Chinese appetite for foreign technology companies could be good news for everyone
Chinese cross-border merger and acquisition deals are rising and China is taking its place as a leading global investor alongside the advanced economies. But the targets of Chinese acquisitions are changing. Once dominated by commodities, they are increasingly composed of technology, finance, automobile, and real estate companies.
The amount invested by Chinese companies for mergers and acquisitions abroad in the first 10 months of this year has already reached what was invested in the whole of last year, which was in turn 7 per cent higher than in 2013.
In the last five years, Chinese companies were the fifth largest source of cross-border deals after the US, the UK, Canada and Japan.
But while Chinese appetite is rising, its tastes are changing.
Chinese companies have lately targeted a number of technology companies in the US including Unisplendour buying part of Western Digital last September, Lenovoacquiring Motorola Mobility from Google, and a consortium of Chinese companies acquiring OmniVision Technologies, a US maker of image sensors used in Apple smartphones, both last year. China became the biggest investor in Italy when China National Chemical Corp announced the acquisition of the automotive tyres producer Pirelli last March.
Oil, gas and mining continue to be an important part of the Chinese shopping list, and they are the largest targeted sectors in Canada, Australia, Brazil and Peru in the last five years. The acquisition by China National Offshore Oil Corporation (CNOOC Group) of the Canadian oil company Nexen in 2012 for over 18$bn is still the largest Chinese deal in the last 5 years. The acquisition of part of the oil company Repsol Brasil in 2010 and of the Peruvian mining company Xstrata Las Bambas last year, are all in the top five largest Chinese deals in that period.
However the importance of mining and energy is diminishing. In the 10 months to October this year, technology was the top target of Chinese cross-borders deals, accounting for more than 15 per cent of all deals’ value, followed by automotive, finance, real estate, insurance and transportation. Mining and oil & gas followed as the seventh and eighth largest investing sectors.
Oil and gas has accounted for only 5 per cent of all Chinese deals this year, 11 per cent if combined with the mining sector. These are small figures when compared to the period between 2008 and 2012 when these sectors took over half of Chinese investments by value.
Not all Chinese foreign acquisitions have gone well. When Lenovo acquired IBM’s PC division, the company struggled with integration issues, substandard services and with the exodus of technical employees, so that market share and profitability fell.
According to a paper published in the “Harvard Business Review” that failure led to a revamped approach according to which Chinese companies started using overseas takeovers to strengthen the company’s position in China, rather than in foreign markets. Instead of acquiring foreign brands, sales network or goodwill, they would acquire know-how and technology.
With the new approach Chinese companies target intellectual property, knowledge, and research and design processes. The idea is that foreign engineers come up with ideas for new products and processes and the Chinese scale up the inventions in the local market.
This approach could provide the country with a much needed productivity boost. With labour costs rising and labour productivity still only about 20 per cent of that of the US, China needs to shift away from an economic growth model based on the increase of labour and capital inputs towards technology-intensive and more productive industries.
Chinese productivity is not only at a low level, it is also growing more slowly than in recent years. In the words of the Conference Board in this year productivity briefing report:
“Chinese productivity is on a declining path, as rapid declines in the efficient use of capital and the returns on capital are adversely affecting productivity. This clearly suggests that China can climb the value chain only by focusing on higher productivity activities through technological change and innovation.”
Acquiring state of the art foreign technologies and R&D facilities to grow in the domestic market could be the way to square the circle of the Chinese need to rebalance its economy away from the exploitation of cheap labour – as well as a source of investment to cash-strapped companies in the advanced economies.
On paper, it sounds good news for all concerned.
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