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Focus: Global Supply Chain and Logistics

Our Weekly Feature Article on Topics Related to Global SupplyChain Logistics

From SCDigest's On-Target e-Magazine

Jan. 26, 2011


Global Supply Chain News: China Foreign Acquisitions/Investments Likely to Grow Rapidly - What is the Impact?

Natural Resources and High and Emerging Tech are Key Targets; Recent Investments in European Logistics; Level of Investment to Quadruple by 2020?


SCDigest Editorial Staff


While the perception that China is making massive foreign investments with its huge reserves of foreign currencies is not exactly correct to date, the country's investment activity is clearly rising rapidly, and is expected to accelerate even further due to a variety of factors.

How that will play out in business and political circles remains to be seen.

Acquisitions and investments from China can come from private Chinese companies, the Chinese government itself, and the enterprises there that are a private-government hybrid.

SCDigest Says:

Wolfe says that the level of Chinese investment and acquisitions will double in the next 5 years and possibly quadruple by 2020.
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Investment activities from all three of these entities in recent years have raised hackles in the US and other countries, for several reasons. For example, China has been perceived to be "locking up" natural resources through investments in a variety of commodity-related companies, especially in Africa and South America, and more recently Canada and Australia.

A proposed major investment last year by Chinese metals company Chinalco in Australian ore giant Rio Tinto, for example, met with strong resistance by both shareholders and the government there, ultimately scuttling the plan.

Lately, China has also been turning its attention to natural resource companies in Canada. This week, its sovereign wealth fund - basically an investment vehicle of the Chinese government - announced it was opening an office in Toronto, following billions of investments in the country in areas such as companies operating in the Alberta oil sands and other resource plays.

For example, the Chinese Investment Corp. (CIC), the actual execution arm of China's sovereign fund, paid $817 million (Canadian) for a 45% stake in an Alberta oil sands project owned by Penn West Energy Trust, and $435 million for a 5% interest in the total company.

Just this week, China's state-owned Wuhan Iron and Steel Group Co., China’s third-largest steel producer, was reportedly to have agreed to acquire a 60% stake in an iron ore joint venture with Adriana Resources Inc., a Toronto-based iron ore explorer, for $120.7 million.

Also this week, Regent Pacific Group Ltd., a Hong Kong-based mining company, is said to be planning to acquire BC Iron Ltd, an Australian mining company.

Potential Chinese investments in non-resource related companies have also raised concerns for a variety of reasons. In 2008, for example, plans by Chinese electronics giant Huawei Technologies to acquire network company 3Com were thwarted, nominally over some defense and security related concerns (3Com did a modest amount of US department of defense business), but appeared to actually also raise more fundamental reactions to the idea of a Chinese company taking over a large US electronics firm.

Last year, China's Anshan Steel signed an agreement for a significant investment stake in a steel mill under construction at Amory of Mississippi, which would have given China its first domestic foothold in the US steel industry. It was fought vigorously by US steel producers, but is now moving forward.

Of late, China has also turned its attention to Europe, smartly playing the opening that economically hard hit countries such as Greece, Portugal and Ireland have given it.

"China is concentrating its efforts on ports in Greece and Italy and highways that link Eastern Europe to Germany and Turkey, and aims to secure larger infrastructure investments over time," the New York Times recently reported. "It has provided billions of dollars in state financing for key public works projects that support Chinese state-owned companies and Chinese workers."
Such moves could give China a bigger presence in the European chain of distribution and production, while allowing it to build a track record of investments that it hopes will also encourage Europe to support its position on divisive currency issues and in trade disputes at the World Trade Organization.

(Global Supply Chain Article Continued Below)



Just the Start of China's Investment Plans

Despite all of this activity and concerns by many relative to the growth of Chinese foreign investment, the reality is that China is just getting started.

From 2007 through the first half of 2010, China-related entities acquired or invested in some 400 companies in the rest of the world, spending about $86 billion to do so, according to the RAND Corp.'s Charles Wolfe Jr.

But in total there were a total of some 12,400 companies that received cross border investments or were acquired during that period, to the tune of about $1.3 trillion in total spend.

In fact, China was only sixth in the number of such deals, behind the US, the UK, France, Germany and Japan.

But, like everything else with China, that pecking order is likely to change quickly.

The pace of such foreign investments by China is growing rapidly. China's share of about 6.6% by dollar value in cross border investment over the last three years is up substantially from almost no such investments before 2007.

Wolfe says there are three reasons why the pace of Chinese foreign investment is almost sure to accelerate.

1. The country's huge savings rate - some 45% of GPD. With its domestic investment rate of about 35%, this means China will continue to build huge trade surpluses and foreign currency reserves. China currently has some $2.85 trillion of such reserves, and will increase them by more than $300 million or more annually for many years.

2. China wants to shift away from channeling a substantial percent of those reserves into US bonds; direct foreign investment is a natural alternative.

3. Most importantly to the global supply chain, China has a strategic plan of acquiring companies that posses either natural resources, high tech or emerging technologies, or global financial expertise.

Wolfe says that the level of Chinese investment and acquisitions will double in the next 5 years and possibly quadruple by 2020. That would likely make it the number one global investor, from its sixth place position now, or at least be close to on par with the US.

But it may be a bumpy ride. Wolfe says China's investment expansion "could also lead to increased tension with the host countries, especially in light of the marked disparities between the restrictions it imposes on foreign investor's acquisitions within China and the looser one usually imposed on China's acquisitions abroad."

What do you think will be the impact of China's foreign investment surge? Should the US or other countries be worried about China's natural resources strategies - or its growing movement into the European supply chain? Should Western countries block China investment until it loosens its own internal investment rules? Let us know your thoughts at the Feedback button below.

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