2015-04-08 14:04:59
More European businesses are coming under Chinese ownership
Mar 28th 2015 | MILAN | From the print edition
ITALIAN industrial policy is now made in Beijing, lamented Romano Prodi, a
former Italian prime minister, on March 23rd. His comment followed news the day
before that China National Chemical Corporation (CNCC), a state-owned
conglomerate, would buy Pirelli, an Italian tyremaker, for 7 billion ($7.7
billion). It will be the biggest Chinese investment in Italy so far, but just
the latest in a string of acquisitions driven by China s growing appetite for
Europe s brands and technology.
CNCC agreed with Pirelli s controlling shareholders to buy Camfin, a holding
company which owns 26% of the tyremaker, as a first step before launching a
takeover bid for the whole group. The deal is in some ways an outlier, not just
because of its size but because its shareholder structure, which includes
Rosneft, a Russian oil firm under American sanctions, ruled out many industrial
partners. Yet it is also part of a trend that has seen China s investment in
Italian businesses grow from almost nothing in 2008 to 6 billion last year,
according to KPMG, an accounting firm.
That made China Italy s biggest source of foreign investment in 2014, and Italy
the biggest beneficiary in Europe of Chinese investment after Britain. Chinese
deals in Europe as a whole rose from $2 billion in 2010 to $18 billion in 2014,
according to research by Baker & McKenzie and the Rhodium Group, a law firm and
a research outfit (see chart).
Chinese firms are following an edict to acquire advanced technology and
high-quality brands from abroad that the government laid down in its five-year
plan of 2011. Until recently most outbound dealmaking was by state firms buying
up raw materials. Now high value-added businesses are the main target, and
private capital is flowing: in 2014 private Chinese firms accounted for 41% of
deal value. Like Japan in the 1980s, China is cash-rich and ready to pay up for
prized assets.
Europe is attractive because it has lots of businesses going cheap
privatisations, cash-strapped firms and a weak euro provide ample opportunities
and because it is open for business. In France and Italy an obsession with
national ownership has been eroded by a need for foreign investment. Germans
are proud that their firms are desired by the world s rising economic power.
America, by contrast, is choosier about who buys its strategic assets.
In Britain, which has long been open to foreign ownership, Chinese firms have
stakes in Thames Water and Heathrow airport. In France they have invested in
Toulouse airport; in PSA Peugeot Citro n, a carmaker; and in Club Med, a resort
operator. In Greece a Chinese firm runs part of the port of Piraeus. In Sweden
Volvo, another carmaker, is also Chinese-owned. InFront, a Swiss firm that is a
big owner of sports-broadcasting rights, has just been bought by a Chinese
conglomerate. And in Italy, besides Pirelli, Chinese firms purchases range
from Ferretti, a yachtbuilder, to Salov Group, an olive-oil producer, and
stakes in Ansaldo Energia, a maker of gas turbines, and Ferragamo, a fashion
house.
China s appetite for European assets, particularly in areas such as technology,
food and property, will keep growing. Less clear is how well Chinese firms can
manage their acquisitions. They are not as quick at learning this as they have
hitherto been at copying foreign products, reckons Alberto Forchielli of
Mandarin Capital Partners, a Sino-Italian private-equity fund. Many are
buffoons when it comes to doing business in the West, he says. They tend to
centralise decision-making in China, while failing to give directions to local
managers, leaving the company in limbo. In cases where Chinese owners leave
their foreign acquisitions managers largely to do their own thing, while
helping them gain access to China s huge domestic market, things go better.
Some deals offer hope. Many scoffed at Geely s acquisition of Volvo in 2010. It
took a while, but Volvo s sales last year hit a record 465,900 cars. The
acquisition by Changsha Zoomlion of Cifa, an Italian maker of concrete pumps,
ultimately led to Asian construction contracts that saved the firm. And Peugeot
s deal with Dongfeng, in partnership with the French government, helped the
firm return to profit in 2014; it is now selling more cars in China than in
France.
Francesco Moccagatta of N+1 SYZ, an adviser on mergers and acquisitions, thinks
Chinese managers are rapidly wising up. Their fluency in English has improved
greatly over the past five years; they are increasingly using big Western
investment banks to handle deals instead of doing things for themselves; and
Chinese admissions to American executive MBA courses are rising. They re going
to kick our arses, he predicts. Maurizio Castello of KPMG agrees that Chinese
investors no longer stumble around like tourists, but says too few of them
understand due diligence and the other processes in M&A deals.
There would be more Chinese purchases of European firms but for a gap in
expectations. Chinese firms are aware that buying and turning round an ailing
foreign business would be beyond them, and yet the family owners of the
best-performing European businesses the ones the Chinese covet are fussy about
whom they might sell to. If the Pirelli deal and others go well, that could
help shift attitudes. If so, and if Chinese firms master the art of doing
business in the West, Mr Moccagatta could be proved right.