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Offshore investment widens as it picks up pace
By Peter Fung |
June 28, 2013, Friday
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Print Edition
Print Edition
SINCE the turn of this century, China's rapid economic growth and deepening reforms have propelled a large number of stronger Chinese companies to pursue a "going out" strategy to expand into new markets, secure resources and enhance core competitiveness.
Against this backdrop, China's 12th Five-Year Plan places equal importance on inbound and outbound investment to enhance China's ability to utilize foreign and domestic markets and resources in a safe and efficient manner.
In addition, all enterprises, regardless of ownership structure, will be encouraged to invest overseas, based on market-oriented and independent decision-making principles.
As a result of the economic forces driving the globalization of Chinese companies, we expect to see another boom in outbound investment activity, further integrating the Chinese economy into the global landscape.
By reviewing the history and analyzing the current state of China's outbound investments, we can acquire a full and accurate understanding of the current stage of Chinese corporate globalization, and the challenges faced. This understanding is also fundamental in our efforts to chart the future course of this trend.
China's outbound investment has gone through three stages:
Stage I: From the late 1970s to the mid-to-late 80s;
Stage II: Transition period from 1991 to 2003, marked by the establishment of offshore procurement and sales channels;
Stage III: Rapid development from 2004 to present. China's outbound investment has developed quickly, stimulated by a series of positive factors, including favorable policies and regulations, massive foreign-exchange reserves and the appreciation of the yuan against international currencies.
In 2012, the total value of outbound investments made by China's non-financial enterprises reached US$77.2 billion, representing remarkable 44.3 percent compound annual growth over the period since 2003.
China's outward direct investment has already reached the same level as the average outward direct investment of six of the G7 countries, namely, Great Britain, France, Germany, Japan, Italy and Canada.
However, looking behind these impressive statistics we see that China's outbound investments are still imbalanced in terms of regions and industries. They exhibit a tendency to invest in projects at the lower-end of the value chain.
Although Asia remains the leading investment destination for Chinese enterprises, Europe and North America have shown noticeable growth in the last few years. At the same time, Chinese investment has diversified across a wider range of industries. Recently, outbound investment in manufacturing has picked up, but resource acquisitions remain the dominant sector.
The average deal size has come down as a result of an increasing number of small and medium enterprises and privately owned enterprises beginning to participate in outbound investment.
The key sectors for that investment have been engineering and contracting projects, energy and mining, household appliances, automotive, and financial services.
Looking forward, we expect that agriculture and food products, renewable energy, real estate, and high-end manufacturing will emerge as new hot sectors. We conclude that Chinese companies should pay attention to the following five factors to avoid pitfalls and more smoothly implement globalization strategies:
Overseas investment decisions should support the company's overall strategy;
Risk management systems are essential;
Successful completion of post-deal integration is key to determining whether a project is successful;
Chinese enterprises should increase their efforts to establish a positive image abroad;
Privately-owned companies should be encouraged and supported to go out.
Against this backdrop, China's 12th Five-Year Plan places equal importance on inbound and outbound investment to enhance China's ability to utilize foreign and domestic markets and resources in a safe and efficient manner.
In addition, all enterprises, regardless of ownership structure, will be encouraged to invest overseas, based on market-oriented and independent decision-making principles.
As a result of the economic forces driving the globalization of Chinese companies, we expect to see another boom in outbound investment activity, further integrating the Chinese economy into the global landscape.
By reviewing the history and analyzing the current state of China's outbound investments, we can acquire a full and accurate understanding of the current stage of Chinese corporate globalization, and the challenges faced. This understanding is also fundamental in our efforts to chart the future course of this trend.
China's outbound investment has gone through three stages:
Stage I: From the late 1970s to the mid-to-late 80s;
Stage II: Transition period from 1991 to 2003, marked by the establishment of offshore procurement and sales channels;
Stage III: Rapid development from 2004 to present. China's outbound investment has developed quickly, stimulated by a series of positive factors, including favorable policies and regulations, massive foreign-exchange reserves and the appreciation of the yuan against international currencies.
In 2012, the total value of outbound investments made by China's non-financial enterprises reached US$77.2 billion, representing remarkable 44.3 percent compound annual growth over the period since 2003.
China's outward direct investment has already reached the same level as the average outward direct investment of six of the G7 countries, namely, Great Britain, France, Germany, Japan, Italy and Canada.
However, looking behind these impressive statistics we see that China's outbound investments are still imbalanced in terms of regions and industries. They exhibit a tendency to invest in projects at the lower-end of the value chain.
Although Asia remains the leading investment destination for Chinese enterprises, Europe and North America have shown noticeable growth in the last few years. At the same time, Chinese investment has diversified across a wider range of industries. Recently, outbound investment in manufacturing has picked up, but resource acquisitions remain the dominant sector.
The average deal size has come down as a result of an increasing number of small and medium enterprises and privately owned enterprises beginning to participate in outbound investment.
The key sectors for that investment have been engineering and contracting projects, energy and mining, household appliances, automotive, and financial services.
Looking forward, we expect that agriculture and food products, renewable energy, real estate, and high-end manufacturing will emerge as new hot sectors. We conclude that Chinese companies should pay attention to the following five factors to avoid pitfalls and more smoothly implement globalization strategies:
Overseas investment decisions should support the company's overall strategy;
Risk management systems are essential;
Successful completion of post-deal integration is key to determining whether a project is successful;
Chinese enterprises should increase their efforts to establish a positive image abroad;
Privately-owned companies should be encouraged and supported to go out.
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