China’s dragon enters Europe’s manageriehttp://raktas.ee/wp-content/uploads/2014/11/download-feeding-dragons.jpg 194 259 Justin Jenk Justin Jenk http://1.gravatar.com/avatar/174246487d14b96756454213834980fb?s=96&d=mm&r=g
The surge in inward investments from China into Europe is beneficial development. It reflects two complementary forces that represent the market economy functioning at its optimal. In 2013 there was over €434 billion China/EU bilateral trade. Forecasts are for the combined trade to reach €1 trillion by 2020. For the first time in history China’s outward investments exceed it sinward investments. The Chinese investors have broadened and deepened their targets – looking for profits, leading brand and share positions, technology as well as entry points into fortress Europe. It is a scandal how this positive dynamic is being impinged by local regulation, poor quality advice and xenophobia. Chinese investors are trading their hard currency for insider positions in Europe.
The stock of Chinese investments in Europe has grown dramatically from €6.1 billion to over €27 billion (in less than seven years). The two forces have been the source of this wave of investment activity: (i) relatively cheap assets in Europe caused by the sovereign debt crisis matched by a; (ii) softening of investment opportunities in China itself, as domestic growth slows to single digits. Cheap credit and ta incentive sasre helping to push overseas investments. The economics of becoming an insider are compelling.
The bulk of the investments to date have been in the UK as well as in the infrastructure and real estate sectors. Other EU countries risk missing out. The sector focus is likely to shift to other sectors: such as technology related and consumer goods. In the UK digital and IT related sector investments are growing quickly. Financial services will remain an attractive target but beset by classic non-tariff barriers, national agendas and deep-seated prejudices.
The Chinese purchasers are a combination of State-Owned Enterprises, Sovereign Wealth Funds as well as private enterprises. The balance has shifted with the latter now representing over 30% in value (up from 4% five years ago) and over 60% in number of transactions (359/573). Also the average size of targets has increased: from under €50m five years agon to over €500m today. Also purchasers are shifting from minority stakes to seeking oiut majority ones. The recent Hebei acqusition of Duferco is an example. Bright Food’s acquisition of Weetabix andrumoured subsequent IPO shows how quickly Chniese acquiriers are mirroring theei western counterparts
This positive development though is bringing into sharp relief obvious legal and cultural problems> These include: immigration and visa restrictions, labour laws, business practices and corporate styles. All surmountable, but it seems many participants wish to reinvent the wheel. Good advisors can make all the difference from finding and securing a transcation: the big banks are not the only advisors to retain: better seasoned and well-networkled professionals.
Chinese investors are arbitraging opportunities across the EU, seeking “soft entry” and lower valuations in peripheral EU states. The UK remains a magnet for historical reasons as well as stability and the perceived all-round quality. One can already see the hypocritical nature of EU and national policy at play with regard to visas. There is a bidding war at work for “golden visas”. For example, in Spain a €500,000 property investment is required for a 5-year residence visa. Yet, for the same EU rights, a Chinese immigrant can shop around for between €220-250,000 in Malta, Hungary, Cyprus and Greece! Britain has recently decided to join into this price war and contemplating relaxation of its visa requirements. Britain’s continuing EU membership may well be a deciding factor for the estimated wave of €100 billion Chinese investments expected over the next three years. Yet other EU countries face a risk of losing out; even in Britain is tech-saviness is luring investments away from Sweden; such as for apps and other digital enterprises.
The power of migrants is amply shown again and again. For example the Don Pin food distribution company in Spain. The founder arrived in Spain from China, penniless and not speaking a word of Spanish. By 2008 he and his Chinese partner raised a family loan of €20,000 for a truck. Within a year the company had a turnover of €220,000. Today it has sales of €60 million, 35 delivery vans and 110 FTEs. For every €1,000 a Chinese makes, 50% is saved. The combination of hard-work, frugality and a vibrant network are the hallmarks of success.
That economic success is deep-rooted at home in China. It has over 2.4 million “millionaire households”, second only to the US and over 152 billionaires. Chinese investors are trading the paddi fields of Sichuan for the playing fields of Eton. Already more than two-thirds of these millionaires have left China. Their children are being raised as global citizens in various European states.
There are clear areas of mutual benefit to be derived by cooperation. Far too often misunderstandings and unnecessary bureaucracy, especially at a local level, can impede if not prevent a favorable transaction. Chinese inevstors are being hampered somewhat by the poor quality of advice they receive and farmeworks they are using to assess opportuntiies.
Raktas has been involved in shaping and assisting Chinese investors make inward investments In Europe.
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Justin Jenk is business professional with a successful career as a manager, advisor, investor and board member. He is a graduate of Oxford and Harvard. Justin can be found at justinjenk.com or justinjenk.se