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India is many things: the second most populous nation in the world; an Asian giant experiencing an economic boom on par with China’s; and a hotspot for foreign investment. What it’s not is an easy place to set up a business as a foreign company.
Such has been Beiqi Foton Motor’s experience in the subcontinent. The Beijingbased automaker signed a memorandum of understanding with India’s Maharashtra state government to manufacture trucks in India but the deal has yet to make progress.
“There are too many difficulties in investing in India,” said Zhao Yufeng, Assistant General Manager of Beiqi Foton Motor, one of China’s leading truck makers, at the 2012 China Global Outbound Investment Summit held in Beijing on June 15.
The land lot the company bought for a new plant was far from construction-ready, he said.
“In China, you buy a plot of land and you can expect it to have access to highways, electricity and water. That’s not always the case in India, and then you have to deal with these issues yourself,” said Zhao.
The dramatic fluctuation of the Indian rupee poses another challenge. In the second half of last year, the Indian rupee depreciated nearly 20 percent against the U.S. dollar.
China’s overseas investment has rapidly increased over the last few years as Chinese companies expand into new markets seeking to develop advanced technology, brand names and natural resources.
Although being honored as the Chinese trailblazers, those outbound investors have to face various risks and uncertainties, or even huge losses.
Going global
China started to encourage its enterprises to invest overseas a decade ago, but the pace has only started to pick up in the past couple of years.
The nation overtook Japan and Britain in 2010 to become the fifth largest global investor and is now the largest investor among developing countries.
Its outbound direct investment (ODI) into the non-financial sector reached $23.16 billion in the first four months, up 72.8 percent from a year earlier, according to the Ministry of Commerce(MOFCOM). By the end of April, its accumulated ODI into the non-financial sector had totaled$345.1 billion.
The vast demand for energy and natural resources motivated Chinese investors to go out, said Li Tong, Executive Director of China Enterprise Forum.
State-owned enterprises (SOEs) represented a record-high 98 percent of all deal value in the first quarter of 2012, compared to 53 percent in the first quarter of 2011, due to the focus on resources, A Capital founder and Managing Partner André Loesekrug-Pietri said.
“SOEs may also show better capacity than private firms to seize opportunities in a volatile and competitive environment,” he added.
For Zhao, going global has been a strategy Beiqi Foton has to make amid the looming ceiling of domestic market. “The consumption of commercial vehicles in China will reach its peak in 2020. We need to go overseas to expand our market and balance the books,”Zhao said.
According to Zhao, investment in India serves as a key step for the truck maker to implement its strategies and is an important move for its globalization drive.
Increasing trade frictions in recent years also triggered China’s ODI to soar sharply.
The nation has been a target of trade protectionism for years and has become even more so recently, driving some Chinese companies to try to avoid trade disputes by investing and opening factories abroad.
Hanergy Holding Group, a Chinese renewable energy operator, announced on June 5 that it agreed to buy the Solibro thin-film unit of German solar panel maker Q-Cells SE to expand in the world’s biggest solar market by installed capacity.
The acquisition may help Hanergy avoid an anti-dumping and anti-subsidy investigation into imports of Chinese photovoltaic solar panel launched by the EU in June, reported China United Business News.
Advanced technology constitutes another alluring feature for Chinese investors.
“We want to buy up advanced technology,” Jason Chow, CEO of Hanergy Global Investment & Sales, said at the summit.
For Chow, the ongoing EU debt crisis and weak recovery of the U.S. economy accelerated his company’s ambitions to expand abroad.
“Since September last year, we have been looking for acquisition opportunities in Europe and the United States. Their gloomy economy has put us in a good position to invest,” said Chow.
China’s ODI could hit $2 trillion by 2020, with the private sector playing an important role, according to a report by U.S.-based research firm Rhodium Group.
“The strong demand for energy and natural resources and the over-reliance on overseas markets will be the most powerful engine of its ODI in the next decade,” said Li.
China has established various funds to help its companies invest overseas. They include the China-Africa Development Fund and the China-ASEAN fund. State-owned banks have provided them with some of their capital.
According to the MOFCOM, a fund will be established to help Chinese companies invest in Latin America. The fund is due to begin operating this year.
The State Administration of Foreign Exchange (SAFE) issued a document that allows domestic enterprises to inject foreign currencydenominated loans they receive in China into their overseas subsidiaries, effective on July 1.
Previously, companies could only finance their overseas firms with foreign currencies generated by their own business operations, purchased with the yuan, or from other foreign capital pools approved by the SAFE, according to regulatory rules published in 2009.
Boom or bane?
Although China’s ODI has been surging in recent years, it did not produce a corresponding increase in profit.
A report published by consulting firm Mckinsey & Co. found that some 70 percent of mergers fail to achieve expected revenue synergies.
In July 2011, Aluminum Corp. of China announced that it lost 340 million yuan($53.97 million) at its bauxite project in the Australian state of Queensland. In June 2011, China Railway Construction Corp. Ltd. reported a loss of 4.1 billion yuan ($650.79 million) from a light railway construction project in Saudi Arabia.
“The losses disclosed are just a tip of the iceberg. The actual loss is much bigger than the number we know,” said Jin Jian, a partner at U.S. auditing firm Deloitte Touche Tohmatsu, at the summit.
According to Wan Meng, Dean of Law School of the Beijing Foreign Studies University, more than 70 percent of the Chinese enterprises that have invested overseas suffered losses.
“Half of China’s ODI will be lost over the next five to 10 years,” according to Hua Liming, former ambassador in the Middle East and a researcher at the Chinese Institution of International Studies.
The main reason for the severe losses is a lack of “soft power,” though China’s economic might has increased in the past few years.
“Outbound investors generally lack the ability to operate internationally and have little understanding of the local law and business environments,” Hua said.
“Many Chinese enterprises think that they are able to buy anything because they have money. Actually, they don’t know what they should do after an acquisition finishes,” said Jin at the summit.
“The predominating and the only advantage of Chinese investors is access to capital,” said Frank Xu, Managing Director of Investment Banking Department of China International Capital Corp. Ltd.
Cultural differences are the major obstacle for Chinese enterprises to achieve their expected aim in overseas investment, said Jin.
“Every country has its own underlying rules. We need to fully understand those rules and adjust ourselves to them before we can effectively proceed with our project,” said Zhao.
“Overseas investment involves too many factors, including politics, culture, finance, taxation, environment, talent, corporate strategy, etc. Ignorance of any factor may lead to failure,” said Li.
Lack of professional management talent also poses another major challenge.
“Talent is the pillar of successful crossborder M&As. It is always harder to have an experienced managerial team than just buying a foreign enterprise,” said Jin.
“For Chinese investors, ODI is a very recent phenomenon and in its beginning stage, and they are suffering from a lack of experience and managerial know-how,” said Li.