Transcript PowerPoint

Chinese Investment in Europe and
European Investment in China:
Trends, Risks and Opportunities
Prof. Ivana Casaburi
Director, ESADE China Europe Club, ESADEgeo
Associate Professor, Department of Marketing Management, ESADE Business School
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Fill in the Blank
Q: China is one of the world’s major investors. There are
approximately _________ (how many?) companies located
abroad in _________ (how many?) countries.
A: 18,000; 177
2
Fill in the Blank
Q: There are _________ (how many?) global firms among the
500 largest in the world.
A: 89
3
Fill in the Blank
Q: _________ (which region?) is the main destination for
Chinese investment in the world. At the end of 2012, the FDI
stock was _________ (how many euros?).
A: The EU; €26,768 million
4
Fill in the Blank
Q: _________ (what percentage?) of Chinese FDI in Europe is
concentrated in six countries. The six countries are: _________
(which countries?).
A: 73.3%; Luxembourg, France, the UK, Germany, Sweden, and
the Netherlands
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Lesson Road Map
1. The internationalization of Chinese companies and their presence in
Europe
•
•
•
•
China’s position in the world & its current economic strategy
Chinese companies in the world
Chinese companies in Europe
General characteristics of Chinese investment
2. The renewed allure of China for European firms
• The arrival of European firms into China
• New difficulties for European firms in China
• Business opportunities for European firms in China’s
new economic climate
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1. THE INTERNATIONALIZATION OF
CHINESE COMPANIES AND THEIR
PRESENCE IN EUROPE
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China’s Ranking in the World
8
China’s 12th 5-year Plan—6 Priorities
Boost domestic
consumption
Improve
industry
innovation
Adjust the rate
of GDP growth
Strategic Plan
“12-5”
Save energy and
protect the
environment
Internationalization
Coordinate
regional
development
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China’s Changing Economic Model

Private sector as the economy’s main driver

Globalizing Chinese companies

Focus on 8 strategic emerging industries:
Infrastructure, energy, agriculture, high-tech,
environment, healthcare, agri-food, and consumer goods

Protection of 8 strategic sectors:
Defense, generation and distribution of electricity, oil,
telecommunications, steel, civil aviation, banking, and
water transport
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China’s Changing Economic Model

Private sector as the economy’s main driver

Globalizing Chinese companies

Focus on 8 strategic emerging industries:
Infrastructure, energy, agriculture, high-tech,
environment, healthcare, agri-food, and consumer goods

Protection of 8 strategic sectors:
Defense, generation and distribution of electricity, oil,
telecommunications, steel, civil aviation, banking, and
water transport

China has climbed from its position as
the 33rd foreign investor in 2000 to rank
3rd in 2012.

FDI expected to grow to a rate of $150
billion by 2015.

China leading the boom in foreign
investments by emerging countries, with
a volume of investments:
o
6x greater than India’s
o
29x greater than Brazil’s
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Presence of Chinese Companies in the World
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Presence of Chinese Companies in the World
Two main strategies:
1.
Greenfield investments
2.
M&As to move up the
value-added chain
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Fortune’s Global 500
• 98 Chinese (including
HK) companies among
the world’s 500 largest
companies
Source: Fortune
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But Very Few Chinese Brands Are Truly Global
15
Chinese Brands Do Not Own Distinctive Attributes
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Turning to Europe
Europe is the main
destination for
investment in the world
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Presence of Chinese Companies in Europe
18
Chinese FDI Stock in Europe is Increasing Rapidly
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Hurdles for Chinese Companies in Europe (1/3)
• Brand recognition
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Hurdles for Chinese Companies in Europe (2/3)
• Brand recognition
• Conceptions
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Hurdles for Chinese Companies in Europe (3/3)
• Brand recognition
• Conceptions
• Weak points
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Characteristics of Chinese Investment Abroad
1) What are the characteristics of Chinese companies that invest abroad?
2) Why are Chinese companies investing abroad?
3) Where do Chinese companies want to sell?
4) Where are Chinese companies investing?
5) What are the challenges and opportunities for Chinese companies that
internationalize?
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1) What Are The Characteristics of Chinese Companies That
Invest Abroad?
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2) Why Are Chinese Companies Investing Abroad?
Among other reasons,
• to improve their position in the value-added chain of global goods
production, making them more competitive;
• to expand their markets;
• to adquire new technologies;
• to differentiate themselves in the domestic market;
• to build know-how; and
• to build their brands.
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3) Where Do Chinese Companies Want to Sell?
1. China

To the growing upper and middle class
2. Europe and the US

Mature markets, strengthening and buying brands, R&D, patents
3. Africa


Since the 1990s
South Africa is the main partner
4. Latin America

Focus on Brazil: $25 billion in one year
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4) Where Are Chinese Companies Investing?
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5) What Are The Challenges and Opportunities for Chinese
Companies That Internationalize?
OPPORTUNITIES
CHALLENGES

“Low price” image still dominates
the perception of products from
China

Choosing emerging markets as
the first foothold to global
expansion.

Required managerial abilities are
different

Choosing mature markets to
change perceptions and learn.

Categories: electronics, branded
products, mobile phones, and
appliances
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2. THE RENEWED ALLURE
OF CHINA FOR
EUROPEAN FIRMS
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European Investment in China:
Some Facts and Figures
Mao
Deng Xiaoping
Accumulated European
FDI in China now:
€118 billion
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European Investment in China:
Some Facts and Figures
Mao
Deng Xiaoping
Accumulated European
FDI in China now:
€118 billion
MAIN EUROPEAN INVESTORS IN CHINA (accumulated 2012)
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
Source: Eurostat. Billion €.
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European Investment in China:
Some Facts and Figures
Mao
Deng Xiaoping
MAIN EUROPEAN INVESTORS IN CHINA (accumulated 2012)
Accumulated European
FDI in China now:
€118 billion
Nevertheless, EU FDI to China remains low in comparison:
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
Source: Eurostat. Billion €.
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European Investment in China:
Motivations
Competitive labor costs
Reasons for
European
firms to
invest in
China
Huge potential market
Export platform to Asia
Low firm competitiveness
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New Difficulties for European Firms in China
As a result of the
economic development
undergone in china in
recent years, European
firms are facing new
challenges when it
comes to investing and
operating in China….
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New Difficulties for European Firms in China (1/4):
Economic Slowdown
•
•
Expected economic growth about 7% annually or even lower
Risks linked to economic unbalances such as shadow banking, real estate bubble, municipalities
public debt,… (high level of uncertainty)
•
•
Higher incentives for European firms to diversify for reducing potential risks
Less economic growth and potential unbalances: maybe other emerging markets can offer less
risk and higher profitability for European companies?
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
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New Difficulties for European Firms in China (2/4):
China Is No Longer Cheap
•
•
•
•
Labor costs are not competitive for South Asian standards any more
Increasing pressure for rising salaries (due to the lack of specific working force in some industries and the
Government support for a private consumption model of growth)
Logistic costs are extremely higher (and lack of adequate infrastructure)
Bureaucratic costs are still enormous
Source: China Briefing
Source: Several sources
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New Difficulties for European Firms in China (3/4):
Higher Competitiveness of Local Players
Higher competition for global players in China
New local players with a very competitive position
FINANCIAL
SECTOR
AUTOMOTIVE
INTERNET
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China
Myanmar
Saudi Arabia
Indonesia
Jordan
India
New Zealand
Malaysia
Mexico
Tunisia
Russia
Canada
Iceland
Kazakhstan
Korea
Australia
Israel
Ukraine
Austria
Brazil
Mongolia
Peru
United States
Norway
Switzerland
Kyrgyz Republic
Poland
Morocco
Egypt
United Kingdom
Turkey
Sweden
Chile
South Africa
Japan*
Italy
Costa Rica
Slovak Republic
Latvia
France
Ireland
Lithuania
Belgium
Argentina
Denmark
Greece
Hungary
Colombia
Germany
Spain
Finland
Estonia
Netherlands
Czech Republic
Romania
Slovenia
Portugal
Luxembourg
Difficulties for European Firms in China (4/4):
Classic and Persistent Barriers to Doing Business
FOREIGN DIRECT INVESTMENT REGULATORY RESTRICTIVENESS INDEX 2013
0.450
2013 FDI RR Index
Closed = 1; Open = 0
0.400
0.350
0.300
0.250
0.200
0.150
0.100
AVERAGE ALL
OECD average
0.050
0.000
As of September 2013
Source: OECD
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Difficulties for European Firms in China (4/4):
Classic and Persistent Barriers to Doing Business
Source: World Bank. Doing Business 2015
DOING BUSINESS REPORT 2015
•
Other Asian and Latin American countries offer a much more
business friendly environment.
•
Extremely complicated to open a business (128th in DB 2015)
•
Highly complex to pay taxes (120th in DB 2015)
•
Very weak protection of minority investors (132th)
•
The most complicated regulation for FDI according to OECD
•
Additionally, very important de facto barriers
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Business Opportunities for European Firms
in China’s New Economic Climate
However, the Chinese
economy “new normal”
generates new and
exciting business
opportunities for
European firms
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Business Opportunities for European Firms in China’s New Economic Climate (1/7):
Changing Model of Growth and Rising Living Standards
2 main drivers of the
changing model of
growth
Demand: Higher contribution of
private consumption
Foreign brands: new market opportunities
Supply: Higher contribution of
services and added value activities
Opportunities for foreign companies operating
in the high part of the value chain
•
Size of the market: between 275 – 100 million citizens (depending on whether middle
income is defined as from $ 5,000 or $ 10,000 dollars)
•
Assuming Western consumption patterns
•
Government support for private consumption (fiscal reform) and for high value services
activities (financial incentives and subsidies)
•
Business opportunities to introduce products and services in different market segments
(specially in upper and medium class)
•
Already top market for many foreign companies (ie 34% VW total sales)
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Business Opportunities for European Firms in China’s New Economic Climate (2/7):
Inland China
•
•
•
•
•
•
Business opportunities in Beijing, Shanghai or Zhenzhen 20 years ago are now present in inland China.
Average salary in Beijing is €6,032 compared to €2,047 in Yunnan (58% lower).
Minimum salary €220 in Shanghai compared to €140 in Guinzhou or Qinhai.
Size of market: 750 million citizens (equal to Latin America).
Hunan’s GDP is similar to Nigeria’s and Mongolia’s similar to Egypt.
Government incentives to invest in inland China (allowing covering additional expenses derived from operating in a less friendly business
environment).
AVERAGE ANNUAL SALARY IN SEVERAL CHINA CITIES
BEIJING
ZHEJIANG
GUANGDONG
SHANGHAI
HUBEI
SHAANXI
YUNAN
GANSU
0
1,000
Source: China Statistical Yearbook 2013
2,000
3,000
4,000
5,000
6,000
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Business Opportunities for European Firms in China’s New Economic Climate (3/7):
New Industries
•
Government determination to open most of the industries to foreign capital.
•
Recent publication by China’s National Development and Reform Commission (November 2014) reduced foreign investment restricted
industries from 79 to 35.
•
Foreign investment (as well as domestic investment) is supported by the government in some industries.
•
The Shanghai Free Trade Zone (SFTZ) is a promising project which is extremely business friendly for foreign firms (including fewer
investment barriers). It could be replicated in other regions of the country. SFTZ includes interest rate liberalization or free Renminbi
conversion.
Some industries where investment is supported by the government
SOFTWARE AND
INTERNET
BIOTECHNOLOGY
AND
ENVIRONMENT
ADVANCED
MATERIALS
ALTERNATIVE
ENERGIES
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Business Opportunities for European Firms in China’s New Economic Climate (4/7):
Innovating China
RATIO R&D EXPENSE OVER GDP
•
New opportunities for R&D facilities at lower costs than in Europe.
•
Advantage of proximity to the factories.
•
R&D expenses / GDP in China is 2%, above EU and the rest of large
emerging countries.
•
50% of graduates study scientific degrees.
•
Fiscal incentive to R&D activities (15% corporate tax).
•
Huge market of 500 M internet users.
•
Well positioned for new disruptive technologies development: robot, life
science, big data, alternative energies, rare earths,…
3
2.8
2.5
1.9
2
1.5
1.1
1
0.5
0.8
0.8
INDIA
SUDÁFRICA
2
1.2
0.4
0
MÉXICO
RUSIA
BRAZIL
UE
CHINA
UNITED
STATES
Source: China Statistical Yearbook 2013
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Business Opportunities for European Firms in China’s New Economic Climate (5/7):
Infrastructure and a More Integrated Market
•
Massive government plan to modernize and develop new infrastructure inside and outside the country.
•
China will become a much more integrated market and companies will save time and costs operating among provinces.
•
The plan does not only involve physical infrastructures but also technological infrastructure.
•
Many initiatives supported by the recently created Asia Infrastructure Investment Bank (capital base of US$100bn).
•
Government funding channelized through public banks: Exim bank has provided credit support for 24 highways, 3 railways, one
port, 3 airports and 9 bridges in the Mekong region and the 10-nation Association of South East Asian Nations (ASEAN).
•
Megaprojects like the New Silk Road or the Nicaragua Channel will transform the way in which commodities travel around the
world.
THE NEW SILK ROAD
THE NICARAGUA CHANNEL
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Source: World Bank
Business Opportunities for European Firms in China’s New Economic Climate (6/7):
Urban and Environmental Needs
•
The Chinese government faces very real challenges as a result of an
unbalanced model of economic growth, such as massive migration
and environmental deterioration.
•
Regarding the process of urbanization, in 1978 only 20% of the
population lived in cities, whereas this had increased to 50% in
2010, with numbers expected to soar to 70% in 2030 (13 million
new city inhabitants every year).
•
China’s greenhouse gas emissions will soar from now to 2030 (and it
is already among the most polluting nations).
•
There are urgent needs in green and residential areas, public
transport facilities and technologies, better infrastructures, water
treatment, waste management, and new sources of energy
(alternative and renewable energies).
•
Due to the demographic expectations there is also need to develop
infrastructure and projects related to elderly healthcare.
46
Business Opportunities for European Firms in China’s New Economic Climate (7/7):
Two-Way FDI Flows
CHINA OUTWARD FDI (2005-2013)
CHINA COMPANIES IN FORTUNE 500 (LARGEST COMPANIES WORLDWIDE)
700000
600000
500000
400000
300000
200000
100000
0
2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: MOFCOM
•
•
•
•
Push factors encourage Chinese companies to go abroad: policy, internal reserves, savings levels,
commodities needs, technological deficit, …
Chinese outward FDI is increasing all over the world, and the European Union is one of the main
targets.
There are 2,000 Chinese firms already in Europe, and Chinese investment is now 41 times larger
than in 2001.
Many Chinese firms buy in European companies to have access to technology, brands or the
European market. As a result, European firms have access to Chinese market through the local
partner.
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Application: The Three Paragraph Paper
Given current economic and policy conditions, what might the outlook be
for the following 3 European firms who are considering investing in China?
1. A German luxury car brand,
2. A Spanish firm specialized in smart city grids, and
3. A large French producer of low-cost electronic devices.
Please reflect on these cases for 5 minutes, and then write 1 paragraph per
case, discussing the challenges and opportunities each might encounter
when investing in China, and offering recommendations.
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Conclusion
Questions?
This powerpoint presentation and the matching teaching plan were developed as a part of the Jean Monnet project MEKBiz (Mainstreaming EU Knowledge
in Business Studies and Strategy), hosted by ESADEgeo – Center for Global Economy and Geopolitics and partially funded by the European Commission.
“The European Commission support for the production of this publication does not constitute an endorsement of the contents which reflects the views only
of the authors, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”
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