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| Friday, 6 February 2004 |
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Investment in China : Outward Bound by Michael Vatikiotis Shanghai
Investing in China is part of almost any big multinational's business plan. China attracted a total of $57 billion in foreign direct investment in 2003 alone according to the United Nations. But largely unnoticed against the flood of capital into China is a small but rapidly growing flow of outward direct investment from China as both state-owned and private Chinese companies start to see benefits in investing abroad. Investment hungry Asian nations like Thailand are among the first to see the opportunities. Winyu Laopoonpittaya surveys a new frontier of investment from his office in an ornate building on Shanghai's historic bund. The diplomat represents Thailand's government-run Board of Investment (BOI) which encourages foreign firms to invest in the country and opened a branch in Shanghai eight months ago. "Before the 1997 economic crisis we had a policy of encouraging our businesses to go out of Thailand," says Winyu. Now he says his role in China is "to invite Chinese entrepreneurs to go to Thailand: it's a very good place to invest." With China's domestic market of 1.3 billion people and plenty of low-cost labour, it might be surprising to find companies looking at investing offshore. Yet, like any maturing economy, as China grows and competition intensified, some companies are stretching their wings overseas to tap new markets and develop global brands. They may also aim to escape regulatory barriers and overcapacity at home, and in the most developed areas, higher land and labour costs. And with protectionism growing in the United States against Chinese exports, a foreign presence can be a clear advantage. Just ask Chen Xieyi, Chen is General Manager of Worldbest Textile (Thailand), a subsidiary of a Shanghai-based and state owned enterprise, with two factories on an industries estate in Rayong, eastern Thailand, for the past two years. Chen cities low labour costs in Rayong and the country's efficient financial system as key reasons why Worldbest has seen a 7% return on its investment of $107 million. He says the parent company plans to open a chemical factory in Rayong early this year and a household goods plant in the next year or so. "There are very good investment conditions here in Thailand," says Chen. Tony Xu from textile maker Dunsky in Shanghai says the company is considering setting up a factory in northern Vietnam. One factor is that labour costs in Vietnam are, he claims, 40% lower than in Shanghai, China's financial hub. The reason for moving abroad instead of just to another city with cheaper land and labour. Xu says, is a more liberal investment regime than at home - though Vietnam itself has new problems with quotas on textile exports to the US. China's bureaucracy is another hurdle, he adds. "The rules of the game here (in China) levy higher costs for us," Xu says. Companies like Worldbest and Dunsky could represent the start of a trend that is likely to become more evident as China's firms grow and seek new markets. Some of China's biggest concerns have already taken this path. The earliest beneficiaries of this new exploration will probably be China's neighbours - the very Southeast Asian countries that were recently lamenting how China was sucking up FDI at their expense. Beijing makes no bones about its desire to promote outward investment. Premier Wen Jiabao told a business audience at an Association of Southeast Asian Nations summit in Bali in October last year: "The Chinese government will encourage more of its companies to make investment and establish their businesses in Asian countries." More than 100 Chinese business executives attended an investment forum held in conjunction with the Bali summit. Another 40 companies went to an Asia-Pacific Economic Forum investment conference in Bangkok the same month. Chinese companies invested $2.7 billion abroad in 2002, according to the Ministry of Commerce in December 2003 - the first time it has highlighted outward investment figures. By the end of 2002, the Export-Import Bank of China had provided a cumulative total of nearly 300 billion renminbi ($36 billion) in concessionary loans and guarantees for Chinese companies overseas, official figures show. Despite this encouragement and China's accession to the World Trade Organisation in late 2002, outward investment still requires official approval. Projects that exceed $30 million must go to the State Council, China's cabinet. From Beijing's point of view, lifting all barriers to overseas investment could risk a stampede with cash-rich Chinese companies bidding against each other for foreign assets, something that has already happened in the oil industry. As one of a series of measures to ease upward pressure on the renminbi, Beijing in 2003 gave more leeway to Chinese companies to invest overseas. The state Administration of Foreign Exchange raised to 10 the number of regions from which companies may invest outside China. Compared to the $120 billion of foreign-exchange inflows accumulated the People's Bank of China last year, however, the sums flowing out in the form of approved capital investments are tiny. According to state media, the ceiling on outward investments for each approved region is just $200 million. But even with such restrictions, Chinese companies are still looking abroad - and their ventures are growing bolder. In November last year, for example, leading Chinese consumer-electronics maker TCL agreed to take a majority stake in a joint venture with Thomson of France to produce televisions and DVD players. The deal would create the world's top television-set maker with expected annual revenues of more than $3.78 billion. The new firm would bring together TCL's factories in China, Vietnam and Germany and Thomson's factories in Thailand. Poland and Mexico. The French government dubbed 2004 the "Year of China" and feted President Hu Jintao on a visit in late January during which he was to sign a joint operating agreement between TCL and Thomson. In December, chemical giant China National Bluestar signed an initial agreement to buy a controlling stake in Ssangyong Motors, South Korea's fourth largest car maker and proposed investing $1 billion in it. Not all the deals are so big, but collectively they are starting to show up in investment statistics. China ranked sixth in terms of numbers of new foreign-invested projects in Britain in the year to March 2003. They provided less than 250 jobs in Britain, but are seen as signs of a larger trend - and one that other countries are keen to capitalize on. Chinese companies "realize with WTO entry and globalization they have to go overseas to compete," says Clair West, China manager for the inward-investment arm of UK Trade & Investment. "It's a major step for Chinese companies. They've never had to do it before." Eddie Chen of Invest in Sweden, the Swedish investment agency that opened in China at the end of 2002, believes that the time is almost ripe for an explosion of overseas investment. He points to the phenomenon of slow growth in sectors such as telecoms, cars and text messaging in China before the onset of sudden and sustained demand. "In China's economic development the curve is always flat at the beginning but then it takes off very sharply. I expect the same thing to happen with Chinese overseas investment," says Chen in Shanghai. "Companies are preparing now, they believe they have to start doing this and it will happen soon." To supply industry with raw materials and power, the bulk of China's investment overseas remain resource-based-oil and gas in Australia, Indonesia and Thailand, for example. But now Chinese manufacturers are scouting the region for production platforms to penetrate new markets. "Competition in China is fierce and there are a lot of good reasons for companies to start looking around," says Jonathan Anderson, managing director of UBS investment research in Hong Kong. "Typically the consideration is market driven," says Eugene von Keller, president of Roland Berger Strategy Consulting in Shanghai. The primary beneficiaries in the short-term are likely to be Asean countries with relatively liberal investment regimes and large urban markets. (David Murphy in Beijing, Tom Holland in Hong Kong, Helena Yu in Shanghai and Rodney Tusker in Bangkok Contributed to this article) (Courtesy: Far Eastern Economic Review, Feb 5, 2004) (To be continued) |
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