Crisis presents opportunity

Chinese companies are more apt to invest rather than run from eurozone

Before moving to China, I led Accenture Management Consulting in Spain and Portugal, two countries that have struggled more than most in the eurozone debt crisis. Faced with the uncertainty of the eurozone economy, CEOs across the world continue to express anxiety. But the Chinese executives I have spoken with in recent months have had a more positive perception of the outlook for Europe and the opportunities it offers them.

The eurozone's sovereign debt crisis appeared to reach a peak in 2012, with bond yields on debt reaching unsustainable levels in Spain, Portugal and Italy; Greece had already been excluded from the debt markets. Since the intervention of the European Central Bank last year, those yields fell significantly. Nevertheless, the impact of the crisis and the continuation of fiscal austerity have resulted in a decline in confidence from the periphery to the core. According to the European Commission's latest figures, the eurozone economy shrank by 0.4 percent in 2012 and has returned to a recession for the second time since 2009. A recently released OECD report claimed that the European debt crisis "is still the biggest threat to the global economy".

How should Chinese enterprises respond to the situation? Is the eurozone crisis a question of seeking cover or taking advantage? Accenture recently conducted a survey of 450 corporate executives from countries inside and outside the eurozone. Fifty-five percent said they are mitigating risks by postponing investment in the eurozone, while 72 percent said they have or are about to reduce controllable costs. Forty-eight percent said they are beginning layoffs and 46 percent said they are moving or will move some of their production or supply chain out of the eurozone.

That alarming signal of running for cover is only one side of the coin, however. The other side shows that two-thirds of companies surveyed believe that the crisis is an opportunity to gain a competitive advantage. Despite the crisis, business leaders still believe that Europe is a market that cannot be ignored and recognize that it has long-term development potential. About 42 percent of executives around the world are seeking organic expansion within the eurozone.

Interestingly, Accenture's survey found a sharp contrast: Chinese enterprises seem to have more courage than companies in other countries. Or at least they are acting swiftly in both mitigating short-term risks and in seizing opportunities presented by the crisis. The greatest contrast is found between Chinese and American companies. In response to the fall in demand, 27 percent of US companies have or intend to reduce jobs in the eurozone, against 53 percent of Chinese respondents. Yet despite apparently being the swiftest of surveyed countries to mitigate risks, Chinese companies are also the most eager to see the crisis as an opportunity to invest. Exactly one-quarter of Chinese executives said that the European debt crisis has actually helped them accelerate their pace of investment in the eurozone, versus only 3 percent of US respondents. Seventy-one percent of Chinese executives said they have begun or plan to begin seeking acquisitions in the eurozone versus only 20 percent of US companies. About 75 percent of Chinese executives said they were seeking opportunities for organic expansion, but only 18 percent of US respondents gave the same answer

Of course, these differences between Chinese and US companies owe much to the fact that they are at different stages in their international development. US industries have been present in Europe for more than a century, whereas Chinese companies are eager to establish a presence from a low base. Eurostat data show that as of 2010, the US corporate direct investment stock in the EU reached 1.2 trillion euros, against only 6.7 billion euros invested by Chinese enterprises.

Another factor also impacts the stark differences the Accenture survey has revealed: the investment philosophy of Chinese business executives. Their vision seems to extend beyond short-term risks to the longer-term potential to gain market share. The word "crisis" in Chinese means both risks and opportunities, which may perfectly explain why Chinese entrepreneurs would like to make this crisis work for them. Some 68 percent of the Chinese companies surveyed said they think the eurozone crisis is an investment opportunity to enhance their risk management capabilities.

The courage driving Chinese enterprises to invest in the eurozone can also be partly explained by the "go overseas" strategy pushed forward by the Chinese government in recent years. With the growing strength of Chinese enterprises, the government is increasingly encouraging and supporting qualified businesses to seek overseas development and to compete internationally. Through outbound investment, Chinese enterprises can gain access to global capital, technology, markets and strategic resources, as well as circumvent trade barriers in other countries to reduce trade friction. China's foreign direct investment has been increasing for 10 consecutive years, despite the severe international financial crisis.

Recently, Accenture and the Economist Intelligence Unit jointly conducted an extensive survey on the internationalization of Asian companies and found that China, South Korea and India are keen to enhance their presence along the value chain through global operations and overseas mergers and acquisitions. Among the Chinese companies surveyed, half said that the main purpose of their overseas development is to project a global brand, and 58 percent expressed the hope that they will have more control along the value chain through international expansion.

Although deep in crisis, the eurozone is still one of the most resilient regions in the world and European companies still stand at the forefront of technology, management, branding and operational capability. These are the attributes that China urgently needs for its economic restructuring, corporate development and to accelerate its journey to the next level of international competitiveness.

Rather than investing in natural resource-rich regions, the Chinese enterprises investing in Europe focus more on brand and technology acquisition. They are trying to climb higher up the value chain through acquisitions. Indeed, the eurozone crisis has made some quality assets in Europe more attractive.

On Jan 31 last year, China's Sany Heavy Industry, the world's largest concrete machinery manufacturer, announced the acquisition of Germany's Putzmeister, one of the world's leading concrete machinery brands. This transaction broke the record of overseas M&As by China's engineering and machinery industry and will reshape the competitive landscape of this sector globally.

In Portugal, Chinese energy companies have been bold in launching a series of acquisitions. At the end of 2011, the China Three Gorges Group won a bid for a 21.35-percent stake in Energias de Portugal SA and became its single largest shareholder. This transaction was the largest privatization of state-owned enterprises in the history of Portugal, and was regarded as an overture of asset sales to China in the eurozone. Less than two months later, China State Grid, China's largest utilities company, announced the acquisition of a 25-percent stake of Redes Energeticas Nacionais SA in Portugal.

Any downturn in the economic cycle usually presents opportunities to invest and to take leading market positions. The European debt crisis is no different. But Chinese enterprises should make a clear assessment of the risks that come with these opportunities. Adversities can be turned into opportunities in the following ways.

First, determine the corporate positioning and strategies along the industry value chain. Investment should be focused on the quality of the assets. Avoid reckless investments. They should target assets such as human resources, technology or brands that enhance competitiveness and are prepared for more intense competition in the post-crisis period.

Second, identify inorganic growth opportunities by fully investigating investment targets. In other words, seek gold from garbage. The eurozone is not homogenous. There are member countries deep in the crisis such as Greece, countries that remain reasonably resilient such as Germany and those, such as Ireland, who are showing signs of a turnaround.

Third, find a partner who better understands local conditions. To make an investment through establishing a joint venture can reduce risks and also help to find business opportunities at lower costs.

Fourth, consult third-party professional organizations to fully understand opportunities, risks and executive strategies in the eurozone. In addition to the economic risks, Chinese enterprises should also guard against political risks. Debt-ridden European countries have an ambivalent attitude toward investments from China. They are both expecting and worrying about the investments from Chinese companies. It is not rare to witness controversies caused by Chinese investments in Europe. Discretion is critical.

The author is senior managing director, Accenture Management Consulting, Greater China. The views do not necessarily reflect those of China Daily.

(China Daily 02/22/2013 page11)