China Inc’s new low-profile expansion
reEEPGLINT, A CHINESE facial recognition company, was one of 14 companies to be sanctioned by the United States on July 9 for alleged links to human rights abuses in the Xinjiang region, in the far west of the China. It is also a globally recognized leader in its field and has raised funds from Sequoia Capital and other large American investment firms. The founders of DeepGlint, graduates of the American universities of Stanford and Brown, must now discuss with their foreign donors the prospect of a decoupling of the Western commercial sphere. Many Chinese companies have been forced to hold similar talks.
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China Inc appears to be in the background. In America, President Joe Biden picked up where Donald Trump left off, imposing restrictions on Chinese companies. Last year, Congress passed a bill that could eventually force Chinese companies to withdraw from U.S. stock exchanges, affecting the market value by nearly $ 2 billion. Huawei, banned from America, struggles to sell its 5g telecom kit elsewhere in the West. ByteDance was almost forced to part ways with its popular short video app, TikTok, over U.S. concerns that the Chinese regime could gain access to the personal data of global users. Tencent, another internet giant, is reportedly trading with US regulators worried about its 40% stake in Fortnite developer Epic Games.
All over the world, Chinese companies are rightly or wrongly viewed as instruments of the Communist Party. British Prime Minister Boris Johnson said on July 7 that the government would investigate the Chinese acquisition of Newport Wafer Fab, the country’s largest chipmaker, on national security grounds. The Australian Department of Defense could break a 99-year lease with a private Chinese company for a major port. Foreign acquisitions by Chinese companies have grown from some $ 200 billion in 2016 to $ 36 billion in 2020. Cross-border loans, mainly to poor countries, by some Chinese state-owned banks have stopped growing .
This is not the first time that a wave of Chinese business expansion has met with a frosty reception. When commodity giants such as CNOOC, an oil company, began buying foreign reserves, and its rivals in the 1990s stoked fears of resource colonialism. In the 2010s, the aggressive pursuit of Chinese industrial groups against their Western rivals, from chemicals (takeover of Syngenta by ChemChina) to cars (Geely from Volvo) reminded some worried rich world governments of the conquests of Japanese companies in 1980s. At the same time, Chinese acquisitions of trophy assets such as the Waldorf Astoria hotel (by Anbang, a conglomerate) allowed other Westerners to view China Inc as insignificant or dubious (a suspicion confirmed by the subsequent collapse of Anbang and a few similar groups after accusations of fraud).
Now, just as innovative Chinese tech companies have captivated Wall Street, China’s increasingly authoritarian regime is itself holding back its global champions. President Xi Jinping appears determined to disconnect them from Western capital markets and control their data. Tencent and Alibaba, an e-commerce giant, have lost $ 340 billion in market value since the crackdown began late last year. Days after its $ 67 billion New York IPO, Didi found his ridesharing app banned by Chinese data regulators. ByteDance is scheduled to go public in New York.
Speak softly and carry a small check
It all looks like a traitorous climate for Chinese companies. Take a closer look, however, and a new generation of businesses are not only adjusting to it, but thriving. Many have spent years expanding their global operations and are now making as much money outside of China as they are inside. Some are pursuing smaller investments under the radar. And, reversing a decades-old trend of copying Western intellectual property (IP), a few have become technological powerhouses in their own right, selling cutting-edge products to the world.
The scale of China Inc is formidable. China was the world’s largest investor in 2020. Foreign direct investment (IDE) of Chinese companies reached $ 133 billion, down slightly from 2019 despite headwinds (see graph 1). The country has some 3,400 multinationals, almost as many as America and Western Europe combined, says Bain, a consulting firm. About 360 large Chinese listed groups report foreign income. These stood at around $ 700 billion in 2020, up from 250 large companies earning a total of $ 400 billion in 2012, according to Bloomberg data (see chart 2). In 2020, Chinese venture capitalists invested around $ 3.2 billion in U.S. startups in 249 deals, the second-largest year on record in value, calculates Rhodium Group, a research firm. Analysts CB Chinese investor participation in US venture capital deals in the last quarter was reportedly the highest since at least 2016.
The Chinese presence is both deep and broad. Last year, more than 100 of the listed companies made at least 30% of their income outside of China; 27 won 70% or more. In total, China’s top ten foreign workers recorded around $ 350 billion in overseas sales. That total has grown by 10% per year on average since 2005, according to Bain, twice as fast as the equivalent figure in America, Europe or Japan. Tencent’s overseas sales have grown at an annual rate of 40% for nearly a decade and now represent 7% of its huge revenue.
The first element of China Inc’s new global strategy is smart localization. In the past, most Chinese IDE consisted of asset purchases. Last year, on the other hand, much of the profits from overseas operations were reinvested. Hisense, a consumer electronics maker, wants to triple its overseas sales, from $ 7.9 billion in 2020 to $ 23.5 billion in 2025, half of its projected total, Candy Pang said, its marketing manager. That would leave a lot of money to spend on foreign factories, research and development, and marketing (it sponsors the 2022 FIFA World Cup in Qatar, among other sporting events).
Chinese companies have also retained the foreign leadership of their subsidiaries. Despite its recent merger with another state-backed giant, ChemChina has allowed its foreign assets to operate as global companies. Pirelli, which it bought in 2015 for 7.1 billion euros ($ 7.6 billion), still manufactures tires in Italy. Syngenta, for which it paid $ 43 billion a year later, has a head office in Switzerland, a predominantly foreign management team and a nine-person board of directors with just two representatives from the ‘Chinese state. Likewise, Geely allowed outsiders to run Volvo, and Haier, a home appliance maker, kept most of the GE Top brass of household appliances after the acquisition of the American firm. “You can belong to China without having a Chinese-dominated board of directors,” said a Chinese multinational executive.
The second pillar of China Inc’s new globalization strategy is to avoid mega-deals in favor of smaller ones. The speculative wave of overseas investment between 2015 and 2017 engulfed $ 425 billion in assets and raised eyebrows among foreign and Chinese regulators. In contrast, of the 235 outgoing transactions so far this year, only three have been valued at more than $ 1 billion.
The master of mini-chords is Tencent. It has made at least 85 cross-border investments since early 2019, according to Refinitiv, a data provider. Many of these are small holdings taken as part of a larger investor consortium that includes leading non-Chinese private equity groups. This year, for example, Tencent bought a 4% stake in Rakuten, a Japanese internet group, for around $ 600 million, a small change for a giant worth nearly $ 700 billion. He has also continued to invest in America, with at least 12 deals over the past two and a half years, including the purchase of a $ 150 million stake in Reddit, an American online platform that hosts forums. popular chat rooms.
Chinese companies are making their global presence felt in a final way. Rather than diving into foreign countries to buy technology, or copying IP, they will sell theirs, says Bagrin Angelov of CICC, a Beijing-based investment bank. Because Chinese subsidies to electric car and battery makers force them to own part of the heart IP, companies such as BYD, CATL, Gangfeng and SVolt ran to develop it. With that done, they are now targeting export markets. BYD and SVolt sets up factories in Europe. So is CATL, which also announced in December its intention to build a $ 5 billion one in Indonesia.
BeiDou, the response of the Chinese state to that of the United States GPS satellite navigation system, was used by more than 100 countries in 2020, according to EY, a consulting firm. Chinese telecommunications services cover more than 170 countries with a population of 3 billion people. Regardless of US sanctions, Huawei remains a popular choice for 5g networks, even in parts of Europe. Horizon Robotics, which develops autonomous driving systems, counts the German Volkswagen and Bosch among its partners.
And new Chinese stars are rising all the time. Few fashionistas probably realize that Shein, a beloved fast fashion darling from the trendy TikTok ensemble, is Chinese. The company has the best shopping app in 50 countries, including America, where it was downloaded to more iPhones than Amazon in June. OneConnect, a financial technology platform owned by Ping An, a major insurer, sells a number of digital banking products developed for China to banks and other businesses in Asia and beyond. She recently designed an artificial intelligence fraud prevention system for a Sri Lankan lender.
These subtle corporate conquerors could still be thwarted – by the heavy hand of the Chinese Communist rulers or of America and its allies, who are sure to increasingly monitor Chinese trade forays. The emerging Chinese multinationals would then have to adapt again. They have shown themselves to be more than capable of doing it. ■
This article appeared in the Business section of the print edition under the headline “Discreet Expansion”