China’s Investors Advance
By Investing Overseas China Seeks to Gain Access to Technology, Expertise and Innovation
Chinese outbound foreign investment continues to beat records year by year. The Asian powerhouse is investing in overseas markets to acquire advanced technology, know-how and brands to take back to China.
According to PricewaterhouseCoopers (PWC), 2016 was another record year. China’s outbound mergers & acquisitions (M&A) surged by 142% in volume and by 246% in value to a reach a record of $221 billion, more in one year than the previous four years combined and three and a half times the previous high in 2015.
In total, PWC says there were 51 outbound transactions that were worth more than $1 billion, which is more than double the previous record. This includes the pending $43 billion purchase of Syngenta by state-owned enterprise ChemChina, which is the largest transaction ever to be announced by a Chinese buyer.
ChemChina’s Growth Path
The acquisition, which represents an increasing desire by Chinese corporations to secure strategic assets, is vital for the country’s food availability issues and development, and would strengthen ChemChina’s agricultural portfolio, says Bocconi Students Investment Club (BSIC), part of Italy’s Bocconi University. Although China has more than 20% of the world’s population, it has less than 10% of the earth’s arable land.
The deal would also enable Syngenta to continue its growth strategy and expand in emerging markets, particularly China, and keep the Swiss group as one of the world’s largest agrochemical companies even after the Dow/DuPont merger, notes BSIC.
At the time of writing, the EU had given the green light to the deal as the portfolio has few crucial overlaps in the European market. The companies had offered concessions in January 2017 to secure clearance from antitrust authorities. Divestments from Syngenta’s businesses in Europe are expected, along with small divestments from some units in the US. Syngenta CEO Erik Fyrwald was hopeful in mid-February that the deal would close in the first half of 2017.
ChemChina has a track record of overseas acquisitions. In 2006, these included Adisseo Group, a French animal nutrition feed firm that specializes in producing methionine, vitamins and biological enzymes and Australian polyethylene producer Qenos Holding. These were followed in 2007 with Rhodia Global Silicone, then in 2011 with Norwegian silicon business Elkem and Israeli fertilizer producer Makhteshim Agan. Last year, ChemChina acquired the world’s fifth largest tire manufacturer, Italy’s Pirelli, for around $7.9 billion.
Lianhetech steps into Europe
A much smaller transaction, but no doubt still significant for the parties concerned, was the acquisition of UK-based chemical manufacturer Fine Industries by Lianhe Chemical Technology (Lianhetech) for around £103 million, giving the Chinese life sciences company its first base in Europe. The deal was agreed in February 2017.
Located in northeast England, Fine Industries develops and manufactures complex intermediates and actives for the agrochemical and pharmaceutical industries, as well as specialty chemicals. It was previously part of Germany’s Evonik (and its predecessor Degussa), and was formed in 2008 as a result of a management buy-out. The company was then acquired in 2013 by UK-based private equity firm NorthEdge Capital.
Lianhetech’s acquisition includes Fine Organics, which performs custom and toll manufacture of chemicals for the crop protection, pharmaceutical and specialty chemical markets; Fine Contract Research, which focuses on synthetic chemistry; and Fine Environmental Services, which markets hazardous liquid waste treatment services by thermal oxidation. The UK group has annual sales of more than $60 million, of which about 30% are said to go to North America and 20% to South America.
Focus on Europe
According to the report Chinese Investment Trends in Europe 2016-2017 published by the China Europe Club at Spanish institute Escola Superior d’Administració i Direcció d’Empreses (ESADE), Europe is the primary destination for Chinese foreign investment after Asia. “The attraction of Europe for Chinese companies is clear: political and macroeconomic stability; a predictable, transparent investment environment; 500 million potential consumers with high purchasing power; highly qualified workers and executives; and industrial companies than can help to increase technological capacity and innovation,” says Ivana Casaburi, ESADE professor and director of the ESADE China Europe Club.
According to ESADE’s analysis, China could overtake the US and become the world’s leading investor by 2023. In terms of investment flows, it was the world’s third largest investor in 2015, outranked only by the US and Japan.
Casaburi says the large-scale investment and innovation programs entered into and implemented by the EU and China in the last two years complement each other in ways that should strengthen the links between the two regions and stimulate Chinese investment in Europe over the coming years.
Specifically, this includes Horizon 2020, also known as the 8th Framework Program, which could help encourage Chinese investment in Europe. The budget for this initiative is €80 billion to be invested in the period 2014-2020. According to Casaburi, China has already played a prominent role as financier and executor of projects under the 7th Framework Program (2007-2013) and was invited to actively take part in the R&D projects included in Horizon 2020. China and the EU have a co-financing mechanism in place for the purpose of conducting joint research projects.
Casaburi notes that the really interesting factor about Horizon 2020 is that it dovetails nicely with China’s interests. The initiative is designed to contribute to shifting European corporate agendas to new sectors and activities that will add value, with the aim for industry to made advances in sectors such as green technologies, biotechnology and nanotechnology, precisely the areas that Chinese investors are interested in. These, she says, will be the types of assets that Chinese companies will be seeking in Europe in the coming years.