become the most important players in China’s M&As in
Europe
• Chinese firms have emerged as important investors in
East and Central Europe to acquire production facilities
and strategic assets
• M&As as the mode of entry became a new landmark for
Chinese investment in Europe
New developments in China’s
M&As Europe
• Many Chinese firms target sectors in which European
companies have built up world-class operational,
managerial and innovation expertise
• An increase in investment by wealthy Chinese
individuals or families who look at Europe as a way to
acquire the European distinction or “cachet”
Evolution of China’s outward FDI stock per
region (2003-2011) (2003=100)
Africa
Europe
North America
Oceania
-
1,000
2,000
3,000
4,000
5,000
6,000
2003 2004 2005 2006 2007 2008 2009 2010 2011
CNOOC (Unocal)
Huawei->3com
Source: MOFCOM, 2012
EU-China cross-border FDI flows (billion
US$), 2003-2011
-
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
2003 2004 2005 2006 2007 2008 2009 2010 2011
EU FDI flows to China Chinese FDI flows to EU
EU FDI stock in China: US$76 billion
China’s FDI stock in the EU: US$20
billion
China’s OFDI in EU
(million US$), 2003-2012
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31538.24
6118.72
0
5000
10000
15000
20000
25000
30000
35000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Stock Flows
Source: MOFCOM, 2013
China’s FDI outflows to EU-27
(€ million and per cent), 2001-2012
(0.50)
-
0.50
1.00
1.50
2.00
2.50
(1,000)
(500)
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
200120022003200420052006200720082009201020112012
China as % of extra EU inward FDI flows
Net FDI flows from China to the EUSource: Eurostat, 2013
China’s OFDI stock in the EU-27 EU
(€ million and per cent), 2001-2012
-
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
China as % of extra EU inward FDI stock China's OFDI stock in the EUSource: Eurostat, 2013
Mapping of China’s M&A projects
in Europe, 1995-2013, June
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22 Source: The Heritage Foundation, 2013
Types of value added activities
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8%
86%
3% 3%
Knowledge intensive services
67%
Less knowledge intensive services
12%
High-tech manufacturing
17%
Low-tech manufacturing
4%
Understanding China’s GVC in Europe
New developments in the
Chinese economy
• Switching from export/investment led to
consumption driven model
• Slowdown in China’s economy (export and inward FDI)
• Increasing demand for Western consumer
products/services
• Looking for opportunities abroad
• Moving from low-end market to “good enough”
market
• Increasing competition
• Need for technological upgrading – “asset augmenting”
New developments in the
Chinese economy
• Facing the rise of trade and investment
protectionism
• Reduced competitiveness for large scale manufacturing
• Moving production to the export market
A simplified global value chain and expansion
of Chinese GVC in the European Union
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Extension of Chinese GVCs
in Europe
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Knowledge creation
• Technology exploration, rather than
technology exploitation
• Asset seeking
• Knowledge Learning
• Different as compared to other MNEs
• Introduction of new business model
• From European to Asian/global market
• Low cost leadership position
Linkage opportunities
• Backward/Forward linkages
• Creating opportunities to local knowledge partners
• to speed up their technology exploitation process (new
investment)
• To extend the life cycle of their product (new market)
• To lower R&D cost
• Examples
• Shanghai Automotive Industry Corporation
• Huawei
• Haier
Operation and manufacturing
• Upgrading from OEM to OBM
• Moving into “good enough” market segment
• Competing with Western MNEs
• Decline of low cost leadership position due to the
increase of labour cost
• Facing rising trade protectionism
• increasing anti-dumping measures
• Acquiring European brands
• Producing in Low cost manufacturing countries in
Central and Eastern Europe
Linkage opportunities
• Backward linkages
• Component producers
• Logistic companies
• Examples
• TCL Operation Polska
• Hedgren Creation
Distribution and supporting
services
• Acquisition of transport facilities
• Port/container terminals
• Transportation network
• Acquisition/establishment of distribution channels
• Consumer goods
• Industrial goods
• Forward linkages
• After-sales services
• Examples
• TCL Operation Polska
• Lenovo’s acquisition of Medion
Specific characteristics of
Chinese GVCs in Europe
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Typology of Chinese FDI
investors in Europe
Type of Chinese owned enterprises in
Europe (% of total number of firms), 2013
Individual and family investors
82%
State owned enterprises
3%
Privately owned enterprises
15%
Corporate investors
[PERCENTAGE]
N=7,148
Geographical distribution of Chinese
firms in Europe (numbers) 2013
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Geographical distribution
(assets) 2013
Entry form
Wholly owned
subsidiary 47%
Majority JV 18%
50:50 JV 15%
Minority JV 14%
Other JVs 6%
Origin of joint venture partners
With partner from China
51% With partner from the host
country 24%
With partners from China and host country 12%
With partners
from third countries
8%
Unknown 5%
Ethnic origin of joint venture
partners
Chinese partners (from
mainland China) 50%
Overseas Chinese partners
26%
Non-Chinese partners
16%
Mixed partnership
8%
Linkages of Europe SMEs to Chinese GVCs
Opportunities and challenges for
European SMEs
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Opportunities
• To supply components, materials and services locally
• From arm’s-length market transactions to deep, long-
term inter-firm relationships
• To transfer their existing production and product
technology or cooperate in new technological ventures
• To increase market size, especially if these operations
could create forward linkages with the Chinese market
for diversification or expansion of current customer
portfolio,
• To adopt new corporate strategy, new business model or
new management approach, which can generate rapid
growth in size and in turnover
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Challenges
• Difficult for SMEs to fully understand the complexity of
Chinese companies, especially regarding to their
business activities, management structure and decision
making process.
• Difficult to cooperate with Chinese MNEs due to
constant pressure to lower costs and time compression,
which heavily threat their profitability.
• The cultural and language barrier is another major
challenge for most European SMEs, which are not easy
to overcome, especially for SMEs which are lack of
international and cross-cultural communication and
management skills
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Recommendation for European
government institutions and
business representative
organization
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Challenges
• Raising awareness of local SMEs about the
opportunities and challenges when linking up with
Chinese direct investors
• Special programs could be organised to support for networking,
business matchmaking, information and databases on suppliers
and business alliances, etc.
• Supporting local SMEs to link in to the GVC of Chinese
MNEs at different stages.
• For instance, at the knowledge creation stage, special measures,
such as tax incentives for encouraging MNEs to localize their
R&D activities and promoting technology transfer among
between SMEs and MNEs, public-private partnerships in
connecting research centres/universities and industry, etc 9/23/201430/11/10
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Challenges
• Taking Chinese GVCs into consideration when
promoting and supporting the internationalization
process of SMEs
• Organising competency training and cultural awareness
programs for SMEs to facilitate their business
relationship with Chinese MNEs
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