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Going Private

Updated: 2013-08-30 13:00
By Andrew Moody, Chen Yingqun and Song Wenwei ( China Daily)

Going Private

Going Private

Lu Qiyuan, president of Qiyuan Group, which is planning a $1 billion development in Addis Ababa. Li Junfeng / for China Daily

Going Private

Xu Weimin, president of Jiangsu Dongdu Textile Group, says any overseas strategy needs to be thoroughly thought through. Li Junfeng / for China Daily

Going Private

Going Private

An Increasing number of private Chinese companies are making big investments IN Africa

Few Chinese private company bosses are as ambitious as Lu Qiyuan.

The 48-year-old president of the Jiangsu Qiyuan Group used to be just a steel pipes maker. Now he is planning a $1 billion development that will create a 500,000-square-meter new urban area within Addis Ababa.

If it goes ahead, it will feature a shopping mall, a five-star hotel and a major residential housing scheme.

He makes no apology for it looking more Chinese than African or that it will be a somewhat futuristic addition to the Ethiopian capital's architectural lexicon.

"Yes, yes. Chinese city in the middle of Ethiopia," he says proudly as he points to the scale model in his office in Zhangjiagang city in Jiangsu province.

Lu is one of a number of private sector bosses who are now making major investments outside of China.

Until recently, state-owned enterprises have been at the vanguard of the world's second-largest economy's moves into international markets, particularly in the resources and raw materials field.

But already in the first six months of this year, four of China's top 10 overseas direct investment deals have been by private companies, compared to just one in 2012 during the same period.

The most high profile of these is perhaps Shuanghui International Holdings' $4.7 billion (3.5 billion euros) proposed acquisition of Smithfield Foods in the United States in May.

In a new report by international business advisers KPMG, The Dream Goes On: Rethinking China's Globalization, which has yet to be published in English, some 75 percent of respondents predicted major international advances for China's private businesses over the next five to 10 years.

According to the report, within three years, a third of private companies will set up an overseas sales network, around a quarter will establish offices abroad and about 15 percent will establish factories overseas.

Lu, who says he has shown the plans for his futuristic development to Ethiopian Prime Minister Hailemariam Desalegn in Beijing, has already created something of a model for ODI in Africa.

His company, which was formed in 1994, has built one of the largest Chinese enterprise zones in Africa, the Eastern Industrial Zone, 30 km outside of Addis Ababa.

It is regarded as a template for other such zones across the continent, being an area where mainly Chinese companies can set up manufacturing and production facilities.

To some extent, it replicates the special economic zones that kick-started China's economic growth after reform and opening up in the late 1970s.

Lu predicts there will soon be between 30,000 and 50,000 people working in the zone.

"The China real estate market has been fully developed and this is a new kind of business for us," he says.

"My view of Ethiopia, however, is that you are not working with a company but a country, and you are helping that country through its first stages of industrialization."

According to KPMG, Chinese private companies investing overseas are either setting up greenfield operations or acquiring or merging with foreign companies to take their businesses on to the next stage of development.

Among the 159 representatives from Chinese companies interviewed, nearly one in five (19.2 percent) cited seeking out new markets as the most important reason.

Building international marketing networks was cited by 16.6 percent, and becoming an internationally competitive global company by 15.7 percent.

Although some private enterprises are being driven overseas because of the increasing costs of doing business in China with rising wage costs and the higher value of the Chinese yuan, this was a factor for only 8.2 percent of respondents.

The report concludes that, in fact, many Chinese private firms have reached a "tipping point", where if they don't seek to expand overseas, they cannot develop their businesses.

Although the biggest destination for China's ODI remains Asia, making up 60.9 percent of the total in 2011, according to the Ministry of Commerce, Africa is an increasingly attractive destination for ODI, accounting for 4.3 percent in 2011.

China's stock of overseas direct investment on the continent increased eightfold from just $1.6 billion in 2005 to $13.04 billion at the end of 2010, the last year for which figures are available, according to China's National Bureau of Statistics.

Vaughn Barber, head of China Outbound for KMPG based in Beijing and co-author of the report, says that Africa has proved attractive to companies in a number of sectors.

"The main areas of investment have been in the contracting industry, the resources sector and mining," he says.

"There have also been major inroads by companies such as Huawei (the telecommunications company), Lenovo (the PC maker) and the Chinese banks have been following all of them."

Oliver M. Rui, professor of finance and accounting at China Europe International Business School (CEIBS) in Shanghai, agrees with KPMG's findings and says that what is forcing companies abroad is that their old business model no longer works.

"They can no longer just be OEM manufacturers producing low-design, low-margin goods because the domestic markets they serve now want brands and higher quality products," he says.

He adds that China has exceeded a per capita income of $8,000, which has been a global benchmark when consumers demand better products and services.

"In Shanghai and other parts of eastern China, that is now $20,000. That is why you see many companies there looking to make acquisitions," Rui says.

"They are increasingly going to Europe and the United States to acquire brands and research and development capability that will strengthen their position in their own markets."

According to China's Ministry of Commerce, private companies now account for up to 70 percent of ODI in some of China's more prosperous eastern provinces

The KPMG report highlights Jiangsu province, which is seen as a hot bed of Chinese private companies stepping up their global efforts. Many of these enterprises have a focus on Africa.

At the Economic and Technology Park at Yangshe town in Suzhou, Xu Weimin was a pioneer of the efforts of Chinese companies to go overseas.

The 60-year-old is president of Jiangsu Dongdu Textile Group, which has a turnover of 8 billion yuan (980 million euros) and 26,000 employees, 10,000 of whom are located in Southeast Asia.

"If China's economy wants to develop to a higher level, Chinese companies need to speed up the pace of going international, which is becoming a necessary and vital step for every company," he says.

A former local state-owned enterprise, Jiangsu Dongdu began selling overseas in 1993 and is now one of China's top 50 exporting companies.

He insists that although a third of its garments are made overseas in Vietnam, Malaysia and, in particular Cambodia, any company setting up overseas operations to save costs would be misguided.

"People think going global will help solve problems such as labor shortage and rising labor costs. We had thoughts like that at the beginning but even 20 years later we haven't made those costs savings," he says.

"Going global is more for Chinese companies to participate in international competition, to find target markets in an overseas environment and get to know that market."

Xu, who spends two-thirds of his time abroad and works on behalf of the government advising Chinese companies about their overseas efforts, says the main problem with trying to achieve costs savings by establishing bases abroad is that you lose all the benefits of Chinese manufacturing, which is among the most efficient in the world.

"From our own experience, if you invest in Southeast Asia, the overall efficiency level is around a third of that in China. Companies from other countries are also trying to move to these locations so there is a lot of competition for resources," he adds.

In the conference room of his offices on the 16th floor of International Trade Tower on Suzhou's Xihuan Road, Wang Zhiming, vice-director of the Suzhou Bureau of Commerce, says local private businesses are not afraid of going abroad since they have had long exposure to multinational businesses.

Nearly 300 sq km of the city is taken up by the Suzhou Singapore Industrial Park, which has attracted more than 3,000 foreign enterprises, including 77 Fortune 500 companies.

"The so-called Suzhou model for development was on foreign companies coming and investing in the various development zones around the city. That is how the city's regeneration began 30 years ago," he says.

"Many of our private businesses grew up supplying foreign companies on these zones. There are also export processing centers there."

Wang says many local businesses are now keen to make overseas acquisitions in their own right and there is no shortage of suitors. The bureau holds several seminars for investment promotion agencies from the United States, Sweden, the UK and Japan.

"One of the main problems for companies going abroad is the lack of information and these seminars provide information on investment opportunities," Wang says.

"They are very much open to the idea of Chinese investment coming in even though there has perhaps been resistance to it in the past."

"We definitely want to encourage more businesses to also export, and I think that transformation is happening now."

The ambitions of some Suzhou entrepreneurs go way beyond mere exporting, however.

In Beijing, Xu Hongcai, director of the information department of the China Center for International Economic Exchanges, a Chinese government research body, says private enterprises are now finding it easier to go overseas than state-owned enterprises.

"When state-owned enterprises go global, they often meet with political resistance, but private companies are given more leeway and can avoid political issues and risks," he says.

He also believes that Chinese companies now have greater strength to meet the challenges of going overseas.

"After many years of development, private companies are now stronger in terms of both the capital they have and the talent of their people. They also are much more international in their outlook and have wider horizons," he says.

Peter Nolan, professor of Chinese management at the University of Cambridge and author of Is China Buying The World? is one, however, who insists that Chinese private companies have yet to make major inroads in overseas markets.

"China has not bought the world and shows little sign of doing so in the near future," he argues.

"Their presence in high-income countries is negligible. This is a remarkable situation for a country that is the world's largest exporter and its second-largest economy and manufacturer. In other words, we are inside them but they are not inside us."

Xu at Jiangsu Dongdu Textile Group admits there are still many challenges and insists that any overseas strategy needs to be thoroughly thought through.

"We need to think why we want to go global, how exactly we need to do that, and what goals we want to achieve by it," he says.

He says this is particularly important when making decisions about overseas acquisitions, which have often gone wrong for Chinese companies.

"We actually have many opportunities for acquisition," he says.

"You cannot acquire just because you want to acquire, however. Any successful acquisition requires that the merged entities are greater than the sum of their parts."

In Zhangjiagang City, Lu at Jiangsu Qiyuan Group, believes Africa will become an increasingly important destination for Chinese private company ODI, particularly in manufacturing, because labor costs are beginning to climb in Southeast Asia.

Apart from his investment in the Eastern Industrial Zone, he set up a cement factory in Addis Ababa in 2009 and is planning to open a steel company next month.

"Labor rates in Southeast Asia will soon be similar to those in China. We have to pay Africa workers just 330 yuan a month, around a tenth of the 3,000 yuan we would have to pay a Chinese worker," he says.

"The fact is that if we buy just one plane ticket for a Chinese worker to Africa and back, it would pay for about five local workers for the year."

Lu says the company has attempted to localize as much as possible to meet workers' needs.

Rui at CEIBS says the main impetus behind Chinese private ODI over the next decade will not be about low-cost manufacturing but about acquiring brands and R&D capability.

China's ODI to Europe has already significantly increased five-fold as a proportion from 2.9 percent in 2004 to 11.1 percent in 2011. ODI to North America, however, has lagged behind, increasing from 2.3 percent to just 3.3 percent over the same period.

"What we have seen so far in terms of Chinese companies moving to low-cost centers in Southeast Asia and to Africa and elsewhere is just what happened in China 30 years ago," he says.

"The new and more important trend, however, will be Chinese firms making acquisitions in the European market to acquire the brands, the research capability and management expertise. They want the soft business skills from these markets that they now lack. This, I believe, is very important to the China economy."

Contact the writers through andrewmoody@chinadaily.com.cn

Going Private

( China Daily Africa Weekly 08/30/2013 page1)

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