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EU‐China Investment PolicyHearing European Parliament6th Nov. 2012, Brussels
Prof. Dr. Haiyan ZhangAcademic director of Euro‐China Centre
Antwerp Management School
Outline Key features of Chinese investors in Europe
Case illustration
Challenges and opportunities
Policy implications
Are Chinese investors different from their predecessors? (1)
Not a new phenomenonAmerican antecedent in EuropeJapanese antecedents in US and Europe
But, “this time it’s different”Emerging economy
upstream investmentasset‐stripping “reverse Marco Polo effect”
Are Chinese investors different from their predecessors? (2)
“Communist” regimeopacity of firmsState‐led capitalism
Security rivaltechnology exportsultimate motive of investment?
Source: Meunier, 2012
Are Chinese investors different from their predecessors? From Euro‐China investment Report
Chinese investors are not homogeneousIndividual/family business (intl. entrepreneurs)Global niche market players
MotivationMarket expansion/trade supportingAssociated sometimes with motivation for emigration
ActivitiesLow‐technology manufacturing/less knowledge intensive services
Source: Zhang, Yang and Van Den Bulcke, 2011
Is Chinese OFDI in Europe fundamentally different from Chinese OFDI in other countries?
As compared to Africa and Latin AmericaLess in resource seekingLess in asset exploitation
As compared to the USMore in asset seeking
Technology (CFIUS)Brands Public utilities
Less involved in “political conflict” (politisation)
Outline Key features of Chinese investors in Europe
Case illustration
Challenges and opportunities
Policy implications
EU Merger Regulations facing Chinese SOEs Understanding Chinese SOEs and their
“boundaries”
Case illustration No. 1
EU Merger Regulation
EU Merger Regulation (EUMR), i.e. the Council Regulation (EC) No 139/2004
to assess if the proposed deal can be qualified as
ConcentrationEU dimension
No discrimination between the public and private sector
Five FDI projects involving Chinese SOEs subject to EU merger controlInvolved Chinese companies (Ranking in the 2011 Fortune Global 500)
Characteristics of the acquisition
China National Bluestar of ChemChina (475)
All shares and sole control in Elkem from Orkla ASA
Huaneng (275) 50% of shares held by GMR Netherlands in InterGen
Sinochem (168) To establish a joint venture, owned 50% by DSM and 50% by Sinochem
China National Agrochemical Corporation of Sinochem(168)
To acquire 60% of Israeli agrochemical company Makhteshim Agan Industries Ltd. (MAI) by CNAC from Koor (part of the IDB group)
PetroChina (6) To create three joint ventures jointly controlled by Ineos and PetroChina as part of a single transaction..
Key challenges for the EC in assessment
SOEs SASAC‘China Inc’
Central SASAC local SASACsPolitical control
ProcedureCombination of turnoverPresence in three member States
Substance:Independence in decision makingCompetition assessment
Results
All of 5 cases were cleared in Phase Ifour cleared under the normal procedureone under the simplified procedure‘two thirds rule’ was not met: the transaction does not have a EU dimension
YetAll questions about Chinese SOEs are still open
The European Commission took a ‘wait and see’ positiontime bomb!?
COVEC in Poland Understanding Chinese SOEs and their “low‐cost
leadership strategy”
Case illustration No. 2
Mis‐adventure of REC’s COVEC in Poland
Turnover: US$ 52 billion
Employees: 235,387
No133 on Fortune’s 2010 Global 500‐list
100%
• Turnover: US$ 600 million• No 34 of China’s construction and
engineering companies – overseas revenue
Assumed to be high reliable large SOE by Polish authorities: Prestige, reputation, government support, strong financial position, etc.
COVEC’s bid: ‘Too good to be true’
December 2009: COVEC wins bid for the construction project of two sections of the A2 highway (49 km) to link Warsaw with Berlin
For the amount of € 330 million, i.e. less than half of the planned budget
Germany’s Committee on Eastern European Economic Relations, an industrial employers organization, alleged that COVEC engages in:
price‐dumping, aggressive financing and generous risk‐guaranteesReaction of the Polish construction sector:
“They are cutting prices, stealing our work and destroying the market, and we have to help them? Not on your life!” states the director of one of the Polish companies
Problems and non‐compliance by COVECMay 2011: Subcontractors stop to supply and block COVEC’s Warsaw office
Reasons: Late payment – at least € 30 million was not paidJune 13, 2011: COVEC requests to renegotiate the contract and claimed that:
the raw materials were unexpectedly expensiveit was unfairly treated it could complete the project on time, but at a much higher price
June 15, 2011GDDKiA rejects the proposal from COVECand demands €185 million in damages
“One has to finish the contract which was agreed, for the price that was agreed, with the conditions that have been described.”
COVEC’s low‐cost strategy and challenges for the Polish government
COVEC’s low‐cost strategyEquipment from China ‐materialsChinese labor force (500 workers from China) Materials (local sourcing)Practice of co‐finance by subcontractorsCompromise on environmental regulation Misplaced confidence in their ability to renegotiate the contracts
Challenge for the Polish governmentMisplaced trust on Chinese SOEsPressure for renegotiate the contracts and compromise on labourregulations
Geely’s Volvo acquisition: Will it be successful ? Post‐acquisition integration
Case illustration No. 3
Geely vs. Volvo
GeelyA private and “independent” car maker in China Established in 1986 and entered into the car industry in 1997Listed in Hong Kong Stock Exchange in 2005In 2006, Geely acquired a 23% stake in UK taxi maker Manganese Bronze HoldingsIn March 2009, Geely took over Australian DSI, the second largest producer of automatic transmissions in the worldSold 325 thousand cars in 2009
VolvoEstablished in 1927 and sold 345 thousand cars in 2009
Post‐acquisition integration
Past experience – TCL – ThomsonLimitation in HR – international managersPostponed in post acquisition integrationChallenges to come
Technology gapManagement styleCultural chocksOverall operation performance ‐ restructuring
Case illustration No. 4
China in Prato Ethnic entrepreneurs
Industrial clusters in Prato
“Third Italy” industrial districts Specialization and division of work among small business firms driven by strong entrepreneurial spirit. Deeply embedded in a “culturally and socially constituted” local market. Textile workshop emerged in 12th century Industrial clusterIn the 1970s, the textile industrial cluster in Prato became Europe’s most important textile and fashion centreDuring the 1980s, arrival of non‐EU immigration due to the decline of local labor force
Chinese in PratoChinese workers arrived in Prato in the 1990s
Number of Chinese residents increased from 169 in 1990 to 10,077 in 20073,177 firms registered by Chinese residents 65% are less than 4 years oldEarly 2011: 900‐1000 manufacturing firms
Contractors for native manufacturers to strength Prato fashion cluster
Offering low and competitive priceGuaranteeing productive and organizational flexibilityFaster processing and shorter lead‐time for delivery
But, low social integration Failure of local institutions for assimilation‐ “Living Outside the Walls”
Outline Key features of Chinese investors in Europe
Case illustration
Challenges and opportunities
Policy implications
Scope of FDI policy/regulations
Post‐establishmentprotection
Pre‐establishmentMarket access
Member states European commission
?From restrictive to liberal approach
Lisbon treaty
Further European integration
Regulatory challenges
Pre‐establishment market access ‐> Post‐establishment protection
Changing FDI position of ChinaState‐investor dispute settlement (international standard)
BITs: 26 BITs ‐> EU‐China BITDiversity/difficultyNew elements to be included, e.g. human rights and sustainable development
Common EU FDI policyPolicy coherence (competence at the Commission level and member state level)“Hardware without the software”
Policy implications
Industrial restructuring Protection or cooperation in sunset industry
E.g. Construction machinery sector/consumer electronics
Corporate restructuringCompetition policy (EUMR)SMEs Policy: Positioning and integration into global value chain
Ethnic communityAssimilation or discrimination
Education programs organized by the Euro‐China Centre
• Master degree program• China‐Europe Business
Studies• Executive programs
• Understanding China (co‐financed by the EU)
• Mastering global business: China
• Be Successful in Europe
Contact Prof. Dr. Haiyan ZhangAcademic director / Euro‐China CentreAntwerp Management SchoolSint‐Jacobsmarkt 9‐13B‐2000 AntwerpTel: +32 3 265 46 97Email: [email protected]
