Guess Who’s Bullish on Europe? China’s New Investment Play

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Another day in Europe, another Chinese acquisition: over the first June weekend it was the turn of three prestigious Bordeaux wine châteaus, Bon Pasteur, Rolland-Mallet and Bertineau St.-Vincent, to be acquired by the Hong Kong–based Goldin Group for an undisclosed amount.

A new wave of Chinese investment is rolling across the world, and Europe is where much of it’s washing up. Over the past couple of years, Chinese groups have been snapping up an assortment of manufacturing companies and consumer brands, from forklift makers to wineries, in Germany, France, the U.K., Scandinavia and elsewhere at a steadily increasing pace. Last year Chinese investments into Europe totaled $12.6 billion, up 21% over 2011, according to A Capital, a private-equity fund based in Beijing, Brussels and Shanghai that was involved in the biggest recent European deal, a friendly $700 million buyout of France’s Club Med by shareholders including China’s Fosun International. Chinese investment into Europe tripled between 2006 and 2009, and then tripled again from 2009 to 2011.

At a time when Europe and especially the 17 nations in the core euro zone are struggling with no growth, rising unemployment and an increasingly restless populace, this Chinese investment is a vote of confidence, just as some U.S. companies have become increasingly downbeat about the Continent’s prospects.

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The Chinese are also interested in the U.S., of course, as shown by the $4.7 billion agreed acquisition by Shuanghui International of Smithfield Foods. If that deal receives regulatory approval, it would almost equal in dollar terms the total amount of Chinese investment in U.S. companies during the whole of 2012. But it’s on the other side of the Atlantic where much of the deal flow is taking place. A Capital says one-third of all Chinese mergers-and-acquisition volume is coming from Europe, more than double than the U.S., where Chinese investments last year totaled $5.4 billion.

China watchers detect an important strategic shift in all this activity: Chinese companies are now hungry to acquire both Western consumer brands and leading-edge technology, not just natural resources, in order to bolster their positions at home. “There has been a big increase of costs in China, and so without a brand or technology, it’s increasingly hard [for Chinese companies] to make a reasonable margin,” says André Loesekrug-Pietri, A Capital’s chairman and managing partner. He believes European companies are especially attractive because the Chinese are looking for sectors that will help them with their process of urbanization, such as transportation and environmental technologies, as well as health care and food.

China business specialists say the Smithfield and Club Med deals demonstrate this new emphasis among Chinese companies to shore up their own competitive position in China by acquiring international quality brands. For years, the Chinese have been investing heavily in natural resources in Africa and Eastern Europe. But Daniel H. Rosen, a China expert at consultants Rhodium Group, describes the new focus as “China’s Globalization 2.0” and says “new flows such as outward investment and outbound tourism are now outgrowing traditional flows, a sign that the next stage of China’s global integration has arrived.”

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Among the firms Chinese companies have invested in during the past year are household brands like cereal maker Weetabix in Britain and the designer Danish audio-equipment firm Bang & Olufsen. (In the U.S., the biggest deal before Smithfield was Dalian Wanda’s $2.6 billion acquisition of AMC Entertainment Holdings.) For the Chinese acquirers, buying such consumer brands is an attempt to raise their status and reputation back home in China, and differentiate themselves from their domestic competition. But they are also looking to improve their already formidable manufacturing abilities by buying state-of-the-art machinery firms.

Germany is the epicenter of Chinese investments of this sort. In the past year, Shandong Heavy Industry has acquired a big stake in Kion Group, a big worldwide forklift maker, while Sany Heavy Industry Co. has snapped up a concrete pumpmaker, Putzmeister, and Hebei Lingyun bought a German car-parts maker, Kiekert.

The change has important implications for policymakers as well as companies that could be targets. Most significantly, perhaps, this wave of Chinese investment secures jobs in the U.S. and Europe rather than imperiling them; the Chinese investors so far are tending to keep European management in place, and have opened up access to the Chinese market, helping to boost sales. At Putzmeister, for example, revenue rose 20% after Sany finalized the acquisition in April 2012, and has given long-term employment guarantees to the workforce in Germany. Norbert Scheuch, Putzmeister’s CEO, has said the Chinese are looking for German quality and know-how and certainly want to preserve them once they’re acquired.

At a time when trade relations with China are tense, this merger activity adds a new dimension to negotiations, and is already altering perceptions, especially in Europe. Germany in particular is pushing for a more conciliatory stance in disputes.

“In the U.S., there’s a regulatory arsenal that is perceived as being an obstacle. That may explain why there are many more deals in Europe,” says A Capital’s Loesekrug-Pietri. One clear sign of how the investment strategy is helping to soften trade disputes has been visible this month in a row about how Europe should deal with Chinese solar panels. The European Commission has accused Chinese producers of allegedly dumping their solar panels on the European market at below-cost prices, and Karel de Gucht, the E.U.’s trade commissioner, has called for the imposition of punitive tariffs. But Germany has led the countercharge, arguing that antidumping measures would be a “grave mistake.” Gucht, furious, countered that “if we in the E.U. do not stand together on this, then we will lose.”

The Chinese acquisitions have raised eyebrows in Europe, but the reaction has been softer than in the U.S., where the latest Shuanghui deal is making waves. The Chinese company would export pork from the U.S. to China and improve both its food-safety expertise and its own domestic reputation. A series of food scandals in China — including rat meat sold as mutton — have seriously damaged consumer confidence in Chinese brands.

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Chuck Grassley, a Republican Senator from Iowa, urged the Shuanghui acquisition to be examined by both the Department of Justice and the U.S. Committee on Foreign Investment, which examines foreign investments that could have an impact on national security. “No one can deny the unsafe tactics used by some Chinese food companies. And, to have a Chinese food company controlling a major U.S. meat supplier, without shareholder accountability, is a bit concerning,” Grassley said in a statement. “I’ve always said that we are nine meals away from a revolution, so a safe and sustainable food supply is critical to national security.”

The overall volume of Chinese investments remains relatively modest: total spending on mergers in 2012 rose to $37.8 billion, up by 26%. By comparison, investments by German companies in China have so far been many times higher; at the end of 2011, aggregate investment by German companies in China alone was worth about $35 billion, according to the German government. There are now about 900 Chinese companies active in Germany, many of them small, compared with more than 5,000 German companies operating in China.

But the big growth now looks to be coming from the Chinese side, as companies there look to ramp up their positions at home and abroad. Rhodium Group anticipates that by 2020, Europe might be receiving as much as $250 billion to $500 billion cumulatively in new Chinese M&A and greenfield investment.

There are still some clear limitations, however, one of which is the management capacity to take on international deals. “Investments from China are a major trend, but these are still early days,” says Loesekrug-Pietri. “And the Chinese have so far very little experience in cross-border acquisitions.”