Chinomics 101

Chinese MoneyHummer and Saab in Chinese hands? Something that would have raised more than a few eyebrows in the not too distant past is becoming increasingly commonplace: the Chinese are investing abroad. The dragon is truly roaring! Whilst the rest of the world is still scrambling to its feet after the financial crisis China is rapidly increasing its foreign mergers and acquisitions. The times. They are a-changing.

This article written by Professor Winter Nie give us a quick run down of the situation. Let me share with you some of her numbers. From 2002 to 2006 China foreign direct investments outflow grew  at a rate of over 60% per year. At the end of 2008 China’s outward FDI stock was worth nearly $148 billion: about 3.4% of China’s GDP. Impressive numbers. It should be noted however that this is still relatively small compared to the size of it economy. For developing economies this number usually hoovers around 14% (and is almost 27% for the rest of the World). We can only imagine the impact it would have on the world economy if the Chinese decide to up the ante and increase that number to something approaching that average.

So why are the Chinese on a roll? Professor Nie provides us with four main reasons:

1. They need the raw materials. China is poorly endowed with natural resources so Chinese companies have to acquire these resources abroad to secure a strategic supply of key energy and raw materials.

2. The want a bigger cut of the pie. Chinese manufacturers want to escape the low-margin cut throat competition they typically face (from eachother)  by gaining access to more profitable, attractive foreign markets.

3. They want the brands. Chinese companies prefer  simply buying existing brands and sales networks instead of building them from scratch. A good example would be Lenovo’s acquisition of IBM’s Think Pad line.

4. They need the knowledge. The Chinese have good use for (western) capabilities such as R&D and (top of the line) human capital.

It seems the Chinese aren’t done yet by a long shot. They have about 2 trillion dollars in foreign reserves and a voracious appetite for T-Bills. All in all this story may sounds vaguely familiar to the Japanese expansion of the last century. Perhaps it may even evoke the same kind of fear: will professionals in the US and Europe soon be worker bees in a Chinese ruled and owned world economy?

They might very well be. But there’s also a distinct difference between the Chinese and the Japanese.

The the Japanese of the 80s were made sure to install glass ceilings for foreign managers in their companies. The Chinese however are making many of these acquisitions to get access to natural resources, marketing know-how brands, know-how and managerial experience. Take Lenovo for example. After its acquisition an American CEO was put in place and American engineers got prominent positions in the combined company.

A move like that would have been rather bizarre in the eyes of the Japanese of the 80s: who usually believed their own management systems superior to those of the US and Europe. Unlike the Japanese the Chinese seem to want to learn from the companies they buy. A quick mental tour of history’s great empires could give you an idea that this may not be such an unwise strategy at all.