Getting the give-and-take of M&As right

There's a right and wrong way for Chinese companies to look at investment in europe

'Invest in Europe" is the cry at the moment. As bad news on the euro debt crisis keeps flowing in, many Chinese entrepreneurs and business experts believe Europe's going cheap.

However, worries and suspicions are also building over the extent and purpose of China's foreign investment projects, and Europe is wary of the quality of Chinese investors.

According to China's official statistics, outward direct investment in 2010 reached $68.8 billion (56.1 billion euros) . Foreign sources have put the 2011 figure at $66 billion to $67 billion, foreseeing a further rise in 2012.

A survey by the China Council for the Promotion of International Trade showed that Germany, the powerhouse of the European economy, has become the second-largest destination for Chinese outbound investment after the US. Of the survey's respondents who will invest in Europe, 63 percent selected Germany, far ahead of the next most-favored countries, France (13 percent), the Netherlands and Russia (10 percent each).

The deteriorating euro debt crisis has overshadowed the general economic and investment prospects for Europe, and has led to two inappropriate approaches by Chinese investors. One is to be pessimistic and hesitate about investment in Europe. The other is to buy cheap just to make money.

The threat of euro disintegration is only temporary, however. With the European economy resuming growth, hopefully by the end of 2012 or early 2013, a relief in the crisis will be likely. And one should not forget the strong European advantages in new energy, automotives, high-end machinery, electronics, aero-industry, biotechnology, and other industries.

More significantly, Europe is the pioneer of the third industrial revolution, highlighted by new energy and materials, the Internet, and their integration. Germany alone supplies one-sixth of world's environmental products. The notion that Europe will become merely a "theme park" will be proved wrong.

"Invest in Europe" should therefore be based on a broad, farsighted vision, so essential for China's future.

European countries, especially Germany, the UK and the Netherlands, are generally quite open in business. Green field investment and mergers and acquisitions usually do not need government approval. However, there are three major requirements to their welcoming foreign investment.

First, money. European business, especially small- and medium-size business, does not lack good products and technologies. What they lack is money. Due to the hard economic situation and tight money market, they need additional liquidity and better asset balance sheets.

Second, jobs. The jobless rate is lingering around 10 percent in the eurozone generally, and 7.4 percent in Germany. Any investment that will create jobs is naturally needed.

Third, market. To a large extent, the first two requirements arise as a result of insufficient market demand. European business needs to find additional markets for products and services.

On the other side, there are logically three major concerns by Europe: investment with little money, investment with ultimate job losses, and investment that takes away technology and uses it competitively. The latter two are major concerns.

German and European businesses worry that Chinese acquisitions will take away local jobs. BenQ acquired a German company back in 2005. It later took the technology and manufactured in China, resulting in the closure of the German company. More than 300 people lost their jobs. This is, of course, not the right approach for Chinese investment.

They also worry about possible technology leaks. If an M&A offer comes from a Chinese company that wants the core technology, the Germans tend to hesitate for fear of facing future competition in the world marketplace.

AT Textiles, a German company, which looked for an acquisition from a Chinese enterprise Shan Shan Group at the Chinese-German Business Matchmaking Conference at Bad Homburg in June, laid down conditions that it would keep its children's wear brand, and sell it in the Chinese market. This showed the German company needed money and a market to keep their jobs. They wouldn't give away their core technology - in this case, the brand.

In planning for investment in Europe, many Chinese companies pay attention only to their own strategy: a foothold in Europe, expanding the marketplace, advanced technology, becoming world leader in a sector, and so on. The European partner's interest is often neglected. These are not good strategies and will often end in failures.

A more appropriate approach would be to propose: 1) a joint venture green field investment with a German company that will create jobs; 2) acquisition of the company either in majority or minority stocks; 3) the new company will keep or even add to local jobs; 4) will create new markets in Europe, China and elsewhere; and 5) will develop new technologies.

In short, the investment in Europe should aim for a win-win outcome, and at achieving tangible benefits for China and the European country. Only this way will an investment be welcomed, and become successful and sustainable.

Geely's acquisition of Volvo in August 2010 should be regarded as successful in this respect. Volvo did not lack good products or technologies; what it lacked was money and a market. Geely, on the other hand, had money and the huge Chinese market. What it lacked was a world-renowned brand and top technology. Through this deal, each got what it wanted.

The culture gap is often mentioned as a major handicap to Chinese investment in Europe. However, it is only one side of the coin. On the other side, often neglected, is a shared culture, or a common international culture of job creation, taxes and promoting local economies.

Chinese investment failures in Europe are often blamed on cultural differences. But mostly this is not the case. Failure is often down to the wrong strategy, which does not pay enough attention to the needs of and benefits for the host country or region.

An investment that fits in well with local economic needs, and with job and tax creation, will be welcomed and sustainable. This is true in China, in the US or Europe.

In looking for investment projects in Germany, Chinese companies, should work closely with the German federal, state, city and local governments, including the German embassy in China, the Federal Trade and Investment Promotion Department, and trade associations.

We should first have a thorough survey of the local area's economic situation, its key industries and technologies, leading companies, education, communities, transportation, labor supply, living costs and land prices. Then, we should discover the problems and key issues regarding the economy and jobs, and look at possible solutions.

After that, the basic resource networking should be made - visiting the leading chambers of commerce, industry associations, banks and law firms. With this clear understanding, we could obtain help from the local government, in identifying target companies and setting up business operations.

I worked in Cologne in the 1980s, following all these steps, and worked with the Germans very well, succeeded in several trade projects, and did not experience any so-called cultural differences.

A new subsidiary, setting up in Germany or elsewhere in Europe, should be made a German or European company from the outset. The Chinese parent company should only send a president, and a few assistants, leaving the development, management, accounts, marketing and PR in local hands. The procedures of the new company should strictly meet the requirements of the local legal and accounting system.

Huawei and Haier run big operations in Germany. They have been quite successful in naturalizing. An overseas subsidiary with an identical management of the parent company is usually unsuccessful.

The author is co-director, China-US/EU Study Center, China Association of International Trade. The views do not necessarily reflect those of China Daily.

(China Daily 08/03/2012 page10)