By Marc Szepan
As China imposes tighter controls on capital outflows, China’s global M&A activities may decelerate. However, German companies are likely to remain attractive targets for Chinese buyers for strategic, geopolitical, and business reasons.
Over the past decade, Chinese investments in Europe in general and in Germany in particular have grown rapidly. This deal flow has remained strong and has accelerated despite, or perhaps because of, the recent slowdown of China’s economy. In fact, Chinese investments in Europe have reached new record levels in 2016.
China’s continuing strong outbound investments need to be understood in the context of China’s larger challenge of significant capital outflows that have resulted in China’s foreign currency reserves dropping to the lowest level since 2011. In response, the Chinese government has initiated wide-ranging measures to limit capital outflows. These include restrictions on outbound investment activities by Chinese firms that, in turn, have led to concerns by some market observers that the halcyon days of China’s global M&A activities might be over.
In the case of Germany, however, there are good strategic, geopolitical, and business reasons to believe that German companies will remain attractive targets for Chinese buyers and that Chinese acquisitions of German companies will remain strong:
China’s long-term industrial strategy
China has launched an ambitious strategic initiative named “Made in China 2025” to achieve technological parity with the world’s leading industrialized economies. Technology upgrading via acquisition is an integral part of this master plan of establishing China as a global innovation and high-tech manufacturing leader. China’s investments in Germany are highly consistent with this industrial strategy. By and large, these acquisitions are not merely cash-generating assets such as hotels or real estate or vanity projects such as soccer clubs. Instead, Chinese companies have typically acquired knowledge-intensive manufacturing and process technology firms. The acquisitions of plastic and rubber machinery manufacturer KraussMaffei Group by ChemChina and of recycling and power generation specialist EEW Energy from Waste by Beijing Enterprises are good examples of this target type. Given the predominantly strategic nature of China’s M&A activities in Germany, it is less likely that similar deals will fall victim to new restrictions on outbound foreign investments.
Flight to quality
Given the rapid growth in China’s outbound investments, it is no surprise that some acquisitions have been of questionable quality and have resulted in a destruction of value for Chinese buyers, private and state-owned alike. The Chinese government has announced that it will tighten audits of foreign investments by state-owned enterprises. This could mean a shift in emphasis to favor high-quality take-over targets. In fact, many German acquisitions have been so-called “hidden champions”, i.e. global technology and market leaders in their respective industries. Midea’s take-over of Kuka, one of the leaders in the global robotics industry, is a case in point. Given intensified government audits of Chinese foreign investments and the resulting potential flight to quality in terms of acquisition preferences, German companies may well become even more attractive as take-over targets.
Given the outcome of the American presidential election, U.S. trade and investment policies toward China are expected to become more hawkish. A potentially tougher U.S. approach to China is likely to impact the viability of Chinese acquisitions in the U.S. as well. The political risk associated with acquiring and selling an American company could become significantly higher, both for the Chinese buyer and the American seller. This increased political risk of making deals in the U.S. could lead to a decrease in relative attractiveness of U.S. acquisitions for Chinese companies and, in turn, could make deals in Europe, including in Germany, more attractive. Significant Chinese financial firepower that has been trained on the U.S. market for corporate control so far could be re-allocated to potential European and especially German acquisition opportunities instead.
Virtually no take-over of a German company by a Chinese buyer has been hostile so far and previous owners have mostly been willing sellers. This willingness to sell to Chinese investors has been driven by a broad range of factors such as the desire to restructure impaired assets, to gain a foothold in the Chinese market, and to secure access to financial resources for future growth. Also, in light of the succession issues faced by many German family-owned companies, one of Germany’s most prominent corporate leaders has pointed out that a strong Chinese investor can be a better alternative than an inadequate family successor. Given these supply-side factors it appears likely that many German firms will continue to be willing sellers.
China’s measures to control capital outflows are likely to impact China’s outbound foreign investment activities in general. However, in the specific case of Germany, there are good strategic, geopolitical, and business reasons to believe that German companies will retain, if not gain, attractiveness as potential targets of Chinese buyers. So even if the 2016 deal-making record will not be topped again in 2017, and barring any geopolitical shocks, Chinese acquisitions of German companies are likely to remain strong.