China boosts its presence in Europe

But it's not all plain sailing for businesses that are outward-bound in their outlook

When the global financial crisis broke out in 2008, little did economic experts think it would be the precursor to a healthy economic relationship between China and Europe. But in the subsequent years the alliance, aided by a series of mergers and acquisitions in Europe, has managed to give Chinese outbound investment a new direction.

More importantly, the Chinese investment footprint covers the entire continent, ranging from the cantons of Switzerland, to the industrial heartlands of Germany, the vineyards of France, a port in Greece, and textile companies in Italy. It also includes utility investments in the UK and services sector investments in many European nations.

Zhejiang Xuebao Fashion Co, a leading fur coat maker, is one of the Chinese companies eyeing Europe for further growth. The company plans to invest 50 million yuan ($8 million) to acquire a local fur coat factory in Turin and establish a representative office in Italy by the end of May.

"Italy is the fur capital of the world. There is a lot of know-how we can gain from the Italian factory. It will also help in making our products appeal more to European customers," said Zhu Weixiang, general manager of the company. "The debt crisis in Italy has given us an ideal investment opportunity."

In July last year, China's leading down coat producer, Bosideng International Holdings Ltd, opened its first overseas store in London's West End. The $55 million store is the first main link in Bosideng's overseas expansion.

The company, named Chinese Investor of the Year in 2012 by the British Business Award council, expects overseas business to account for more than 5 percent of its total revenue in the next five years.

Chinese investment in Europe has not only grown rapidly, but also outpaced its investments in the United States. And, not surprisingly, most of these investments have managed to create jobs amid a dismal economic climate in Europe.

A recent study conducted by the European Chamber of Commerce in China, KPMG and Roland Berger Strategy Consultants indicates that Chinese companies operating in the EU will not only increase their investments in Europe but also look to acquire more technology, brands and expertise through mergers and acquisitions to further improve their competitiveness.

"We were surprised to find that most of the respondents wanted to continue to invest in Europe. This gives us the feeling that Chinese companies that have an ongoing investment in Europe are happy with these projects and want to continue to stay invested in Europe," said Davide Cucino, president of the European Chamber of Commerce in China.

Of the 74 surveyed Chinese enterprises that have invested in the EU, 97 percent indicated that they would make future and additional investments in the EU, with the vast majority of them planning higher outlays, the study said.

Lending further credence to the survey findings were figures published by the National Development and Reform Commission in December, indicating that 11 of the newly approved outbound investment projects were in Europe.

Zoje Europe GmbH, the fully owned unit of Zoje Sewing Machine Co, a sewing machine company in East China's Zhejiang province, has recently completed two major acquisitions in Germany and is considering another.

The company plans to buy the German industrial sewing machine maker Pfaff Industrial to hone its technological strengths, said Chen Yongwu, general manager of Zoje Europe GmbH. If the purchase is successful, Zoje will hold more than 15 percent of the global sewing machine market, and become the world's second largest sewing machine company.

"We expect the Chinese investment wave in Germany to continue for the next five to 10 years," Chen said.

According to Germany Trade and Invest, the official investment promotion agency of Germany, investments from China accounted for 18 percent of the total investments last year. It is estimated that Chinese companies invested $1.47 billion in Germany last year, almost equal to Germany's investments in China.

"Germany is located in the center of Europe. Chinese companies can enter the European market easily by using the 'Made in Germany' tag. We expect to attract more Chinese investment this year," said Benno Bunse, chairman of Germany Trade and Invest.

Investment rationale

However, Cucino of the EU chamber said revenue is not the only factor that is propelling Chinese companies to Europe.

"The foremost reason why Chinese companies want to invest in the EU is of course the European entry point for their products. However, they are not in Europe just for the European market, but also to bring back products to China and even export products to other countries."

In the EU chamber study, 85 percent of the respondents said their main reason for investing in the EU was to gain market access for their products in Europe and to provide goods and services within the EU market.

But "in Europe, for Europe" is not the only purpose, experts say.

Coco Ke Liu, head of business channel development at HLB International, a global network of independent professional accounting firms, said that while some Chinese businesses are investing in Europe to serve the European market, some are also investing here to acquire technologies and brands, which are important resources for success both in the Chinese market and abroad.

In recent years, a growing number of Chinese acquisitions in Europe have been across a diverse range of industries, including food, retail, manufacturing, education, clean technology, industrial technology and healthcare.

Shanghai-based Bright Food Group's purchase of a 60-percent stake in British cereal maker Weetabix Ltd in May last year helped the company gain a well-known and well-trusted British brand.

Chinese construction equipment maker Sany Heavy Industry Co and Chinese private equity company CITIC Group's joint acquisition of Germany's largest concrete pump maker Putzmeister in January last year in a landmark deal allowed China to claim a pillar of the German industry.

Bunse of Germany Trade and Invest said that for Chinese companies which are faced with industrial upgrading issues, investing in European countries such as Germany can help overcome the problems.

"It is still a difficult process for Chinese companies to set up globally recognizable brands. They need the support of both advanced management and technology, which we believe European countries such as Germany can provide."

Many Chinese companies are expanding into Europe to build globally recognizable brands because the European market has strict regulations especially for high-technology products.

Chinese medical equipment maker Mindray Medical International is one such company testing the waters.

"We are committed to international expansion, especially in the US and Europe. These two markets are like two fortresses we have to conquer to become a truly global leader," said David Yin, managing director of Mindray's European operations.

"In the process of selling our products to Europe and the US, we learn about their strict standards. These lessons have become invaluable for product development at home."

Yin said Mindray's success in Europe and the US has helped it gain trust from domestic and customers in other emerging economies which had often favored Western products in the past.

"Some Middle Eastern and Latin American markets only give medical equipment product registrations if they had already been sold in Europe or the US, which just demonstrates how important it is to have a presence in Europe and the US," Yin said.

Challenges ahead

As with any companies entering a foreign market, challenges are inevitable for Chinese companies.

Cucino said the survey respondents cited operational problems, rather than market access, as the biggest obstacle for Chinese investment in Europe.

Other big problems included obstacles in obtaining visas and work permits for Chinese employees, European labor laws, human resources costs and cultural differences in management style.

Many Chinese companies have found it difficult to employ Chinese workers at their UK subsidiaries because the British government often rejects their applications to sponsor work permits for employees who are non-EU nationals.

This is because the government limits the number of work permits granted to 20,700 a year. This quota is then allocated to each professional category.

If the number of applications for work permits made by companies in a particular professional category exceeds the category's quota, generally applicants with the highest salary will get the places, said Xue Haibin, a partner in the London office of Zhong Lun Law Firm.

Xue said that it has been very difficult for his company to secure work permits for employees because the salary it offers cannot compete with that of the biggest British law firms.

"The minimum salary of a trainee in London is only 20,000 pounds ($30,000) annually but some large law firms have the financial ability to pay 50,000 pounds," Xue said.

Headquartered in Beijing, Zhong Lun expanded into the UK in 2006 to provide legal services to both Chinese businesses going there and UK businesses expanding into China.

"The British government said the country is open to businesses but its regulations show that it isn't so open," Xue said, adding that Zhong Lun may consider investing more in its offices elsewhere that have more open markets.

The company now has overseas offices in Riyadh, Lyon, Paris and major cities in the US.

An alternative way of employing Chinese workers in UK subsidiaries is through intracompany transfer (ICT), but this method is very costly.

Under the UK's ICT scheme, foreign companies can only transfer workers to their UK subsidiaries if their salaries are above 24,000 pounds.

However, employees whose annual salary is between 24,000 pounds and 40,000 pounds can work in the UK for only one year which, for most companies, is not enough for a worker to fully contribute toward the company's business there.

Those whose annual salary is above 40,000 pounds can stay in the UK to work without time restriction. The UK's average full-time salary was only 26,500 pounds as of April 2012.

Paul Taylor, CEO of Dynex Semiconductor Ltd, a British company bought by China's Zhuzhou CSR Times Electric Co and which is now a subsidiary, said it is very expensive to transfer workers from the parent company to work with his team in the UK.

"This is a problem because we sell our products in China through our parent company and we need people working in China who understand our products. By transferring them to work in the UK for maybe three years, they can gain a good understanding of our products," Taylor said.

"If we sell more products in China, our manufacturing in the UK will grow, and we can recruit more local people to work for us if we grow."

In 2008, Zhuzhou CSR Times Electric bought a 75 percent share in Dynex. It has since invested in Dynex to build a new research and development center costing 12 million pounds.

Taylor said most of the Chinese workers at Dynex are sent from Zhuzhou CSR Times Electric on one-year ICT visas because the salary of 40,000 pounds needed to pay workers staying for more than a year is unaffordable.

Sylvain Godinet, vice-director of the HLB Swiss member firm Beau Group, sees differences in business culture as a big challenge and, in particular, "the difficulty of EU counterparts to understand the Chinese manners in business".

"Typically, Europeans consider signing a contract with their Chinese counterparts to be the most important act in a partnership. And typically, in mergers and acquisition cases, Europeans focus only on the selling price. This is difficult for Chinese parties who generally want to develop more deeply the relationship, exchange know-how and strengthen the relationship and collaboration."

http://www.ecns.cn/business/2013/06-08/67678.shtml