July 22, 2010

The Latest Growth Story: China Outbound Investment to the U.S.

by Philip Ma, Managing Director, MergerTech Advisors

Recently I attended an AmCham Shanghai briefing on a June 2010 report they published titled “Chinese FDI in the U.S. – Causes, Case Studies and the Future”. Over the past three decades, much foreign direct investment (FDI) has flowed into China from Western companies looking to set up low-cost manufacturing facilities and gain access to the China market. Now, for a number of reasons, a growing base of FDI is outbound from China to other countries, including the U.S.

According to the AmCham report, Chinese FDI in the U.S. reached US$1.2 billion in 2008. Informal estimates have that figure growing by at least 3x for 2009. Much of this investment has occurred in the automotive,
energy and real estate sectors. Top China FDI deals in the U.S. for 2009 include:

o China Investment Corp acquired an equity stake in AES Corp, a renewable power company, for $1.58 billion

o Jinjiang International Hotels Group entered into a 50-50 joint venture with Thayer Lodging Group with an investment of $150 million

o BeijingWest Industries acquired the automotive suspension and brakes business of Delphi Corp for $100 million

What’s driving this Chinese outbound investment trend? A number of factors:

o Global Economy: the liquidity crunch and economic recession in the U.S. has pushed down asset valuations. At the same time, China has purchased large amounts of U.S. treasuries and accumulated U.S. dollar reserves. With China now starting to let the Chinese Yuan appreciate against the U.S. dollar again, U.S. assets are at very attractive valuation levels for Chinese companies and investors.

o Market Access: many large and mid-sized Chinese companies have ambitious plans to go global with established worldwide brands and global operations to serve customers all over the world. Acquiring U.S. companies is one strategy for gaining access to customers and distribution channels and building up a brand name in the U.S.

o Technology and Know-how: similar to China’s strategy for attracting inbound FDI to gain access to technology and know-how, outbound investment is a way for Chinese companies to acquire advanced technology and move up the value chain of providing high-margin products and services to the U.S. market.

Of course the most prominent Chinese outbound U.S. investment deal in the IT sector is Lenovo’s 2005 purchase of IBM’s personal computer division for $1.75 billion. While the same global economic drivers that exist today were not in place at that time, Lenovo certainly was driven by the opportunity to instantly obtain a global brand, worldwide distribution channels, and advanced technology and know-how.

Lately in the IT services space, we are seeing increasing interest and deal activity in outbound investment from Chinese IT Outsourcing companies looking to grow and gain market access in the U.S., Europe and Japan. Similar to the trend we’ve seen with ITO companies in India, cross-border M&A is a natural evolution of the outsourcing model. Indian ITO companies like Infosys and Wipro have become multinational giants in their own right, and now are looking for growth, market access and technology/know-how via M&A of U.S. IT services companies.

Our Chairman, Martin Wolf, is planning a trip to China later this year, and will give a keynote presentation on this topic in Shanghai. We’ll report back later on insights gained from Martin’s trip.

Shanghai World Expo Notebook:
“People Mountain People Sea” is the literal translation of a Chinese idiom which means crowds of people everywhere. That is certainly the feeling one gets in Shanghai this summer, as the World Expo 2010 is in full swing. With a theme of ‘Better City, Better Life’, more than 200 countries and 50 international organizations have pavilions set up to showcase cultural traditions and the latest in green urban development. Daily attendance averages almost 500,000 people, mostly from other parts of China.

For some of the popular country pavilions like China and Saudi Arabia, people are lining up for up to 7 hours just to get in. Several corporations, including Coca-Cola, Shanghai General Motors, and Cisco Systems have their own pavilions where they are showcasing products, technologies and programs relating to the green theme.

The Shanghai World Expo runs until October 31, 2010. I’ve visited it three times so far, but have mostly only visited some of the smaller, less crowded pavilions. Situated on both sides of the Huangpu River, the Expo grounds are an impressive sight and worth a look, even if only from afar. If you go inside to experience the Expo first hand, be prepared for “People Mountain, People Sea.”