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Embrace the Trend of Chinese Investments in Europe

We are standing at the threshold of what has been called China’s century. Chinese companies are taking their virgin steps of investing abroad. Should Europe be afraid of these investments or should we embrace the trend? Views are increasingly divided as the trend grows exponentially.

By Hans Halskov, Managing Partner, Across Partners

In Denmark, we have a tradition for being colour-blind when we accept foreign companies to invest in our country. It’s not exactly like this in every country, but thanks to our liberal beliefs probably explained by trust in our society’s cohesion, Chinese companies are welcome here and also feel welcome here.

This is unlike the kinds of increasingly hostile investing environments of the US and recently some European countries where governments are probing voters’ sentiments and engaging their Foreign Investment Review Boards.

Across Partners as a thrust
Across Partners was founded to add more thrust to the trend of China’s global Outbound Direct Investments (ODI). For 1.200 days by now, we have worked full-time on China outbound M&A and built networks numbering in the 100s to investors in China, and paired and negotiated win-win deals already in the 10s. These types of deals are simply part of a historic growth trajectory with an annual ODI growth measured in double digits.

The acceleration was driven by greater incentives for corporations to diversify in the face of a slowing domestic economy, desire for product diversification and globalization, and devaluation pressure on the Chinese currency. Chinese ODI was USD 226 billion in 2016, a whopping 91 per cent increase compared to 2015, which was a record year. This cements China’s role as one of the top direct investor nations globally.

The EU is now a favourite destination for Chinese investors. In contrast, EU firms invest less in China than in the past. Europe could record a staggering EUR 35 billion of completed Overseas Direct Investment transactions in 2016, a resounding increase of 77 per cent from 2015.

Globalisation in the works
We are bombarded by news of technology disruption everywhere, but we have yet to feel the new world economic order that is inevitable. It’s a change…and it is arguably for the better. A philanthropist would agree that what is good for one-fifth of the world population is probably good for the world. As we learn about China, we begin to see patterns, patterns so clearly that China becomes a predictable player in the competition for market leadership.

Fundamentally, China cannot be stopped, governments of the West are not coordinated enough to do so and ultimately do not have near the same leverage in negotiations like they had several years ago. The tectonic power shift has happened. The point of no return has been passed.

Denmark will receive more investments
In Denmark, by some estimates, we have not seen the same interest for M&A with our companies as in Germany, UK or other comparables. Such countries have already seen some landmark deals. Soon the opportunity to work in a fully-owned or co-owned Chinese company will also come to Danish workers in the 10s of thousands. We are already trading on a Saxo platform and listening to music from B&O where Chinese investors are among its largest shareholders.

Copenhagen Business School hosts Executive Alumni groups from China several times yearly. Most recently on June 12, 2017, where CBS and Across Partners introduced investments and business models to 35 Chinese chairmen and CEOs.

Chinese investors respect the unfamiliar
If you can join them, why not? Putting the old cliché to rest, if you can’t beat them ... An equity partnership offers incredible synergies necessary to compete in a modern world - and it will continue to be a partnership with the right advisors who can negotiate the right levels of influence or independence over decisions whether it’s to protect IP, employees, values and Denmark as engineering base for the future business innovation and perhaps robot production.

It cannot be said frequently enough that Chinese investors are not bullies, but humble and respecting affairs they don’t know well. They have a strong desire to keep current management in place and keep them satisfied for as long as possible, unlike Private Equity seeking a 5-year quick return. One investor recently explained the common approach of Chinese investors: “we are not interventionist and we have confidence in the current people working. We let professionals do their job in their distinct areas.”

Healthcare - the next big thing
Chinese private investors are eying a broad range of industries, but showed particularly strong interest in technology and brands in 2016. Due to the vast reforms expected in the Chinese healthcare sector, M&A here will be a business which Across Partners is deploying resources towards. The two-child policy introduction, the middle-class’ demand for quality care, outdated facilities and legislation, as well as ineffective hospitals, are some of the key drivers. So, we now speak ART, IVD, CRO, IVF, MDx, etc.

The New Normal pressures Chinese Companies
The fundamentals that Chinese outbound investment in Europe shall remain high for the next ten years. Chinese companies, mid-sized and up, are too vulnerable if they don't work cross-border. We are working with many of them, especially listed companies, and they are scrambling for finding their feet under the 'new normal' lower-growth business conditions anno China 2017. This spells OPPORTUNITY for the open-minded ambitious Danish company of any size.

Equity cooperation
It is already proven by examples measured in the 100s that Danish SMEs in general cannot sustain as a player in China on its own and traditional cooperation modes with Chinese partners are inadequate in the China of tomorrow.

The offer on the table now for qualified companies is a Chinese interest in co-piloting its market development in China in the initial years and after half a dozen years, also globally. It’s a positive disruptive opportunity for Danish companies. But the profile differences of such a partner (read: synergies), not only in geography, should be clearly understood to be embraced.

Once a fair acknowledgment of synergies has been achieved, we recommend taking such a strategic partner in as minority or majority equity shareholder in the Danish firm. In this way, synergies can be fully exploited, not all at once but over the course of many years.

If you can afford to exploit less, it’s your luxury, but with the speed of changes in competitive landscapes expected to exponentially accelerate, time is of essence to accept the Chinese window of opportunity 窗口期 of the present to shield off competitive forces by joining with a strategic partner from the world’s most populous nation.

See related DCBF article here

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