Private firms can bloom globally

Africa is a golden investment opportunity for Chinese investors

Though state-owned enterprises account for most of the overseas direct investments from China, it is only a matter of time before private enterprises catch up with them in the investment stakes. Africa, which is seeing a rapid growth in investments from Chinese private enterprises, is already proof of the new trend.

Though China began to embrace the opening-up strategy in late 1970s, it was only in the early 2000s that it actually started using "going global" as a national strategy. Since 2004, ODI has developed rapidly.

There is no doubt that the early impetus for ODI came from the merger and acquisition moves of state-owned enterprises. Most of these moves were targeted at foreign enterprises with access to natural resources or to proprietary technology. But this pattern of going global has not worked well. Though SOEs accounted for more than 90 percent of the ODI in recent times, many of these projects were a waste of China's precious foreign reserves.

According to official data, more than 70 percent of the overseas investments made by Chinese SOEs were unprofitable, while the rest were questionable. There are several reasons for this.

The main reason obviously is the flawed M&A strategy pursued by Chinese SOEs. Deals pursued by SOEs anywhere have a success rate of less than 35 percent, judging from the past M&A experiences of Japanese and South Korean companies.

Also, Chinese SOEs have not made much headway due to their close links with the government and the resultant political tag affixed to their actions. This has led to the failure of several deals, or in some cases to higher acquisition costs.

Lack of internal controls at most of the SOEs has been another major reason for failure of ODI deals, thereby increasing corruption risks.

China's private companies, which create 60 percent of the domestic GDP, accounted for about 10 percent of China's total overseas investments.

During the past 10 years, SOEs in general enjoyed more favorable policies to expand domestically and to invest overseas. There were also adequate development opportunities in the domestic market for private entrepreneurs, especially in sectors like real estate investment.

At the same time, unlike the SOEs, private companies did not have any favorable government policies to bank on, past experiences to learn from or have access to international management talents.

But the situation is slowly changing. The SOEs' lack of success in ODI deals may prompt the Chinese government to rethink its present stance and consider actively supporting private enterprises. China's economic growth transition and the appearance of real estate bubbles may also force more private companies to invest overseas. Several new opportunities, such as in Africa, with high profit margins are also opening up for private enterprises.

This judgment can be backed up with enough evidence such as the official data that gauges the percentage of overseas investments by private enterprises during the past three years. The figures have been steadily increasing and climbed to 30 percent in 2012.

Active participation by private companies in overseas ODI will also change the overall investment patterns. M&A deals will no longer be the guiding factor for companies. Setting up branch offices, building factories and brand promotion will be the new investment tools pursued by companies. Market presence and services, rather than resources will be another driver for ODI. Geographies or industries will no longer influence ODI moves.

The biggest change may actually happen in Africa. Investments by private firms from China can bring great changes to the African economy as well as to the Chinese ODI structure.

Africa, which accounts for 12 percent of the global population, has so far attracted only 2 percent of the global ODI. But it has been improving its foreign investment environment steadily in recent years and can now be counted as an ideal investment destination for China's private companies.

The best avenues are obviously in infrastructure. Africa has been ravaged by conflicts for years and needs to badly improve its infrastructure. China, on the other hand, has rapidly improved its infrastructure and is suffering from excessive production capacity. Since many big infrastructure companies in China are SOEs, private companies can expect to get many subcontracts from these SOEs in Africa.

Although Africa has sufficient land and labor resources, many of its people are still suffering from hunger. China has sufficient experience in agriculture, but less cultivable land. Many Chinese private companies can use the cheap land and labor in Africa to realize higher returns.

In terms of manufacturing, Africa still needs a lot of articles for everyday use. China's private companies have been the global leaders in the manufacture of many household appliances, and these companies can consider setting up units in African nations to save transportation expenses and offset rising costs. China also has advantages in manufacturing bigger commodities, such as automobiles.

In the case of the services industry, China's private companies can find cooperation opportunities in tourism, financial services, the Internet, logistics and telecommunication services.

Although China's private companies may face several investment obstacles, their industrial nature and fast-learning capabilities will ensure that they are suitably rewarded in Africa.

The author is a lecturer at the Management School of Shanghai University and a research fellow at the China Europe International Business School Lujiazui International Finance Research Center.