Setting sail on a quest for overseas M&As

House Intelligence Chairman Mike Rogers (left) and ranking member (Representative) Dutch Ruppersberger speak at a news conference releasing their report on alleged national security threats posed by Chinese telecommunications companies Huawei and ZTE on Capitol Hill in Washington DC on Oct 8. However, the negative comment about China's multinationals in some countries fails to dampen the enthusiasm of ambitious Chinese investors eyeing overseas markets. [Photo/China Daily]

According to the Ministry of Commerce, China's outbound direct investments surged by 39.4 percent from a year earlier to $47.68 billion in the first eight months of this year.

Outbound direct investments through mergers and acquisitions maintained fast growth in the first eight months of this year and reached $13.2 billion, accounting for 28 percent of China's overseas direct investment in the same period, according to the ministry.

As the Chinese government encourages domestic enterprises to go abroad to tap international markets, China's overseas investment "experienced rapid growth or leapfrog development and will maintain fast and healthy expansion", said Shen Danyang, a spokesman for the ministry.

Going-out

China's strategic focus was to attract foreign investment in the 1990s. Foreign investment and outbound direct investment have now struck a balance in the first decade of the 21st century. This decade will see massive overseas mergers and acquisitions by Chinese enterprises, said Eddie Chan, vice-president of Invest Sweden.

Having witnessed the growth of Chinese ODI over the past 10 years, Chan has been involved in more than 100 overseas M&As. In his view, the complexity and the professional level of Chinese enterprises in dealing with these cases has been of an international standard. The volatile international economic situation presents tremendous opportunities for forward-looking companies with strategic vision.

"Overseas investment by Chinese entrepreneurs will still focus on developed countries. We will see a number of cross-border investors in the future emerging in China," said Chan.

However, along with the fast outward-going pace come doubts about the efficiency and profitability of these projects.

Shi Ziming, commercial counselor at the Ministry of Commerce's department of outward investment and economic cooperation, said 77.6 percent of the non-financial enterprises have profited from their overseas investments while 22.4 percent reported losses.

Volvo, for example, which was acquired in 2010 by Geely Group, suffered a net loss of 243 million kronor ($38 million) in the first six months of this year. In contrast, it generated a net profit of 1.2 billion kronor in the same period of 2011.

According to Chan, the overseas M&As of Chinese enterprises possess a uniqueness, unlike internal mergers within countries in the West. Chinese companies bring not only capital but the opportunities to explore the Chinese market. "It is a brand new business cooperation model," he said.

"Capital can immediately play a role when the money is there but full exploration of the market will take some time to complete," he added.

"The return period in investment in Volvo has not yet begun but, with its plant completed in China, Volvo will gradually expand the market and see a rise in sales," said Chan who was involved in the Geely-Volvo purchase.

"They (overseas M&As) are the right direction for Chinese enterprises to go in. Despite a temporarily adverse situation, they will eventually see a silver lining," he said.

While Chinese companies are anxiously looking for shelter in overseas markets, European countries are also eager to seek opportunities from the rapid economic growth in China.