With the recent announcement by the Chinese oil giant CNOOC of its $15 billion bid for Nexen, one of Canada's largest energy companies, Chinese investment in the West is poised to take a massive leap forward. This is a "coup" both for Canada, which is seeking foreign investment in order to exploit its abundant natural resources, and for CNOOC, whose 2005 bid to acquire the American Unocal ended in a very public failure.
The CNOOC-Nexen deal, announced in the middle of a bitter U.S. presidential campaign where China is often portrayed as a bogeyman, will undoubtedly reignite a political debate over the true nature and purpose of Chinese outbound foreign direct investment. To be sure, some of the fears triggered by the surge of Chinese investment abroad are legitimate. Cyber-hacking and intellectual property theft are important and relevant issues. Concerns about national security and trade equality have also shadowed the continued growth of China's economy as it has powered through the global economic slowdown. The fact that the Chinese government has tasked its companies to "go out" and invest abroad in successive five-year plans only fuels the fear that Chinese investment primarily fulfills strategic and political motivations.
Yet while national interest is certainly one of the reasons for Chinese investment abroad, and one America is prudent to be mindful of, it is most definitely not the only motivation. Let us not forget that other real and less threatening factors are at play in the investment decisions of Chinese companies.
Here is our top ten list:
10. Servicing Chinese Companies Abroad. As Chinese state-owned banks help provide M&A consulting services and finance Chinese companies expanding abroad, the banks themselves are also going global. They follow their clients. Industrial and Commercial Bank of China (ICBC) has 244 institutions in 34 countries worldwide, including the U.S. The bank is also planning to offer wealth management services as Chinese companies grow abroad.
9. Proving Themselves. The official Party line is that China wants to rise peacefully, but most Chinese businessmen and women will tell you that China's rise is about regaining the country's place in the world. The central issue here is respect. Many Chinese believe that the financial crises in the U.S. and Eurozone have opened a window of opportunity to prove themselves and gain a stronger foothold in the global economy.
8. Circumventing Trade Barriers. Like Japanese companies in the 1980s, Chinese companies are investing in the U.S. to avoid potential trade barriers such as duties, tariffs and subsidies. Currently, wind turbines, raw earth materials, chicken, steel tubes, solar panels and tires have all been the focal point of a brewing trade war between China and the U.S. One Chinese company, Suntech Power Holdings Co., Ltd., the world's largest manufacturer of solar panels, invested in a solar panel manufacturing facility in Goodyear, Arizona in 2010, partly in anticipation of future trade barriers and a potentially negative verdict in an anti-dumping case launched in the WTO.
7. Increasing Talent. Wage inflation, labor shortages and a rapidly aging population are putting pressure on a developing Chinese economy. Chinese companies are investing in leading American companies to gain the managerial know-how to build multinational companies. They also need the help of a highly educated, skilled American workforce to learn how to move up the value chain in China.
6. Building Brands. China is in desperate need of global brands. According to a recent survey conducted by Millward Brown, 83% of consumers beyond China's borders can't recall a single Chinese brand. Consumer-facing companies such as Haier, Lenovo and Tsingtao Beer have relatively short histories operating in international markets, but have made significant strides forward on this front. Buying Volvo was a quick way for Chinese automaker Geely to build its own brand reputation rather than to develop it from scratch. Many Chinese companies are trying to replicate this model.
5. Diversifying Investment. China has already invested a significant amount of its more than US$3 trillion dollar foreign-exchange reserves into the U.S. economy. A majority of the investment is held in dollar-denominated assets such as government- and institutional-bonds. China also manages another estimated $400 billion through its sovereign wealth fund, China Investment Corporation (CIC). China, rich in foreign currencies, is looking to diversify these holdings in order to escort more Chinese capital into equity markets and infrastructure investments in the U.S.
4. Advancing Technology. Chinese companies are looking for advanced technology across a wide array of sectors. Anshan Iron and Steel and Aviation Industry Corporation of China (AVIC) investments in U.S. companies are two notable examples. These types of acquisitions are to gain access to technology to improve productivity or tap into a rapidly growing industry in China.
3. Securing Resources. Excluding CNOOC's bid for Nexen, since 2010, Chinese companies have invested more than US$17 billion into oil and gas deals in the U.S. and Canada, according to Dealogic. At the helm of these investments are two Chinese companies, CNOOC and China Petroleum & Chemical Corporation Limited (SINOPEC). Their success can be partly attributed to pursuing minority stakes in a non-aggressive public manner. According a recent report by the U.N., China also led in renewable energy spending last year, accounting for a fifth of global investment.
2. Following Policy. The "go out" slogan is largely believed to be first coined by China's Former President Jiang Zemin in 1997. It has evolved from slogan to policy in China's subsequent 10th, 11th and 12th Five-Year Plans. Each plan more specifically defines which areas China wants its companies to invest. Successfully investing abroad results in receiving "face" in China and promotion from the Communist Party.
1. Making Money. Chinese companies are investing in America to make money. It's the sole objective of almost every company, yet it often gets left out of the conversation. Amongst Chinese citizens and government alike, social harmony is valued above all else and at this point in history, harmony equals economic growth.
These factors bring greater dimension to China's outbound foreign direct investment initiatives. While America needs to keep national security in mind, it can benefit from taking into consideration one of the many deeper motivations for Chinese investment.
Co-written with Justin Knapp, director of Ogilvy Public Relations, China Outbound Practice in Beijing, China. Follow him on Twitter @jknapp45
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