Words of wisdom can save pain

When investing in Europe Chinese firms can afford to be more discriminating

Europe has become a popular destination for Chinese investment following the eurozone crisis, with a surging number of Chinese acquisitions.

But to fully take advantage of Europe's investment opportunities, Chinese companies can arguably become more discriminating when selecting acquisition targets, and improve their process to secure these deals.

Europe offers numerous investment opportunities in several key sectors: consumer brands, industrial equipment, natural resources, agriculture, chemical industry, healthcare and clean technology.

As these sectors are often ones where Europe has an advantage, finding value in an acquisition is a question the Chinese investors need to consider.

Take, for example, the talks between China's Ming Yang Wind Power Group and the Danish wind turbine manufacturer Vestas Wind System last year, which were leaked to the media in July, but were followed by silence.

Many analysts suspected that Ming Yang wanted to create value from the acquisition by reducing expenses and headcount in the post-acquisition stage, because in the first quarter of last year, Vestas was making a pre-tax loss of 225 million euros ($294 million), at which time Ming Yang's loss was 116 million yuan ($18 million; 14 million euros).

However, whether and how well a cost-cutting strategy could be implemented is not necessarily guaranteed, considering the huge differences in corporate strategy, culture and human resources of the two companies.

Additionally, as the wind industry already faces the challenge of excess production, perhaps acquiring a similar company, rather than integrating vertically with downstream project developers, is not the best way to go.

In the search for acquisition synergy, there are some innovative sectors that our European competitors are investing in and we could keep an eye out for.

For example, engineering conglomerates such as Siemens, ABB and GE have invested in many leading marine technology players, where either their current equipment can be used or their experience in offshore wind energy development can be applied.

Although at an early stage, the marine technology sector presents significant potential for growth, because of its production predictability, energy intensity and potential to provide 10 percent of the world's electricity needs.

Often these "first mover only" investments are in niche technology sectors, which are difficult to find without the guidance of a good adviser with a deep understanding of these sectors.

Without such guidance, Chinese companies often end up paying much higher prices for mature technologies, such as wind and solar, not realizing that a smaller investment at an earlier stage in innovative sectors such as marine technology can derive large future benefits.

On the other side of the investment spectrum, projects offering relatively stable long-term returns can have unexpected value to Chinese companies.

A Middle East family office that we work with has recently launched its first renewable asset fund, to finance the renewable engineering, procurement and construction company it took onboard last year. The fund was then able to provide the huge upfront capital investment to projects its EPC subsidiary develops, even if the return is only a single-digit one in 25 years.

This type of investment, with a long-term stable income stream, is attracting the interest of some Chinese investors. One example is the Cheung Kong Infrastructure Holdings' investment in Northumbrian Water last year. The UK's electricity network and water sectors are known to provide regulated and nearly guaranteed return, which is generally attractive to cash-rich investors looking for stable income stream.

However, for the majority of Chinese companies to move up their value chains through acquisition in Europe, they would have to focus on mid-market opportunities, where the size of investment ranges between 10 million pounds ($15 million; 11.6 million euros) to 100 million pounds.

In comparison with larger investment in more established companies, such deals would often bring controlling stakes without much capital injection. This means Chinese acquirers could have access to core technologies and other know-how, which they could integrate into and upgrade their Chinese operations.

While many Chinese investors think investment in debt-stricken European companies would be welcomed everywhere, the emerging European technology leaders with the most potential are never short of investors.

They are interested in strategic investors who can offer more than just money: technology learning curve, supply chain optimization and access to market. Even if Chinese investors can offer access to the Chinese market, they will have to form a convincing pitch to win against rivals, where offers for access to their European home markets and the US could normally be on the table.

While Chinese companies may sometimes fear Europe's high human resources costs and strict labor laws, these operational challenges should never become a barrier to Chinese investment there.

We should spend more resources to search for the value of good investments and learn from the West. Local advisers might be worth more than we think, especially when understanding of local regulatory environment and business culture is necessary for greater profits in the long run, and sometimes essential for a deal to proceed at all.

The author is the founder and director of EcoLeap, a boutique strategic advisory firm in London.