Chinese Investment in Europe and European Investment in China: Trends, Risks and Opportunities

1. Chinese Investment in Europe and European Investment in China: Trends, Risks and Opportunities Prof. Ivana Casaburi Director, ESADE China Europe Club, ESADEgeo Associate Professor, Department of Marketing Management, ESADE Business School 1

2. Fill in the Blank Q: China is one of the world’s major investors. There are approximately _________ (how many?) companies located abroad in _________ (how many?) countries. A: 18,000; 177

3. Fill in the Blank Q: There are _________ (how many?) global firms among the 500 largest in the world. A: 89

4. Fill in the Blank Q: _________ (which region?) is the main destination for Chinese investment in the world. At the end of 2012, the FDI stock was _________ (how many euros?). A: The EU; €26,768 million

5. Fill in the Blank Q: _________ (what percentage?) of Chinese FDI in Europe is concentrated in six countries. The six countries are: _________ (which countries?). A: 73.3%; Luxembourg, France, the UK, Germany, Sweden, and the Netherlands

6. Lesson Road Map • The internationalization of Chinese companies and their presence in Europe • China’s position in the world & its current economic strategy • Chinese companies in the world • Chinese companies in Europe • General characteristics of Chinese investment • The renewed allure of China for European firms • The arrival of European firms into China • New difficulties for European firms in China • Business opportunities for European firms in China’s new economic climate

7. THE INTERNATIONALIZATION OF CHINESE COMPANIES AND THEIR PRESENCE IN EUROPE

8. China’s Ranking in the World

9. China’s 12th 5-year Plan—6 Priorities

10. China’s Changing Economic Model • Private sector as the economy’s main driver • Globalizing Chinese companies • Focus on 8 strategic emergingindustries: • Infrastructure, energy, agriculture, high-tech, environment, healthcare, agri-food, and consumer goods • Protection of 8 strategic sectors: • Defense, generation and distribution of electricity, oil, telecommunications, steel, civil aviation, banking, and water transport

11. China’s Changing Economic Model • Private sector as the economy’s main driver • Globalizing Chinese companies • Focus on 8 strategic emergingindustries: • Infrastructure, energy, agriculture, high-tech, environment, healthcare, agri-food, and consumer goods • Protection of 8 strategic sectors: • Defense, generation and distribution of electricity, oil, telecommunications, steel, civil aviation, banking, and water transport • China has climbed from its position as the 33rd foreign investor in 2000 to rank 3rd in 2012. • FDI expected to grow to a rate of $150 billionby 2015. • China leadingthe boom in foreigninvestmentsbyemergingcountries, with a volume of investments: • 6x greaterthanIndia’s • 29x greaterthanBrazil’s

12. Presence of Chinese Companies in the World

13. Presence of Chinese Companies in the World • Two main strategies: • Greenfieldinvestments • M&As to move up thevalue-addedchain

14. Fortune’s Global 500 • 98 Chinese (including HK) companies among the world’s 500 largest companies Source: Fortune

15. But Very Few Chinese Brands Are Truly Global

16. Chinese Brands Do Not Own Distinctive Attributes

17. Turning to Europe Europe is the main destination for investment in the world

18. Presence of Chinese Companies in Europe

19. Chinese FDI Stock in Europe is Increasing Rapidly

20. Hurdles for Chinese Companies in Europe (1/3) • Brand recognition

21. Hurdles for Chinese Companies in Europe (2/3) • Brand recognition • Conceptions

22. Hurdles for Chinese Companies in Europe (3/3) • Brand recognition • Conceptions • Weakpoints

23. Characteristics of Chinese Investment Abroad • What are the characteristics of Chinese companies that invest abroad? • Why are Chinese companies investing abroad? • Where do Chinese companies want to sell? • Where are Chinese companies investing? • What are the challenges and opportunities for Chinese companies that internationalize?

24. What Are The Characteristics of Chinese Companies That Invest Abroad?

25. 2) Why Are Chinese Companies Investing Abroad? Amongotherreasons, • to improvetheir position in thevalue-addedchain of global goodsproduction, makingthem more competitive; • to expandtheirmarkets; • to adquire new technologies; • to differentiatethemselves in thedomesticmarket; • to build know-how; and • to buildtheirbrands.

26. 3) Where Do Chinese Companies Want to Sell? • China • To the growing upper and middle class • Europe and the US • Mature markets, strengthening and buying brands, R&D, patents • Africa • Since the 1990s • South Africa is the main partner • Latin America • Focus on Brazil: $25 billion in one year

27. 4) Where Are Chinese Companies Investing?

28. 5) What Are The Challenges and Opportunities for Chinese Companies That Internationalize? • CHALLENGES • “Low price” image still dominates the perception of products from China • Required managerial abilities are different • OPPORTUNITIES • Choosing emerging markets as the first foothold to global expansion. • Choosing mature markets to change perceptions and learn. • Categories: electronics, branded products, mobile phones, and appliances

29. THE RENEWED ALLURE OF CHINA FOR EUROPEAN FIRMS

30. EuropeanInvestment in China: SomeFacts and Figures AccumulatedEuropean FDI in China now: €118 billion Mao DengXiaoping

31. EuropeanInvestment in China: SomeFacts and Figures AccumulatedEuropean FDI in China now: €118 billion Mao DengXiaoping MAIN EUROPEAN INVESTORS IN CHINA (accumulated 2012) Source: Eurostat. Billion €.

32. EuropeanInvestment in China: SomeFacts and Figures AccumulatedEuropean FDI in China now: €118 billion Mao DengXiaoping Nevertheless, EU FDI to China remains low in comparison: MAIN EUROPEAN INVESTORS IN CHINA (accumulated 2012) Source: Eurostat. Billion €.

33. EuropeanInvestment in China: Motivations Competitive labor costs Reasons for European firms to invest in China Huge potential market Export platform to Asia Low firm competitiveness 33

34. New Difficulties for European Firms in China As a result of theeconomicdevelopmentundergone in china in recentyears, Europeanfirms are facing new challengeswhenit comes to investing and operating in China….

35. New Difficulties for European Firms in China (1/4): EconomicSlowdown • Expected economic growth about 7% annually or even lower • Risks linked to economic unbalances such as shadow banking, real estate bubble, municipalities public debt,… (high level of uncertainty) • Higher incentives for European firms to diversify for reducing potential risks • Less economic growth and potential unbalances: maybe other emerging markets can offer less risk and higher profitability for European companies?

36. New Difficulties for European Firms in China (2/4): China Is No LongerCheap • Labor costs are not competitive for South Asian standards any more • Increasing pressure for rising salaries (due to the lack of specific working force in some industries and the Government support for a private consumption model of growth) • Logistic costs are extremely higher (and lack of adequate infrastructure) • Bureaucratic costs are still enormous Source: China Briefing Source: Several sources

37. New Difficulties for European Firms in China (3/4): HigherCompetitiveness of Local Players Higher competition for global players in China New local players with a very competitive position FINANCIAL SECTOR AUTOMOTIVE INTERNET

38. Difficulties for European Firms in China (4/4): Classic and PersistentBarriers to Doing Business FOREIGN DIRECT INVESTMENT REGULATORY RESTRICTIVENESS INDEX 2013 Source: OECD

39. Difficulties for European Firms in China (4/4): Classic and PersistentBarriers to Doing Business DOING BUSINESS REPORT 2015 • Other Asian and Latin American countries offer a much more business friendly environment. • Extremely complicated to open a business (128th in DB 2015) • Highly complex to pay taxes (120th in DB 2015) • Very weak protection of minority investors (132th) • The most complicated regulation for FDI according to OECD • Additionally, very important de facto barriers Source: World Bank. Doing Business 2015

40. Business Opportunities for European Firms in China’s New Economic Climate However, the Chinese economy “new normal” generates new and exciting business opportunities for European firms

41. Business Opportunities for European Firms in China’s New Economic Climate (1/7): Changing Model of Growth and Rising Living Standards Foreign brands: new market opportunities Demand: Higher contribution of private consumption 2 main drivers of the changing model of growth Opportunities for foreign companies operating in the high part of the value chain Supply: Higher contribution of services and added value activities • Size of the market: between 275 – 100 million citizens (depending on whether middle income is defined as from $ 5,000 or $ 10,000 dollars) • Assuming Western consumption patterns • Government support for private consumption (fiscal reform) and for high value services activities (financial incentives and subsidies) • Business opportunities to introduce products and services in different market segments (specially in upper and medium class) • Already top market for many foreign companies (ie 34% VW total sales)

42. Business Opportunities for European Firms in China’s New Economic Climate (2/7): Inland China • Business opportunities in Beijing, Shanghai or Zhenzhen 20 years ago are now present in inland China. • Average salary in Beijing is €6,032 compared to €2,047 in Yunnan (58% lower). • Minimum salary €220 in Shanghai compared to €140 in Guinzhou or Qinhai. • Size of market: 750 million citizens (equal to Latin America). • Hunan’s GDP is similar to Nigeria’s and Mongolia’s similar to Egypt. • Government incentives to invest in inland China (allowing covering additional expenses derived from operating in a less friendly business environment). AVERAGE ANNUAL SALARY IN SEVERAL CHINA CITIES Source: China Statistical Yearbook 2013

43. Business Opportunities for European Firms in China’s New Economic Climate (3/7): New Industries • Government determination to open most of the industries to foreign capital. • Recent publication by China’s National Development and Reform Commission (November 2014) reduced foreign investment restricted industries from 79 to 35. • Foreign investment (as well as domestic investment) is supported by the government in some industries. • The Shanghai Free Trade Zone (SFTZ) is a promising project which is extremely business friendly for foreign firms (including fewer investment barriers). It could be replicated in other regions of the country. SFTZ includes interest rate liberalization or free Renminbi conversion. Some industries where investment is supported by the government BIOTECHNOLOGY AND ENVIRONMENT SOFTWARE AND INTERNET ADVANCED MATERIALS ALTERNATIVE ENERGIES

44. Business Opportunities for European Firms in China’s New Economic Climate (4/7): Innovating China RATIO R&D EXPENSE OVER GDP • New opportunities for R&D facilities at lower costs than in Europe. • Advantage of proximity to the factories. • R&D expenses / GDP in China is 2%, above EU and the rest of large emerging countries. • 50% of graduates study scientific degrees. • Fiscal incentive to R&D activities (15% corporate tax). • Huge market of 500 M internet users. • Well positioned for new disruptive technologies development: robot, life science, big data, alternative energies, rare earths,… Source: China Statistical Yearbook 2013

45. Business Opportunities for European Firms in China’s New Economic Climate (5/7): Infrastructure and a More IntegratedMarket • Massive government plan to modernize and develop new infrastructure inside and outside the country. • China will become a much more integrated market and companies will save time and costs operating among provinces. • The plan does not only involve physical infrastructures but also technological infrastructure. • Many initiatives supported by the recently created Asia Infrastructure Investment Bank (capital base of US$100bn). • Government funding channelized through public banks: Exim bank has provided credit support for 24 highways, 3 railways, one port, 3 airports and 9 bridges in the Mekong region and the 10-nation Association of South East Asian Nations (ASEAN). • Megaprojects like the New Silk Road or the Nicaragua Channel will transform the way in which commodities travel around the world. THE NEW SILK ROAD THE NICARAGUA CHANNEL

46. Business Opportunities for European Firms in China’s New Economic Climate (6/7): Urban and EnvironmentalNeeds • The Chinese government faces very real challenges as a result of an unbalanced model of economic growth, such as massive migration and environmental deterioration. • Regarding the process of urbanization, in 1978 only 20% of the population lived in cities, whereas this had increased to 50% in 2010, with numbers expected to soar to 70% in 2030 (13 million new city inhabitants every year). • China’s greenhouse gas emissions will soar from now to 2030 (and it is already among the most polluting nations). • There are urgent needs in green and residential areas, public transport facilities and technologies, better infrastructures, water treatment, waste management, and new sources of energy (alternative and renewable energies). • Due to the demographic expectations there is also need to develop infrastructure and projects related to elderly healthcare. Source: World Bank

47. Business Opportunities for European Firms in China’s New Economic Climate (7/7): Two-Way FDI Flows CHINA OUTWARD FDI (2005-2013) CHINA COMPANIES IN FORTUNE 500 (LARGEST COMPANIES WORLDWIDE) Source: MOFCOM • Push factors encourage Chinese companies to go abroad: policy, internal reserves, savings levels, commodities needs, technological deficit, … • Chinese outward FDI is increasing all over the world, and the European Union is one of the main targets. • There are 2,000 Chinese firms already in Europe, and Chinese investment is now 41 times larger than in 2001. • Many Chinese firms buy in European companies to have access to technology, brands or the European market. As a result, European firms have access to Chinese market through the local partner.

48. Application: The Three Paragraph Paper Given current economic and policy conditions, what might the outlook be for the following 3 European firms who are considering investing in China? • A German luxury car brand, • A Spanish firm specialized in smart city grids, and • A large French producer of low-cost electronic devices. Please reflect on these cases for 5 minutes, and then write 1 paragraph per case, discussing the challenges and opportunities each might encounter when investing in China, and offering recommendations.

49. Conclusion Questions? This powerpoint presentation and the matching teaching plan were developed as a part of the Jean Monnet project MEKBiz (Mainstreaming EU Knowledge in Business Studies and Strategy), hosted by ESADEgeo – Center for Global Economy and Geopolitics and partially funded by the European Commission. “The European Commission support for the production of this publication does not constitute an endorsement of the contents which reflects the views only of the authors, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”