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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

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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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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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