China Successfully Continues Its Expansion on Foreign Markets

pexels-photo-235648

Prof. Ing. Peter Baláž, PhD.
EUBA
Bratislava, Slovakia

The extraordinary growth of the Chinese economy is not slowing down. Previously, this growth was a result of extensive structural changes funded by multinational companies and subsequent rapidly increasing export to all world markets; after 2010, it is marked by China’s foreign investments. These investments have become an integral part of China’s activity in the international economic environment, and in most cases, the main backing of its further economic growth. Reasons for foreign investments are diverse: higher capital revaluation, building a more effective product range, market expansion or improving markets’ absorption level, higher security of the investment, or other – often hidden – positive points that can become especially important for the investor in the future. In China, its foreign investments support its long-term interests in controlling the world economy.

 

Territorial intentions of Chinese investors were changing rapidly, in connection to the ongoing world financial crisis. They realized that many of the foreign companies have the knowledge lead and established markets, where competition can penetrate only if it offers similar products with higher quality or lower price. China had limited options to catch up with them by itself. Besides, demand for these goods is growing fast on the Chinese market itself and the risk of competition is growing with it. The government understood that domestic deposits in US dollars from the huge ‘bulk’ of assets gained mostly from trade with the United States will be devalued in the process of quantitative easing. However, exchange rates trends after 2010 and rapid drop in euro rates by 40% were bringing potential advantage from simple exchange of dollars for euros (investments in Europe). It is a known fact that the prosperity of the European Union stands on export. Its key markets, besides the European Union itself, happen to be China and the United States. While the trade balance of the European Union with the United States is favorable, its deficit with China lies between $130 and $155bn every year, more than $1 trillion cumulatively, which is a risk that needs an effective solution.

 

European markets stayed outside China’s investment interests for a long time. This was quite natural, since the Continent did not have much to offer with regard to preferred raw materials. The situation changed with new technologies and industrial equipment gaining strategic importance for China. Between 2000 and 2010 Chinese companies carried only 573 transactions with an overall $21 billion trade volume, but already in 2012 Europe absorbed 90% of Chinese investments (besides raw materials and energy). The chemical industry became the most attractive (Wanhua-BorsodChem), as well as processing or supplies of coal, crude oil and gas (Sinochem – Emerald, CIC – Gaz de France). China is also interested in communication equipment and services, energy generating technologies, mainly from photovoltaic cells etc. Here, China with its own production growth and the export of cheaper solar cells, that started a rapid drop in their world prices, outran biggest German companies and increased its own world market share from 34% to 57%.

 

China’s interests focused on acquisitions of German companies with the goal to get the industrial know-how. In 2012 they took over Sany, the construction machinery manufacturer, Putzmeister, F. Zimmermann and others. Many manufacturers in construction, precise industrial technologies, and more and more in the chemistry sector (e.g. Coburg, Waldrich, FACC, Vensys, Saargumi etc.) changed owners. Chinese managers have seen the comparative advantage in 2.5 times higher labor productivity in German companies compared to domestic ones, but they have also been pointing out “the enormous desire of the Chinese to improve and to compete on the same level as the biggest world players”. Today, they are especially interested in the concept of the 4th industrial revolution (4D). In the United Kingdom they have a similar strategy, they invested in waterworks industry, in companies preparing the construction of Hinkley Point, the nuclear power station, and in prestigious properties.

 

At the time when European companies have not yet recovered from the consequences of the financial crisis and the European Union trading position relied more on the low euro/dollar exchange rate than on fundamental modernization of its own industries that would bring innovations, practically everything on the indebted Continent was for sale. China used this fact and pushed its own economic interests through, with the motto: “Buy what you cannot make cheaper or faster than others.” Gradually it acquired hundreds more European companies, many of them representing the Continent’s “family heirloom”. Italian Pirelli, Spanish Repsol, German KraussMaffei and Kuka or Swiss Syngenta are probably just the tip of the iceberg of these acquisitions since many others were acquired through intermediaries or set-up companies or funds. According to official sources, only in 2015 Chinese investors made 179 contracts about a take-over or a capital investment, which is 10% more than in 2014. This is confirmed by the fact that China invested around $500 billion abroad in a short time. What is more essential is that with these sales Europe is losing not only the intellectual wealth accumulated over the years and important scientific and technological knowledge, on which it based its unique positions on the markets for years, but also the ability to adapt successfully to the new situation in the globalized world economy. German government realized as first in the European Union the need to protect important companies from foreign investors. However, legislative adjustments are coming late, and are often labelled as unconstitutional by unitary businessmen, because they limit free market competition. Paradoxically, it was free market competition that allowed German companies to make favorable foreign investments before.

 



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