Jo Doolan, chair (left) and Florence Wong, director of EY China/New Zealand Network.
Jo Doolan, chair (left) and Florence Wong, director of EY China/New Zealand Network.
China is seeing an outbound investment boom, say Joanna Doolan and Florence Wong.
After more than 30 years of investment-driven growth, China plans to move from its dependence on manufacturing exports to an economy driven by domestic demand.
As a recent EY report on private equity in China notes, executing this change has not been easy. The structural reforms needed for the transition have come at a price - a cut in the country's growth rate. According to the IMF's latest figures, GDP fell from 7.8 per cent in 2013 to 7.4 per cent last year - well short of the double-digit rates China enjoyed as recently as 2010. But these figures are still well ahead of New Zealand's.
In response, the Chinese Government has introduced a raft of fiscal and monetary stimulus measures designed to boost investment across several targeted sectors, including energy, infrastructure, real estate and banking.
Rebalancing the Chinese economy away from a reliance on exports (and low value-added manufacturing) towards a consumption-based economy is a radical change and the EY report says the move will reduce the economic focus on GDP growth at all costs. '"The most fruitful deals of the future will be those done by firms that can add significant operational expertise, financial discipline and good governance practices over an extended period."
The expansion of China's investment footprint is a critical part of this strategy and figures from the Chinese Ministry of Commerce show 5090 Chinese enterprises have already made direct investment offshore in 156 countries and regions, worth US$90.17 billion. To put this in context, since the Global Financial Crisis in 2008, foreign direct investment from China has grown about 40 per cent a year.
Another recent EY report Outlook for China's outward foreign direct investment 2015 clearly shows the new wave of outbound investments is underpinned by government policies and the accelerated implementation of the "One Belt, One Road" strategy.
It also shows Chinese industries are diversifying from "Made in China" to "Made for China". Though these may seem like catchy PR slogans, the Chinese Government has thrown its weight behind these programmes, meaning more can be achieved in a shorter timeframe than in countries like New Zealand.
The objective of this investment has shifted from acquiring production factors (such as resources) to acquiring advanced technology and brands with the aim of increasing the international competitiveness of Chinese companies and meeting the changing domestic consumption.
Many global investors raise a lot of money and invest to generate high returns quickly, and sometimes they are looking for relatively risky investment opportunities. Unlike traditional ways, we want to develop our global opportunities in the next 10 or 20 years, instead of the next three to five years.
How ready are New Zealand companies to benefit from this?
Industries of interest for Chinese-based investors include:
• Asset management companies
• Agrifood industries, ranging from animal feed, seed technologies, food safety and security, and consumer products such as dairy, processed meats, precooked dishes and frozen foods
• Clean-tech and energy conservation technologies
• Pharmaceuticals and health services
• Advanced manufacturing technology
• Consumer products and services relating to lifestyle
• Real estate investments, and related lifestyle and luxury related products and services
The starting point for New Zealand-based companies is to ensure their businesses are investment-ready by engaging in vendor due diligence and generally getting their house in order.
The process should be robust and cover the upside and downside risks. No stone should be left unturned; the disclosure process should be warts-and-all.
Those seeking investment might also want to engage with groups such as EY China Overseas Investment Network (COIN) which has a list of Chinese investors looking for target industries.
After the investment process is complete, it is critical to establish an integration framework so the cultural and expectation differences are proactively managed. These issues are likely to include how you continue to incentivise and empower your staff under the new environment; how you deliver sustainable growth, how you create the right management structure and secure the top talent, what level of engagement you need with your new investors and how approvals and ongoing communications are managed.
It is important to use local professional advisors with the right cross border experience and an intimate understanding of both markets.
The big unknowns include different taxation and regulatory regimes, and cultural barriers.
There are likely to be huge differences in expectations and time horizons - for example, our fast and furious expectations around growth and investment will need to alter dramatically if we are to attract Chinese investment.
For those seeking to do business in China, the market-oriented reforms of the past decade have dramatically changed the business landscape. As the EY report puts it, China is "rife with opportunity". As always, the challenge lies in identifying them.
• Jo Doolan is the chair and Florence Wong the director of EY China/New Zealand Network. If you would like a copy of any of the China reports then email us on joanna.doolan@nz.ey.com
