Chinese money abroad: investing in the UK

Posted on 28 Mar 2012

Where will China stand on the world stage in a century? It has deep pockets, but will the UK and the West always be one step ahead in manufacturing and engineering? George Archer blogs for TM with his outlook.

The balance of global economic power is argued by many experts to be tilting towards the BRIC countries; Brazil, India, Russia and China.

But there is an opportunity for UK companies to mitigate the shift in power through riding the wave of BRIC growth and hooking into the needs of rapidly expanding middle classes and transformative political ambitions.

This said, I believe UK companies must be cautious in their clamour to do this. If we believe in the principles of Western democracy, we must not abandon them to grasp lucrative but compromising opportunities. There is a role here for UK government in leaning on nations like China to accelerate social, political and economic reform. I believe this is necessary if Chinese and UK businesses are to fully and positively engage.

he Sovereign Wealth Institute has predicted that China possesses roughly $1.1tn sovereign wealth funds
The Sovereign Wealth Institute has predicted that China possesses roughly $1.1tn sovereign wealth funds

Firms of all sizes in BRIC countries are keen to expand their uptake of hi-tech and high value added manufacturing and reap the benefits. But Western nations should not give up their laurels in these disciplines without a fight.

The UK automotive sector is almost unrivalled. At the Australian Grand Prix this year, not a single car was without a component manufactured in the UK.

Furthermore, the US boasts an array of both multinational and truly innovative companies. The top 10 positions in Interbrand’s Top 100 global brands are all held by US companies, several of them with manufacturing operations, and Silicon Valley is awash with agile internet start-ups turning out technology that continues to transform private and professional lives around the world.

So the game is by no means up for Western manufacturing companies.

That said, complacency would be foolish. To me, China is fascinating; it is classed by some academics and historians a ‘civilisation state’ because it is so big and has such a rich cultural history.

Its economy has grown at an astonishing rate over the past decade, and although this rate has slowed slowed in recent months it still far outstrips grwoth in any European nation or in the USA.

The Sovereign Wealth Institute says that China has the largest sovereign-wealth fund – almost $1.2 trillion. This is almost twice as much as the United Arab Emirates.

So, what do the Chinese government do with all this money? It invests in domestic development of course – with iterative five year plans which pinpoint targets for social and industrial projects. But it also lavishes funds on establishing an international infrastructure for China through M&As and the construction of facilities to extract natural resources.

East, but looking west

There was one statistic that caught my eye in a report from global consultancy Deloitte on Chinese manufacturing. Fifty per cent of executives at manufacturing companies in China believe innovation is the industry’s biggest challenge. Instead of producing lots of cheap goods, a great deal more high quality and technologically advanced goods need to be designed and produced by Chinese scientists, engineers and manufacturers.

Can China achieve this? Its government buys Western firms with long established reputations (see second boxout on JLR below). Along with the facilities come the the specialist skills and knowledge of the employees inside that firm. Purchasing a firm is not cheap, but the benefits are more often than not well worth it. The new owners can learn and apply the knowledge to manufacturing processes at their own native companies.

Chinese investors buy overseas companies regularly. The Asia Society released a report that predicts China will invest up to $2tn overseas between now and the end of the decade. It’s predicted that a lot of this investment is bound for the US, but a lot will reach Europe and the UK.

Chinese foreign direct investment (FDI) signifies to other potential investors that there is at least a certain degree of confidence in the UK economy. Another minor consequence is that in an uncertain economic climate, confidence among British manufacturers arguably rises. Knowledge that FDI is still flowing to the UK enforces the fact that it’s still a good place to possess assets.

Chinese mergers and acquisitions (M&As) in the UK are predicted by many economists to increase a great deal over the next five years as China strives to remain competitive on the international stage. Already this year, Chinese manufacturers have acquired five European companies, in deals valued at roughly £1bn.

BAE Systems' Samlesbury Facility
BAE Systems' Samlesbury Facility - a prime example of British manufacturing excellence

The Chinese Government sees its reliance on low-value manufacturing as problematic, one of the reasons being that it depends on developed countries buying their goods. The Chinese are very keen to be in a position to manufacture their own unique technologies, rather than adapting Western products for an Asian market (which they are extremely good at). Chinese manufacturers, engineers and scientists need to innovate, and investment in leading manufacturing companies will help them to achieve this.

Ross James, manufacturing M&A partner at Deloitte, says:

“While a competitive advantage on costs has helped the development of Chinese manufacturing companies, they are also facing numerous challenges and pressures that should not be overlooked.”

“Well executed M&As is an important way for enterprises to strengthen their competitiveness and as a result we are likely to see more outbound M&A activity from China, allowing enterprises to expand and leap-frog development,” he adds.

In a recent article in The Economist, a writer called the rising of wages taking place in the country a precursor to “the end of cheap China”. The writer has a point – many Chinese citizens are earning better wages than they did and the middle class is expanding. This new demographic desire Western living standards – why should they not?

An M&A success story is Tata Motors’ acquisition of Jaguar Land Rover in 2008. The firm is now making more money than it was before the takeover. It has plans to build engine facilities in Brazil and China after construction of an Indian production facility is finished, and a new engine manufacturing plant is under construction in Wolverhampton.

The new plant in Wolverhampton will create skilled and much needed jobs for the region, which is excellent news for the local economy, particularly with such a high rate of unemployment.

Chinese investment in British manufacturing firms is something that should be fully

One of China's most pressing problems is the rate of desertification near its cities.
One of China's most pressing problems is the rate of desertification near its cities.

embraced, but the Government needs to ensure we don’t fall behind on R&D spending, it needs to tirelessly continue to promote business investment while highlighting the benefits that vocational degrees and apprenticeships can bring to young people disenchanted with a university education.

Future China: the new international heavyweight?

China’s foreign M&As will increase its knowledge base, and facilitate innovation. The economic balance of power may tip slightly towards the BRIC countries, but the rise of China is not necessarily a bad thing. If Chinese government officials follow Premier Wen Jiabo’s recent advice to implement “urgent” political reforms, China could become a country not to be treated with caution, but a strong and internationally admired country.

Please feel free to comment on this blog and give your opinions – it’s good to get different viewpoints heard, analysed, argued about and published.