Why EU firms are nervy about Chinese deals

Amid increasing Chinese investment overseas, European businesses are still nervous about selling their companies to the Chinese, preferring instead to be taken over by a fellow European or U.S. company. Why?
Written by Eileen Yu, Senior Contributing Editor

European businesses are still uncertain about selling their companies to the Chinese, preferring instead to be taken over by a fellow European or U.S. company. 

Davide Cucino, president of the European Union Chamber of Commerce in China, said during a visit at the Lufthansa Center in Beijing: "I have to tell you frankly that when there are deals involving rivals bids, a company might prefer to sell to another European business rather than one from China." Based in China for 26 years, the senior official oversees China operations for Italian engineering conglomerate, Finmecccanica Group. 

He added that U.S. companies were not the only ones concerned about Chinese investment, reported China Daily. "There still remains a feeling of uncertainty when considering an investment that comes from China. You have the unions, government leaders, and the consensus of public opinion that are reluctant to see beyond the negative aspects [and] see the positive side of these investments."

Cucino applauded efforts by the Chinese government to boost ODI (outward direct investment), which would help ensure China nurtured more global companies and pave the way for Chinese businesses to become more competitive in a global landscape. 

According to the latest stats from China's Ministry of Commerce, the country's ODI climbed 16.8 percent to US$90.17 billion last year, and would surpass foreign direct investment (FDI) within two years. FDI last year grew just 5.25 percent to US$117.59 billion. 

Chinese companies have been making significant overseas investments including China's second-largest automotive manufacturer, Dongfeng Motor Group, which last week announced it would fork out 800 million euros (US$1.1 billion) for a stake in French automaker, PSA Peugeot Citroen. 

Chinese PC giant, Lenovo Group, last month also made headlines with its US$2.91 billion acquisition of Google's Motorola Mobility handset business. This followed its US$2.3 billion buyout of IBM's x86 server business.

According to a China News Service report Monday, Chinese companies are moving to tap falling valuations in Europe and the U.S. a result of the financial crisis. 

"Very few Chinese companies have global brands and even their names are a no-go as far as Western consumers are concerned."

~ Paul M. Cheng, chairman of Hong Kong-based China High Growth 

Paul M. Cheng, chairman of Hong Kong-based private equity China High Growth (CHG) and former member of the Hong Kong Legislative Council, said in the report: "I expect to see a lot more investments over the next 5 to 10 years. It is an opportunity for Chinese companies to acquire technology instead of relying on their own home-cooking research and development. 

"They can also acquire consumer brands. Very few Chinese companies have global brands and even their names are a no-go as far as Western consumers are concerned," Cheng said.

China's home-grown companies still not global enough

Echoing similar sentiments, Cucino said most of China's home-grown entities still lack a truly global footprint. He noted that many of the 89 Chinese organizations currently on the Fortune 500 list conducted most of their business within China, with "very minor international elements". These companies made the list primarily due to their size, he added, but said they had potential to become more international global.

He urged Chinese companies to understand the importance of governance, pick up new skills, and be better prepared for the pace and challenges of international markets. 

According to Cucino, the majority of Chinese ODI comes in the form of purchasing stakes in small and midsize businesses and buying up research and development (R&D) units. Most of these involve smaller companies that offer high-end technology that Chinese businesses don't yet own. 

"There are a lot of companies in Europe with good products but are not in good financial shape because of the financial issues that are happening in Europe. Chinese companies have the strength and power to offer a high price when they do a deal," he explained.

Good news is that Europe is more open than the U.S., he said, indicating more potential for huge deals and investments in the future. Chinese investments involving infrastructure projects, though, can be tricky, he said, noting that some EU countries were more wary about Chinese involvement in infrastructure and utilities. 

So why exactly EU businesses are more nervous about letting the Chinese buy them out, preferring instead to be taken over by a U.S. company or fellow European firm? If security is the main concern, as he alluded to, then surely a U.S.-owned entity would ring similar alarm bells in this post-Snowden era

Were there similar concerns in the 1980s when Japanese companies making similar investments? 

Perhaps China still needs to prove it can spawn genuinely innovative companies able to successfully commercialize their inventions, and not simply build a business model based on plagiarism. And Cucino is right, Chinese companies need to guide themselves via international governance and industry standards, as well as prepare to face the challenges of international markets. This could also mean having the resolute to address global scepticism.

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