Chinese foreign investments have sights on raw materials and market share

14/03/2007
The speed which companies from China got on the path to international investing is striking. Target countries are no longer Asian neighbours only but also countries rich in raw materials in Africa, Europe (for example Norway or UK where major oil deposits exist) and North America. The Chinese government encourages foreign investments of the local companies in order to secure know-how and resources as well as to build up brands and gain market share.
For a long time, Chinese entrepreneurs focused on investments in their domestic market or the bordering special administrative region Hong Kong. But since joining WTO in 2001, Chinese foreign investments have rapidly increased. In 2005, they amounted to 12.3 bn USD (while new German investments abroad were 45.8 bn USD), a surplus of 123% in comparison to the previous year. 2006, they went up to 16.1 bn USD, and by 2010 they are expected to grow about 20% on average per year.

The Chinese foreign investments shall particularly provide long-term safeguard of energy and resources supply. Above all, the state-owned energy giants embark on a selective acquisition strategy and attract increasingly attention in doing so – as seen at the unsuccessful attempt of CNOOC to take over Californian Unocal. As the own energy sources cannot satisfy the soaring needs any longer, the People’s Republic highly depends on supplies from abroad. Therefore investments in locations with appropriate resources shall protect against price fluctuations and bottle necks on worldwide markets.

Another reason for Chinese companies to invest abroad is to acquire technologies and brands. By opening the local market to foreign companies the domestic companies are forced to improve their competitiveness. Acquisitions abbreviate the tedious build up of know-how and brands.

The development of foreign markets is another important target. Against the background of increasing competition, rising overcapacities and shrinking margins in China especially the producers of consumer goods expand their presence at important locations worldwide. In this way protectionist barriers against Chinese products can be bypassed as well.

The preferred investment method of Chinese companies is the acquisition of existing companies or their equities. Round about half of the Chinese foreign investments fell upon mergers or acquisitions. However, some projects were not crowned with success. Investments in resources or key technologies were prevented to some extent - invoking their strategic importance. What’s more, the difficulties in post-merger-integration are often underestimated.