1. April 2012 І www.thebeijingaxis.com/tca
The
China
Analyst
中国分析家
A knowledge tool by The Beijing Axis for
executives with a China agenda
Features
State of Change: Assessing China’s Competitiveness
How to Engage: The Rise of New Chinese Manufacturers
Chinese OFDI: Bolder, Wiser and More Strategic
2.
3. Chinese companies in the Fortune 500
juxtaposed
with the development of Beijing’s subway system
This infographic illustrates the progression of Chinese companies in the Fortune 500 from 1994 (when the first Chinese company
joined the list) with a visual reference to the expansion of the Beijing subway system from 1971. All but two of Beijing’s current
15 lines were opened in the last decade; in the same period, 47 of the current total of 58 mainland Chinese companies joined the
Fortune 500.
The circles around each company visually portrays the expansion in revenue of the companies at time of joining the Fortune 500 vs.
2010. Note the subway map is not exhaustive of Beijing’s current subway system of 15 lines.
Line 5
Opened
in 2007
Bank of
Communications
Line 13
Opened
in 2002
China Ocean China National China
Shipping Offshore Oil Minmetals
Lenovo Group
China National Building China Railway
Line 4 Materials Group Engineering
Zhejiang Materials Jiangsu
Opened Industry Group Shagang
in 2009 Group
China
Metallurgical
Group
China China South
Railway Industries
Construction Group
Chemchina People's Aluminum
China Datang Huawei Ping An Insurance Co. of Corp. of China
China Wuhan Iron & Technologies Insurance China Shenhua Group
Guodian Group
Steel
Line 10
Opened
in 2008
China State Aviation Industry
Construction Corp. of China China
China Pacific China National Comunications
Insurance Group Petroleum Corp. Construction
China Mobile China Mobile
Communications Communications
Jizhong
Energy Group
Henan Coal Shanghai
China Automotive China North
Shipbuilding & Chemical Industries Group
Industry
Shanghai State Power
Baosteel Group
(company reorganised
Line 1 Line 2
Opened Opened
China and reformed)
Huaneng
in 1981 in 1981 Sinomach Group
Cofco Group China
Construction Agricultrual China
Bank Bank of China Telecommunications State Power
Sinochem Bank of China Industrial & Sinopec
Group Commercial Bank
of China
China National China China First State Grid Dongfeng Motor
Aviation Fuel Southern Automotive
Group Power Grid Works
China Railway
Materials China United
Commercoal Telecommunications
Citic Group
Legend China
Electronics
Companies that joined the Fortune 500 before 2000 (Line 1)
Companies that joined the Fortune 500 in 2000-04 (Line 2)
Companies that joined the Fortune 500 in 2005-07 (Line 13) Hebei Iron &
Steel Group
China Post
Companies that joined the Fortune 500 in 2008 (Line 5) Group
Companies that joined the Fortune 500 in 2009 (Line 10)
Companies that joined the Fortune 500 in 2010 (Line 4)
Sinosteel
Inside circle: Company revenue in year of joining Fortune Shougang
Group
500
Outside circle: Company revenue in 2010
5. Table of Contents
April 2012
6 FEATURES
State of Change: Assessing China’s
Competitiveness
22 STRATEGY
Mapping China in the Global Debt
Landscape
Foreign companies are facing the prospect of a competitive In this edition we illustrate China in the global debt outlook.
landscape significantly altered by emerging Chinese competi-
24
tors.
STRATEGY
China in Europe: Cash, Debt and
M&As
9 FEATURES
How to Engage: The Rise of New Chi-
Is Europe’s crisis becoming China’s opportunity?
nese Manufacturers
Chinese machinery suppliers are producing increasingly sophis-
ticated goods, but are still struggling to increase their efficiency
27 REGIONS
Regional Overview: BRIICS
A macro overview of the leading developing economies: Brazil,
and adequacy of internal support processes. Russia, India, Indonesia, China and South Africa.
11 FEATURES
Chinese OFDI: Bolder, Wiser and More
28 REGIONS
Regional Focus: CHINA-AFRICA
China-Africa trade and investment analysis, and a focus on
Strategic China’s relations with the East African community.
30
The current Chinese OFDI wave is emerging as a key enabler of
consolidation, growth, market positioning and the acquisition REGIONS
of strategic assets and expertise for Chinese companies. Regional Focus: CHINA-AUSTRALIA
China-Australia trade and investment analysis, and the series
'Australia State Watch', featuring Tasmania.
14 MACROECONOMY
China in 2012 - Soft Landing?
32 REGIONS
Regional Focus: CHINA-LATIN AMERICA
China-Latin America trade and investment analysis, and a spe-
This year marks the beginning of a trying period for China’s cial focus on China’s relations with Ecuador.
economy. As it aims for a soft landing, it will find itself in the
midst of a fundamental transition, and the economic indicators
have already begun to reflect these new trends.
34 REGIONS
Regional Focus: CHINA-RUSSIA
16
China-Russia trade and investment analysis, including the series
PROCUREMENT 'China-Russia Resources Watch'.
China Sourcing Strategy: The Purchase
36
Positioning Matrix The Beijing Axis News - September 2011–
Understanding the Purchase Positioning Matrix can help companies March 2012
determine the most suitable procurement structure to set up in China. The latest The Beijing Axis Group news.
19 INVESTMENT
China Capital: Inbound/Outbound
FDI & Financial Markets
40 About The Beijing Axis
Company profile and contact information.
Analysis on the latest on FDI in China and OFDI by Chinese
firms.
6. The China Analyst
State of Change:
Assessing China’s Competitiveness
China has become very competitive in a relatively short space of time, and now it is aiming to
transition to the next development stage, namely innovation-driven competitiveness. China’s
general trajectory in this regard is clear, and foreign companies are facing the prospect of a
competitive landscape significantly altered by emerging Chinese competitors. By Barry van Wyk
C
hina in 2012 is on the verge of transitioning to a third The Global Competitiveness Report (GCR), an annual
generation of national leadership that is seeking publication by the World Economic Forum, is the most
to make China’s economy more competitive in the comprehensive assessment of national competitiveness. It
global economy. After three decades of sustained economic defines competitiveness as the set of institutions, policies, and
growth, China has ambitions not only of being competitive, factors that determine the level of productivity of a country,
but of being a leader in innovation and industry. To reach where productivity leads to economic growth and prosperity.
these objectives, China’s leadership is considering initiatives The report measures a wide range of factors grouped into
and reforms for making China a more developed, more 12 pillars1, and it evaluates the importance of these pillars to
prosperous and more creative country. China’s economy and individual countries by dividing the latter into three stages of
its competitive standing in the world is in a state of change, development:
and in various industries, this is presenting different types of • Factor-driven, for countries still competing based on
opportunities and challenges for foreign companies. factor endowments such as unskilled labour and natural
resources;
Measuring China’s success • Efficiency-driven, for countries developing more
efficient production processes and increasing product
Companies and countries are inevitably drawn into greater quality to account for rising wages;
competition over finite markets. To gain a greater share of
those markets, a company must provide products that are • Innovation-driven, for countries where wages have
in some way superior to those of its competitors, so it can risen so much that businesses can only compete by
ultimately increase profit. For a country, the ultimate objective producing new and unique products
of gaining greater share of global markets is to increase the
standards of living of its citizens. In the latest edition of the report (2011-12), China, which has
improved its ranking each year since 2005 and is now ranked
China’s rising competitiveness after 1978 was the result of a 26th overall2, is categorised in the Efficiency-driven stage. The
mobilisation of the factor endowments that the country had report notes that China has improved its performance in most
in abundance, especially cheap, unskilled labour. Opening of the pillars, yet notable ones where its standing is much
parts of the economy to foreign investors drew in technology lower than its overall position are Institutions (due mostly to
and allowed China to integrate itself into occurrences of corruption), Financial market development
global value chains. China systematically and Technological readiness.
became a supplier of labour-intensive
Over the period products and components, combining To benchmark national industrial performance for evaluating
inward FDI with a policy to develop the competitiveness of companies, the United Nations
2001-08, China’s
competitive local companies. The rise in Industrial Development Organisation (UNIDO) developed
manufacturing China’s competitiveness was conditioned the Competitive Industrial Performance (CIP) index, which
exports grew by a by the concurrence of several factors: a measures an economy’s competitiveness for producing and
staggering 27.9% favourable exchange rate, low wages and exporting manufactured goods. Measuring a set of eight
large labour supplies, the inflow of FDI, the key indicators using manufacturing value add (MVA) data
y-o-y. huge potential of the Chinese domestic as well as population and trade data from 2005 and 2009 for
market, and the opening of world markets 118 economies, the 2011 CIP index ranked China in 5th place
to Chinese manufacturers. overall, rising from 6th in 2005, and trailing only Singapore
(1st overall), the US, Japan and Germany. In analysing the
China has come to occupy a unique position in studies of data used for the CIP index, the UNIDO report found that
competitiveness. Its rapid growth in the last three decades
has seen Chinese exports gaining global market share in an 1 The 12 pillars are Institutions, Infrastructure, Macroeconomic
expanding range of industries along with China’s progression environment, Health and primary education, Higher education and
up the value chain. The living standards of Chinese nationals training, Goods market efficiency, Labour market efficiency, Financial
have also clearly improved, so that China’s competitiveness market development, Technological readiness, Market size, Business
has increased at both the national and company levels. sophistication, and Innovation.
2 China leads the BRICS in the rankings; South Africa is next in line in
50th place.
6 І The Beijing Axis
7. Features
Features 专题 The China Analyst
Leading Producers in the Five Fastest Growing Industry both in the national as well as company spheres. Yet while
Sectors (%, 2000 and 2009) China’s exports have indeed expanded enormously after its
Average World Five Leading Economies accession to the World Trade Organisation (WTO) in 2001,
Annual (Share in World MVA) the processing trade accounts for around half of its exports.
Growth According to a WTO trade policy review on China published in
Rate Economy 2000 Economy 2009 2010, foreign-invested enterprises (FIEs) accounted for 84.1%
US 53 US 53 of China’s total processed exports in 2009. As export data
Office, Japan 15 China 11 reflect the gross value of products leaving a country’s ports,
accounting
UK 6 Japan 9 the very high share of imported inputs in Chinese exports
& computing 9.8
machinery China 4 Germany 7 means that export data do not adequately measure the value
(ISIC 30) Korea actually produced in China. The competitiveness of Chinese
Germany 4 6 exports is thus in large part fuelled by foreign multinational
Rep.
US 61 US 62 plants in China’s coastal regions, and not necessarily by world-
Radio, Japan 15 China 12 class Chinese companies.
television and China 5 Japan 10
communication 9.4 Taiwan, Korea Furthermore, since 1996, foreign firms
equipment 3 5 have accounted for around 85% of
China Rep.
(ISIC 32) Korea Taiwan, China’s high-technology exports. 4 Since 1996, foreign
3 4
Rep. China The technological spillovers that firms have accounted
Japan 23 China 33 were expected to accrue from the for around 85%
Electrical
US 21 Japan 20 FIEs and many MNCs operating in
machinery and
7.9 Germany 13 Germany 10 China, moreover, have largely failed
of China’s high-
apparatus
(ISIC 31) China 8 US 10 to materialise. For all its export growth technology exports.
Italy 4 India 5 and the increasing competitiveness of
US 31 US 22 its industry, and despite the fact that
Japan 9 China 15 58 mainland Chinese companies were
Other transport
equipment 7.3 UK 8 Brazil 14 included in the Fortune 500 in 2011 (the third-most after the
(ISIC 35) Brazil 6 Japan 7 US and Japan), China has not as yet been able to produce a
Korea
France 5 6 truly global brand:5 the latest edition of Interbrand’s 100 Best
Rep.
Global Brands in 2011 is still missing the first Chinese entry. In
Japan 23 China 48
terms of the living standards of Chinese people, the ultimate
US 14 Japan 14
objective of national competitiveness, China is still far in
Basic Metals China 12 US 5
5.7 arrears. With a GDP per capita of USD 4,382 in 2010, the figure
(ISIC 27) Germany 6 Germany 4 for China is not yet half that of Brazil or Russia’s, countries that
Korea
4 India 3 rank below China in comparisons of national and industrial
Rep.
Source: Industrial Development Report 2011, UNIDO competitiveness.
China had increased its share in overall global MVA from 6.7% Transitions
in 2000 to 15.4% in 2010, when global MVA amounted to
USD 7.39 billion. Reflecting the shifting landscape of global China can theoretically only reach the innovation-driven
manufacturing towards Asia, in 2010, developing economies threshold by raising the skills of its workers and upgrading its
accounted for 35.6% of global MVA (up from 20.7% in 1990), domestic technology and institutions to be able to produce
and China accounted for almost 75% of the latter total. innovative products and pioneering technology. The drive
for increasing China’s competitiveness is currently enveloped
Global manufactured exports are dominated by medium- and in a broad transition of China’s economy seeking to develop
high-technology products, which have never dropped below better paid, more skillful and more competitive workers and
60% of world manufactured exports since 1992. The UNIDO industries. In 2012, this is occurring on the backdrop of a
report found that the five fastest-growing sectors globally national leadership transition.
over 2005-093 were all (except for Basic Metals) in medium-
and high-technology manufacturing. In all of these sectors, A vision for a competitive and innovative China was presented
in fact in 21 out of the total 22 industrial sectors, China has in February 2012 in a voluminous study jointly developed
become the first or second leading manufacturer in the world by the World Bank, the Chinese Ministry of Finance and the
(see table above). In this process, over the period 2001-08, Development Research Centre of China’s State Council. The
China’s total manufacturing exports grew by a staggering resultant China in 20306 document outlined six key strategic
27.9% annually. Developed countries still account for around aspects for China to consider in order to become a high-
60% of global medium- and high-technology exports, yet here income country by 2030. These focus in part on rethinking
also China has made inroads, with the share of medium- and the role of the state and the private sector in China’s economy
high-technology products of its total exports increasing from to encourage increased competition, innovation, and China’s
45.5% in 2000 to almost 60% in 2009. continued integration with global markets.
Caveats
4 ‘Foreign’ here refers to foreign firms and joint ventures. In 2009, for
example, the share of foreign firms in this case was 83.2%. See http://
China has clearly dynamically improved its competitiveness, www.sts.org.cn/sjkl/gjscy/data2010/2010-2.htm for more details.
5 Although Lenovo and Huawei have been suggested as possible
3 Office, accounting and computing machinery; Radio, television candidates.
and communication equipment; Electrical machinery and apparatus; 6 With the subtitle Building a Modern, Harmonious, and
Other transport equipment; and Basic metals. Creative High-Income Society.
7 І The Beijing Axis
8. The China Analyst
As the Global Competitiveness Report outlined, rising wages State of change: The implications of a more
have been instrumental in inducing companies to innovate competitive China
to remain competitive. Wages in China have been rising
rapidly since the mid-2000s. All urban wage growth has The current transitions in China’s economy and society have
been high, yet that of low-skilled workers has been highest broad implications for the new type of competition as well
among all wage earners, more or less doubling in real terms opportunity that a more competitive China can hold. Foreign
from 2001 to 2010. China’s labour force is expected to peak companies in various industries are increasingly presented
at around 1 billion workers in 2015, and China may already with a competitive landscape significantly altered by these
have passed or is about to pass the Lewisian turning point.7 transitions in China.
Rising wages in urban areas in China are also regarded as an
important means for decreasing the urban-rural income gap For lower value-added products in industries where China has
and increasing urbanisation in China, thereby stimulating the long been dominant as a Low Cost Country (LCC) producer,
services industry. China is still to a large extent an attractive option. Yet whereas
procurement managers could previously focus their attention
China’s competitiveness will decline, solely on China, they are now increasingly considering China
however, if rising wages occur without as only one of a few options. Foreign companies sourcing
A small number of concomitant increases in labour productivity textiles and clothes from China, for example, will now find
Chinese companies and innovation. With this in mind, China’s it attractive to source only some products from China, as it
have reached or government has identified improving the still holds comparative advantage in areas such as industrial
quality of China’s human capital as a key variety and infrastructure, while increasingly sourcing selected
are approaching objective. The core policy framework to items from other Asian countries like India and Sri Lanka.
the technological this end is the 12th Five-Year Plan (FYP) for
frontier. 2011-15, which aims to engineer competitive One industry that can serve as an illustration of China’s
advantages for China based on science, increasing competitiveness is heavy industry. In this industry,
technology and innovation and to make China has over the last few years begun to provide new options
China an industrial leader in certain strategic for buyers of construction and mining machinery, challenging
industries. During the previous FYP of 2007-11, China’s the established industry leaders. In the period 2000-10, China’s
expenditure on R&D increased by 22% annually, and in 2011, exports of heavy machinery grew by a CAGR of around 30%.
R&D spending is estimated to reach 1.85% of GDP.8 Chinese companies have been most successful in this regard
in developing markets, and have gained a small degree of
China’s output in academic publications has soared in the market share in countries like Brazil and South Africa, as our
last decade, reaching 112,000 in 2008 (8.5% of the global next article How to Engage outlines.
output), and Chinese research publications have become
leaders in the fields of materials science, physics, chemistry This process is still at an early stage, and while China’s
and mathematics. Chinese patent applications to the World construction equipment manufacturers, for example, are
Intellectual Property Office (WIPO) increased from 23,000 in now able to manufacture a bulldozer or a motor grader by
1996 to 290,000 in 2008. Yet in terms of academic papers, industry standards and make gains in market share on price,
Chinese contributions are reportedly still lacking so-called these machines do not yet compete with the leading brands in
high-impact articles, and the quality of its patents have not the market. Yet Chinese companies are making investments in
been matched by its quantity as incentives for filing patent these countries and are systematically upgrading the quality
applications have produced a large number of minor design of their machines as well as their parts and after sales services
and utility patents. to become more competitive, following the example of the
likes of South Korea. The logical conclusion of this process
A small but growing number of Chinese companies have will be a Chinese bulldozer that is cheaper and basically just
actually reached or are approaching the ‘technological as good as a Caterpillar bulldozer, providing an attractive
frontier’ in their respective industries. These include ZTE alternative for mining and construction companies. This
and Huawei in the ICT industry, Suntech Power in the solar gound-breaking development may still be a few years away,
industry and Dalian Machine Tool Group in engineering. yet it is inevitable.10
Huawei, for example, has developed the world’s first ‘100G’
technology capable of delivering large amounts of data The globally competitive and pioneering Chinese company
wirelessly over long distances. Chinese companies – both and brand are still under development, but the outlines have
state-owned and private – are excelling in areas such as PVCs, started to take shape.
biopharmaceuticals, nanotechnology, stem cell therapeutics,
high density power batteries, supercomputers, and shipping Barry van Wyk, Senior Consultant
containers. Chinese companies have also achieved results with barryvanwyk@thebeijingaxis.com
other forms of innovation, for example developing creative
business models to suit existing products.9
7 As China in 2030 points out, “Although the precise timing remains
disputed, most researchers accept that China is at or nearing the
Lewis turning point of exhaustion of the rural labour surplus, and
the remaining rural working age population may be too old, sick, or
disinclined due to family obligations to migrate to urban areas.”
8 The 12th FYP aims to raise expenditure on R&D to 2.2% of GDP by
2015. Some countries have achieved a science & technology ‘takeoff ’
when this percentage approached 2%.
9 Broad Air Conditioning, for example, has developed a way to 10 In South Africa, the Chinese company Shantui recently opened a
commercialise gas-powered air conditioning systems for large large new facility and has launched an advertising campaign as ‘the
buildings. world’s leading maker of bulldozers’.
8 І The Beijing Axis
9. Features
Features 专题 The China Analyst
How to Engage: The Rise of New
Chinese Manufacturers
Squeezed from different angles by the strengthening of the renminbi, rising costs for labour and
raw materials, more stringent environmental regulations, push towards industry consolidation,
and slack capacity in developed countries, Chinese machinery suppliers have no choice but
to move up the value chain. They are producing increasingly sophisticated goods, but are still
struggling to increase their efficiency and adequacy of internal support processes. Buyers must
be patient and invest more time in building relationships with suppliers to ensure that they can
capture the benefits of China procurement while reducing its risks. By Lilian Luca
G
one are the days when the West had the luxury of worrying
about low-end textiles and shoe exports from China. The
future of exports from China will be led by equipment
manufacturers, and although they may not yet be penetrating
Western markets, competition in third markets is intensifying.
(EIU, 2011, ‘Heavy Duty: China’s next wave of exports’)
While China has steadily grown its manufacturing and export
base over the past 20 years to become the world’s largest
exporter, a status that has now become firmly entrenched
in the minds of procurement managers worldwide, a few
worrisome trends emerged last year that depict alterations
to the old China sourcing equation. Labour and raw materials
costs in China have seen a steady increase to a point where
many commodity-type goods such as textiles, toys and
simple carbon steel products can no longer be competitively XEMC’s 220t haul truck. (Source: XEMC)
sourced from China, with China losing market share to
other Low-Cost Country (LCC) producers. Moreover, as we by reduced export rebates affecting the export price
noted in the September 2011 issue of The China Analyst, competitiveness, more stringent energy and pollution
the competitiveness of simple, labour- or raw-material- regulations leading to increasing costs, rising labour and
intensive goods made in China has been further eroded by a raw materials costs, and currency appreciation. For a few
strengthening Chinese currency, government-imposed export years, Chinese manufacturers in these sectors were able to
duties and quotas, the closure of old, polluting facilities, and maintain profit margins by investing in new, more efficient
a reduction in subsidies which provide access to cheap land manufacturing processes, but this game is
and electricity. becoming increasingly difficult to play due
to rising costs of building new capacity in
So, since China is becoming more expensive, all one can do is China, including the rising cost of capital, Facing increased
prepare for a lengthy trip to discover new suppliers in exotic land and environmental compliance. Thus, competition,
Asian locations, right? Wrong. The big picture tells a different facing increased competition at home from Chinese
story altogether. both existing producers with outdated
capacity and nimbler, more innovative manufacturers are
The global, long term trend at work here is of course China’s startups, Chinese manufacturers are turning to product
transformation into a middle-income country, one that is turning to product innovation and exports innovation and
industrialised, modern and aspires to become a leading as avenues for growth.
producer of high value-added manufactured goods. The
exports as avenues
government has been promoting this for years, with every five An article by the Economist Intelligence for growth.
year plan shifting resources to support knowledge-intensive Unit 1 cites the evidence of Western
industries, encouraging investment in science and technology manufacturers losing market share in key
education, and discouraging the exports of low-value added, industries where they still dominate global
resource- or labour-intensive goods via various policies. As exports as evidence that Chinese producers are climbing
an example of such policies, the 12th Five-Year Plan’s list of up the value chain. In centrifuges and filtering/purifying
priority industries includes high-end machinery, energy machinery, for example, a USD 45 billion global exports
conservation and clean technology (included among the market, China doubled its market share from 3.5% to 7.1%
seven ‘Strategic Emerging Industries’). from 2007 to 2010, while OECD countries lost market share
On the other hand, ’discouraged’ industries get penalised 1 See quotation and reference at the beginning of this article.
9 І The Beijing Axis
10. The China Analyst
Increase in China’s Market Share of Select Product Categories (%, 2007-10)
18
Cruise ships, cargo ships, barges
Bubble size: 2010 Global
Transmission shafts/cranks, gears
16 export value (USD bn)
14 124 Air, vacuum pumps; hoods incorp a fan Heating/cooling equip for plant/lab use
Market Share Increase
12 Centrifuges, filtering/purifying machinery
Chemicals in
15 Taps, cocks, valves for pipes
10 wafer form
Lifting/handling/loading machinery
Motorcycles, Electrical switching apparatus
8 17
side-cars
Derricks, cranes Bearings
Harvesting/threshing machinery
6
12 19
Refrigerators, freezers 31
4 Tube or pipe fittings, of iron or steel Fork-lift trucks, trucks with
76 45 43 15
36 handling equip
Aluminium bars, rods and profiles 15 29
60 15 10
14 26 60
2 65 36 51
Pumps for liquids; liquid elevators
Optical fibre, cables Self-propelled bulldozers, excavators
0
55 60 65 80 Electrical ignition/starting equip 95
Construction/mining machinery parts
Moving/grading/boring machinery for earth OECD Countries Global Market Share (2010)
Source: Economist Intelligence Unit; The Beijing Axis Analysis
in the same period, from 82.7% to 80.9%. The same trend is from OECD countries, quality variability, lack of service and
visible in transmissions, gears, bearings, handling machinery limited spare parts supply networks, and lack of flexibility in
and other sectors (see chart above). commercial terms remain the biggest challenges when dealing
with Chinese manufacturers. As the sophistication of buyers in
Most of these exports from China are, however, not going to emerging markets gradually increases, so will their demands
OECD markets, but rather to non-OECD countries, an example on Chinese products: availability of customised designs and
of the so-called South-South trade relationship. Brazil, Russia, features, higher specifications and tolerances, availability of
and India are the major importers of machinery from China. credit terms and financing options, transparent tendering
Incidentally, with growth stagnating in the developed world processes and pricing, and improvements in customer service
in the aftermath of the global financial are some of the features they will demand in the coming years.
crisis, China’s exports are going to markets
that are currently driving world economic Chinese manufacturers will thus have to upgrade not only
With growth growth. They successfully compete in these their manufacturing capacities and product design and
stagnating in the markets against established Western brands, R&D capabilities, but also their supply chain systems (ability
offering more affordable products with to monitor inputs for quality and timeliness), the interface
developed world, simpler features and specification sets while between their engineering departments and manufacturing
China’s exports are more sophisticated, feature-laden Western workshops, capabilities in the tendering departments
going to markets gear gradually lose their appeal to budget- (sophisticated English-language commercial and legal support,
that are currently conscious emerging market buyers. In these fast design change implementation and cost modeling), and
markets, where secure sources of capital of course will have to put more solid internal quality assurance
driving world remain scarce and costly, upfront cost processes in place which should become the norm rather than
economic growth. considerations often trump lifetime costs the exception.
of ownership at which OECD machinery
exports perform better. In the meantime, global procurement managers can already
actively investigate and engage with Chinese suppliers
Chinese producers utilise a number of different ways to offering more sophisticated machinery, high-tech spares
climb the technology ladder. Many have successfully reverse- and consumables. This entails investing upfront time on
engineered (and often improved upon) Western designs; researching and traveling to production facilities, establishing
others are beginning to see the fruits of massive R&D good working relations to open ongoing dialogues over
spending; and still others are trying their hand at acquiring features and pricing, discussing service support options, and
new technologies through M&A as evidenced by the shopping working with suppliers to ensure a rock-solid quality control
spree being undertaken at the moment by Chinese firms in process. In these unchartered territories, local support in
Europe’s mid-size industrial sector. The heavy equipment the form of procurement service providers experienced in
industry has some shining examples of leading Chinese commercial and technical China procurement issues is often
innovators moving up the value chain and making inroads indispensible and the key to achieving LCC procurement
into the export markets: XEMC is introducing increasingly targets within a manageable time frame.
sophisticated haul trucks (see picture on previous page),
Taiyuan Heavy (TZ) is becoming a world leader in open-pit Lilian Luca, MD: Beijing Axis Procurement
mine excavators, while ZPMC is the world’s top container luca@thebeijingaxis.com
crane and gantry crane producer.
As machinery exports from China penetrate more markets, the
reality is that many Chinese suppliers are still unprepared to
adequately service foreign sales. Even though their machinery
is often simpler to maintain and less complex than that
10 І The Beijing Axis
11. Features
Features 专题 The China Analyst
Chinese OFDI:
Bolder, Wiser and More Strategic
Unlike the initial wave of overseas investment led by China’s dominant state sector in their
purchases of mining and energy companies in resource-rich regions, the current M&A activity
is emerging as a key enabler of consolidation, growth, market positioning and the acquisition
of strategic assets and expertise for Chinese companies. Forward-looking Chinese companies
now consider overseas investment as a viable approach towards moving up the value chain by
gaining access to foreign brands and technology. By Daniel Galvez
W
ith China’s rapid economic ascent and subsequent attention being placed on advanced manufacturing,
transformation into a market-based economy, technology and science-based industries. Unlike the initial
Chinese companies are now expanding abroad and wave of overseas investment led by China’s dominate state
going global not only per the government’s mandate, but sector in their purchases of mining and energy companies
also to reduce their reliance on China’s economic growth by in resource-rich regions, current M&A activity is emerging as
expanding into new markets. At the same time, market forces a key enabler of consolidation, growth, market positioning
are inducing them to acquire or gain access to sophisticated and the acquisition of strategic assets and expertise.
technologies through strategic mergers and acquisitions Forward-looking Chinese companies now consider overseas
(M&A), at increasingly favourable prices, to raise their level investment as a viable approach towards
of competitiveness. China’s overseas acquisitions in the moving up the value chain by gaining
non-financial sector, which reached a record USD 60.1 billion access to foreign brands and technology.
in 2011, will continue as increasingly sophisticated Chinese Likewise, while global leaders in the heavy The most
buyers seek bargains amid the downturn among developed machinery sectors have a significant competitive Chinese
economies, especially in Europe (see chart below). presence all around the world, they mostly firms realise size
come from developed countries. However,
Over the short term, the ongoing euro zone debt crisis will leading Chinese construction equipment
alone will not
create multiple opportunities for active Chinese investors, makers such as Sany Heavy Industry are guarantee long-
giving them easier access to technologies they have long quickly catching up, displacing previous term success in the
coveted in the European and other developed markets. Our industry leaders from the top 10 in terms
article in this issue, China in Europe: Cash, Debt and M&As,
domestic market.
of sales through both organic growth and
dives further into this trend. But what are the new driving strategic acquisitions (on next page).
forces behind the current wave of Chinese OFDI? And what
are the strategies being employed by Chinese companies to Chinese companies have also shown a bigger appetite
successfully close deals in the natural resources and industrial for relatively riskier assets compared to their peers from
sectors, which continue to comprise the bulk of Chinese OFDI developed countries. In other words, Chinese companies
deals? (see chart below) are beginning to realise the intangible benefits from making
purchases overseas. But why exactly are Chinese becoming
Shifting focus bolder, looking for acquisitions outside their own borders? It
is becoming increasingly well-known that Chinese companies
As China’s economy moves into a new phase, the focus of are not only concerned about becoming bigger and increasing
Chinese investment abroad is also shifting, with greater their market share in the short term, Chinese companies are
China’s Outbound M&A by Region (USD bn, 2010-11) China’s Outbound M&A by Sector (%, 2010-11)
2010 2011 1%
Automotive 15% 12%
Europe
Industry 7% 14%
Asia 14%
Services
Chemicals 3% 22%
North America
Australia & New Zealand
Resources 61%
South America
51%
Africa
0 3 6 9 12 15
2010 2011
Source: A Capital; The Beijing Axis Analysis Source: A Capital; The Beijing Axis Analysis
11 І The Beijing Axis
12. The China Analyst
Ten Leading Global Construction Equipment Makers China National Offshore Oil Corporation (CNOOC), China’s
(Annual Sales USD mn, 2007 vs. 2011) largest offshore oil and gas producer, has shown a particular
30
2007 2011
interest in Chesapeake Energy’s assets, investing USD 3.43
billion since October 2011 in two separate deals. In these
Market Share by Country (2011)
25 deals, Chesapeake (the second-largest US natural gas supplier
Others and most active American natural gas driller) gets a cash boost
12.0%
20 Germany
US
to help pay back its USD 10.3 billion debt load and remains the
7.5%
28.3%
operator of these projects, lessening the likelihood the deals
Sweden
15 11.4% will face regulatory opposition. In exchange, CNOOC gains
China Japan exposure to the complicated shale gas extraction technology it
24.9%
10
16.0%
lacks. In other words, China is forgoing ‘big splash’ investments
and opting for smaller, more strategic assets under the radar.
5
So what’s driving this quest for shale gas technology? Chinese
0 energy companies are racing to meet China’s aggressive
Caterpillar Komatsu Hitachi Volvo Liebherr Sandvik XCMG Zoomlion Sany Terex
production growth forecasts to power the country’s fast-
growing economy. In fact, Beijing recently announced it
*Note: XCMG, Zoomlion and Sany were not ranked among the top 10 in 2007 would invest USD 13 billion to switch the city’s coal-fired
Source: China Construction Manufacturing Online; The Beijing Axis Analysis
power plants and heating facilities to natural gas in a move
aimed at addressing public concern over the city’s poor air
quality, with other cities sure to follow. Likewise, according to
seeking to invest in assets abroad that will better position the Energy Information Administration (EIA), China is believed
them at home, relative to their domestic rivals, as well gain to have vast reserves (36 trillion cubic metres) of natural gas
a foothold in new markets over the long term. The most trapped in shale rocks, a quantity roughly 12 times the size
competitive firms realise size alone will not guarantee long- of China’s conventional natural gas deposits. In June 2011,
term global success; technological know-how enhances long- China National Petroleum Corp (CNPC), the country’s largest
term competitiveness, and puts them in a better position to energy producer and PetroChina’s parent, formed a joint
compete against western rivals in their own home markets. venture with Shell to improve its own shale-gas well drilling
For example, aforementioned Sany recently opened a USD 60 efficiency. Subsequently, in March 2012, the firms announced
million office and assembly plant in the south-eastern US in their partnership had reached new heights with the signing
2011, its largest such facility outside China, to help realise it’s of a production sharing contract to develop a shale gas
long term goal of eventually manufacturing excavators in the block in China, the first such deal in the country. Increased
US to directly compete against industry-leading Caterpillar domestic demand along with untapped shale gas reserves is
on its home turf. So while industry consolidation is still being strengthening the competitive rivalry among China’s energy
encouraged to facilitate the development of China’s own giants, forcing them to buy strategic assets overseas from
‘global champions’, China’s fast-rising global competitors are their existing partners in order to become more competitive
now letting their global ambitions drive their strategies rather in China.
than relying on government policy alone.
China’s construction equipment manufacturers have also
New trends shown a keen interest in acquiring new technologies through
foreign acquisitions (see chart below). At the beginning of
It’s widely known that China’s energy policy has increased 2012, Sany announced that it would acquire Putzmeister, a
its focus on commercial ties with countries rich in natural German Mittelstand company and also the world’s largest
resources and related technologies, and more specifically manufacturer of high-tech concrete pumps. Together with
those that can help China unlock its huge Citic PE Advisors, a Chinese private equity company, Sany
reserves of unconventional (shale) natural will acquire all of Putzmeister for USD 473 million, with Citic
gas. Of the roughly USD 18 billion that retaining a minority shareholding. This follows Zoomlion’s
China is forgoing Chinese state-owned enterprises spent
‘big splash’ buying oil and gas companies in 2011,
investments and nearly one-third (USD 5 billion) was invested China’s Construction Machinery Industry Outbound M&A
in Canada’s resource sector. In October (2005-12*)
opting for smaller,
2011, Sinopec acquired the Canadian firm 350 3.5
more strategic Daylight Energy Ltd. for USD 2.2 billion in
300 % of China Overall Outbound M&A (%) (rhs) 3.0
assets under the order to gain access to Canadian shale-gas
Value of Deals (USD mn) (lhs)
radar. reserves which marked Sinopec’s largest 250 2.5
foreign acquisition of the year. In 2012,
PetroChina completed its acquisition of a 200 2.0
minority (20%) stake in a Royal Dutch Shell
shale-gas project in Canada, which will allow the company to 150 1.5
use any advanced technology to which it gains access to for
100 1.0
its own exploration and development purposes back in China.
Major Chinese energy firms have also shown a strong interest 50 0.5
in the US, whose firms, along with those in Canada, lie at the
forefront of shale gas technology and are gradually warming 0 0.0
2005 2006 2007 2008 2009 2010 2011 2012
to Chinese investment partly because of cash shortages and
the potential for future exploration opportunities in China. *Note: As of 6 March 2012
Source: Thomson Reuters; The Beijing Axis Analysis
12 І The Beijing Axis
13. Features
Features 专题 The China Analyst
(Sany’s domestic rival) purchase of Italian concrete pumps showed an unwillingness to transfer technologies or brands
maker CIFA back in 2008. Following Sany’s announcement, to Chinese companies, in a futile attempt to retain long-
speculation has grown that XCMG is preparing to bid for full term competitiveness. For example, the planned purchase
control of Germany’s Schwing GmbH, the world’s second- of Swedish car maker Saab by China’s Pangda Automobile
largest concrete machinery manufacturer while Guangxi Trade Co. Ltd. was aborted after General Motors Co blocked
Liugong Machinery Co. recently unveiled plans to acquire the deal. Likewise, historically, the engineering expertise
the engineering machinery unit of a Polish company, Huta and strong brands of German Mittelstand companies are
Stalowa Wola SA, for USD 62 million. However, simply stating highly attractive to potential foreign buyers but tight family
Chinese construction equipment manufacturers are solely control has been a barrier to widespread Chinese takeovers in
after technologies would be inconclusive. Germany. Nonetheless, in addition to Sany’s recent purchase,
other German Mittelstand companies now in Chinese hands
China’s increasingly globally competitive construction include Waldrich Coburg (Beijing No. 1), a maker of milling
gear makers are not only buying production capacities machines, and Dürrkopp Adler (Shang-Gong Group), a maker
and technology, they are also after brand recognition and of industrial sewing machines, which suggests the notion that
established distribution networks, which will China realise once reluctant overseas investors are warming up to Chinese
its three-year goal of becoming the world’s top exporter in investors. In addition to shifting perceptions and attitudes,
the USD 150 billion global market for equipment such as Chinese companies are beginning to circumnavigate these
bulldozers, excavators and forklifts. Their post-acquisition prejudices by buying the foreign assets of other companies,
strategies are also changing. Zoomlion became the first a trend which can clearly be seen in recent Chinese deals
major Chinese construction gear maker to retain a foreign throughout Latin America.
management and production team when it bought CIFA, a
move that extended its presence to more than 70 countries. A sign of things to come
Similarly, when announcing the Putzmeister deal in January,
Sany stated that Germany would become its new headquarters Relative to the size of its economy, China’s overseas investments
for concrete machinery outside China. The country’s largest remain quite modest. The total stock of investment abroad
bulldozer-maker, Shandong Heavy Industry Group, also said rose to 5.3% of China’s GDP in 2011, up from just 2.6% in
this year it would keep the management and production 2001, but it remains well below the average of 27.7% for
base of its latest acquisition Ferretti in Italy, to build up its OECD countries. Moving forward, Chinese enterprises will not
technological know-how. Globally ambitious Chinese firms only have the money, but also the motive and opportunity to
are realising that the value of acquired assets lies not only spend an additional USD 560 billion on overseas investments
in patented technologies, but also in the intrinsic value a in the next five years. Chinese companies are taking advantage
company possesses in its management and employees. of the crisis, acquiring strategic assets overseas which
Likewise, with employment sagging in Europe, Chinese moves will empower them to move toward the frontier of global
to retain jobs are welcomed and will likely make regulatory competition. Additionally, the People’s Bank of China recently
approval easier. released the most detailed public proposal yet for loosening
the government’s strict capital controls, a move which will
Political and corporate hurdles only spur Chinese companies to buy up far more American
and European assets, which have become more affordable by
Chinese companies have their own unique hurdles when the global financial crisis.
attempting to make acquisitions abroad, often dealing with
unfavourable political environments which adds another However, doing deals with China is complex and can pose
obstacle for Chinese companies to win bids, even if cash is not special integration challenges for both sides due to cultural,
an issue. In one of the most cited cases of strong government business and political differences. For Chinese companies
opposition to potential Chinese takeover, in 2005, CNOOC and their new partners, the key lies in maximising synergies
withdrew its USD 18.5 billion bid for Unocal due to strong once the above obstacles are overcome. Looking ahead,
opposition from US government regulators and politicians. Chinese companies will have more tools, more experienced
Looking back, among other factors, the failure of the case could and seasoned M&A professionals and a greater overall
be attributed to a relative lack of diplomacy and common understanding of the complexity of cross-border M&A
understanding between the two countries at that time, which processes, a good recipe for success in future Sino-foreign
made it nearly impossible for the Chinese government and M&A deals.
companies to drum up reputable counter arguments to stem
opposition and address concerns. Nowadays, it can be argued Daniel Galvez, Consultant
that China’s central government and its leading figures are danielgalvez@thebeijingaxis.com
more versed in the ‘art of diplomacy,’ which often spills over
into the business arena. Nowadays, state visits by China’s
leaders are accompanied by high-profile trade and investment
deals. It can be argued that environmental changes are also
making it easier for Chinese companies to seal attempted
deals overseas. For example, CNOOC’s recent investments
are now aligned with global efforts to curb greenhouse gas
emissions and also reiterate the U.S.-China Shale Gas Resource
Initiative announced in 2009, a policy which simply did not
exist four years prior.
At the corporate level, the major hurdle for potential Chinese
investors is that some foreign companies have blatantly
13 І The Beijing Axis
