Comparing Chinese Investment Into North Americaand Europe

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Comparing Chinese Investment into North America and Europe 2 Bird’s Eye View: Comparing Chinese Investment into North America and Europe

TABLE OF CONTENTS

EXECUTIVE SUMMARY...... 03

INTRODUCTION...... 04

A CHINESE INVESTMENT BOOM...... 06

CHINA’S BROADENING GEOGRAPHIC PRESENCE...... 08

NEW DRIVERS OF OUTBOUND INVESTMENT...... 13

CHINESE PRESENCE ACROSS INDUSTRIES...... 18

DEAL STRUCTURES AND INVESTOR MIX...... 34

THE ROLE OF POLICY AND REGULATIONS...... 40

OUTLOOK...... 47

REFERENCES...... 49

DATA RESOURCES...... 50

APPENDIX: DATA METHODOLOGY...... 51

GLOSSARY OF TERMS...... 52 BAKER MCKENZIE 3

EXECUTIVE SUMMARY

Three decades of Chinese economic modernization and globalization have transformed the global economy. Now China has entered a new stage of economic development which will accelerate its financial integration and give China a greater role in global capital flows. Chinese outbound foreign direct investment (OFDI) has grown rapidly in recent years and is increasingly flowing to high-income economies. This report analyzes transactional data to compare the growth of Chinese investment in Europe and North America, the world’s two largest economic regions, including investment patterns and drivers as well as economic and political risk factors that could impact future investment flows. Europe and North America have emerged as major destinations for Chinese investors, with Europe slightly in the lead: Before 2008, both regions received, on average, less than $1 billion of Chinese OFDI per year. In 2015, the combined value of Chinese acquisitions and greenfield projects in Europe and North America totaled $40 billion. The levels of Chinese investment in both regions have grown in tandem, but Europe ($23 billion) was slightly ahead of North America ($17 billion) in 2015. The shift of Chinese OFDI toward mature economies is driven by changes in the Chinese economy that are propelling interest in new types of overseas assets: Europe and North America are attractive destinations as Chinese firms seek to tap into advanced technology and manufacturing capabilities, strengthen brands and know- how in services, and diversify into safe-haven assets to hedge against economic risks in China. While drivers are similar, Chinese investment patterns in Europe and North America clearly reflect the economic strengths of each region: Europe has been a greater attraction for Chinese investors seeking advanced manufacturing assets, given the abundance of leading small and medium-sized manufacturers. North America has received greater investment in advanced services sectors including entertainment, health and software. Differences in policy and regulations also matter: Europe’s need for infrastructure and transportation investment and its active pursuit of Chinese participation have attracted $10.5 billion of Chinese investment in airports, power generation, water supply and other infrastructure assets. This is nearly three times the amount recorded in North America. The mix of Chinese investors is evolving, with significant differences between both regions: Private sector companies now drive Chinese investment in North America, accounting for 80% of total investment in 2015. Private sector investment in Europe has also increased, but state-owned enterprises still account for the majority of Chinese investment (more than 65% in 2015) due to large deals in the industrial sector, privatization bids and greater investments from sovereign funds. The role of financial investors such as insurance companies, financial conglomerates and private equity firms is growing in both regions. 2016 will likely be another record year for Chinese investment in Europe and North America: The economic slowdown in China, uncertainty about the renminbi exchange rate, and other factors have further boosted Chinese deal-making activity since the second half of 2015. The first quarter of 2016 was the busiest period on record for Chinese outbound deal making, with announced acquisitions of more than $60 billion in Europe and $30 billion in North America. 4 Bird’s Eye View: Comparing Chinese Investment into North America and Europe

INTRODUCTION

More than 15 years ago, China’s government openly embraced outbound investment by Chinese companies for the first time as a cornerstone of modernization and development.1 Today, Chinese outbound foreign direct investment (OFDI) has become a megatrend that is shaping global deal making, international value chains, and China’s political relationships abroad. Chinese OFDI has grown an average of 15% per year since 2005, lifting China’s OFDI stock to more than $1 trillion by 2015 and catapulting China into the top three of FDI exporters globally.

FIGURE 1: CHINA’S GLOBAL OFDI FLOWS AND STOCK, 2000–2015 USD billionChinese Global OFDI Stock Chinese Global OFDI Flow (Right Axis) (Left Axis) 140 1,200

120 1,000

100 Chinese Global OFDI Stock 800 (Right Axis) 80 Chinese Global OFDI Flow 600 (Left Axis) 60 400 40

20 200 Source: Ministry of Commerce, State Administration of Foreign Exchange. *2015 0 0 number estimated by combining preliminary 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* data on financial and non-financial OFDI.

The mix of Chinese OFDI is years, however, the overhaul advanced economies, driven by evolving rapidly. In the early years, of China’s growth model, the the growing desire to purchase China’s OFDI boom was marked drop in resource demand, and brands, technology and safe- by large projects, dominated a significant liberalization of haven assets. A 2015 Baker by SOEs and focused on energy outward investment regulations McKenzie report examined how and natural resources. This have transformed the nature of this shift is increasingly bringing push brought China all over the Chinese OFDI. Chinese companies to the world, but mostly to developing economies of the European One of the most visible trends of countries with an abundance Union.2 This report builds on that this new era of Chinese OFDI is a of such resources. In recent research, evaluating Chinese OFDI sharp increase of investment in in the two largest

1. See Daniel H. Rosen and Thilo Hanemann (2009): “China’s Changing Outbound Foreign Direct Investment Profile: Drivers and Policy Implications,” Peterson Institute for International Economics. 2. See “Reaching New Heights: An update on Chinese investment into Europe,” Baker & McKenzie (2015). BAKER MCKENZIE 5

FIGURE 2: EUROPE, NORTH AMERICA AND CHINA IN THE GLOBAL ECONOMY*, 2014

$192 BILLION

$28 BILLION IN FDI STOCK

IN FDI STOCK $219 BILLION IN FDI STOCK

$401 BILLION IN FDI STOCK $72 BILLION IN EXPORTS IN EXPORTS

IN EXPORTS $32 BILLION IN EXPORTS

$188 BILLION

$543 BILLION

$2.6 TRILLION IN FDI STOCK

$328 BILLION IN EXPORTS

$496 BILLION IN EXPORTS

Source: Eurostat, BEA. *In this chart, Europe refers to the EU-28 only. Export figures represent annual flows in 2014.

high-income regions in the world, regions have invested billions of assessment of China’s OFDI catch- Europe and North America.3 These dollars and built extensive trade up in Europe and North America. two regions are still the major links with the third emerging pole It is built on a unique transactions poles of the global economy, of the global economy, China. And dataset that allows a granular and accounting for nearly 50% of global while westward OFDI from China comparative analysis of Chinese GDP, 50% of global trade and more has been small in the past, China investment patterns, describing than 60% of the global FDI stock. is catching up rapidly. the similarities and differences in They are also deeply integrated. both regions.4 This report provides the first Over the past two decades, both comprehensive and comparative

3. The report covers the United States and Canada in North America, and the EU, Switzerland and the remaining EFTA economies (Norway, Iceland and Liechtenstein) in Europe. These countries are considered advanced economies with similar development levels. 4. For a detailed description of the dataset used for this report, please see the Appendix. 6 Bird’s Eye View: Comparing Chinese Investment into North America and Europe

A CHINESE INVESTMENT BOOM

China has not been a major investor in Europe and North America for the past three decades. In the past five years, however, Chinese OFDI has grown rapidly in both regions, representing a broader shift of Chinese OFDI away from developing countries and toward high-income economies. Before 2008, both regions received, on average, less than $1 billion of Chinese OFDI per year. In 2015, the combined value of Chinese acquisitions and greenfield projects in Europe and North America totaled $40 billion. While Chinese investment levels grew in tandem in both regions, Europe ($23 billion) was slightly ahead of North America ($17 billion) in 2015.

CHINA WAS LARGELY ABSENT FROM EUROPE AND NORTH AMERICA UNTIL RECENTLY For decades, North America and and vice versa. Investors from other in mature market economies. Europe have been the world’s biggest parts of the world, including Asia Chinese presence in Europe and recipients of foreign direct investment Pacific, have also become significant North America was limited to small due to their size, economic diversity, investors in Europe and North greenfield projects, such as trading or political stability and openness. America since the 1980s. representative offices, and a handful Together, the two regions host more of larger operations by state-owned China, however, has not been a than 60% of the world’s total FDI enterprises in shipping and other significant investor in either region stock. This partially reflects their export-related industries. According until recently. Chinese companies deep transatlantic economic ties, with to official statistics, China accounted did not have the motive, the capacity Europe accounting for around two- for less than 1% of total FDI stock in or the political permission to invest thirds of North America’s FDI stock, Europe and North America in 2014.5

FIGURE 3: FDI STOCK IN THE Africa 0.8% China EUROPEAN UNION AND NORTH China Other 1.1% 0.5% Americas Africa Asia excl. 5.2% AMERICA BY REGION AND COUNTRY China 9.6% 0.2% OF ORIGIN, 2014* Asia excl. Percent of total China 19.5% Other Americas 20.9% North Europe North America America Source: BEA, Eurostat and Statistics Canada. non-EU 45.2% Europe *In this chart, Europe refers to the EU-28 only. Europe 74.1% Canada and the US are grouped together as 23% North America and their FDI stocks from each other are excluded.

5. While we argue that official statistics do not adequately capture the extent and patterns of Chinese OFDI in both regions (see Appendix), this assessment still holds true even if we use transactional data. BAKER MCKENZIE 7

FIGURE 4: CHINESE OFDI TRANSACTIONS IN EUROPE AND NORTH AMERICA, 2000–2015 Annual aggregate values, USD billion

35,000 Europe North America

30,000

25,000

20,000

15,000

10,000

5,000

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Rhodium Group.

CHINA IS PLAYING CATCH-UP IN BOTH REGIONS

While China’s share of both regions’ arising from privatization efforts compared to $97 billion in Europe. FDI stock remains miniscule, its in Europe, and growing interest While North America is slightly importance in new annual flows in technology, brands and other ahead of Europe in terms of is growing rapidly. Chinese OFDI mature assets. cumulative investment value over in Europe and North America has the entire period, Europe had a The years 2014 and 2015 marked a expanded steadily since the mid-2000s small lead over North America in new stage, with Chinese investment and particularly accelerated in the past all but one of the past five years. In levels in both economies exceeding five years. Up until 2008, the annual 2015, Europe received $23 billion of $15 billion each year despite an transaction value remained below OFDI from China, compared to $17 almost complete disappearance of $1 billion in both regions with the billion in North America. investments in energy, metals and exception of a handful of larger deals. other resource assets. The plunge Largely shielded from the financial in extractive sector investment was disruptions in the West, Chinese made up for by a robust and broad- investors further expanded their based increase of OFDI across all overseas investments after the other industries and asset classes financial crisis, against the global and the emergence of new investors While China’s share of both trend. Annual investment in Europe not previously active in Europe and regions’ FDI stock remains and North America climbed to $10 North America. miniscule, its importance in billion in 2011 and 2012, driven From 2000 to 2015, the value of new annual flows is growing by continuous interest in natural Chinese OFDI transactions in resource assets, opportunities rapidly. North America totaled $108 billion, 8 Bird’s Eye View: Comparing Chinese Investment into North America and Europe

CHINA’S BROADENING GEOGRAPHIC PRESENCE

The OFDI boom of the past five years has broadened the footprint of Chinese companies across Europe and North America. In North America, Chinese firms have extended their presence from major coastal cities and industry clusters to most of the larger urban areas, as well as an increasing number of rural economies. In Europe, Chinese investors used to be focused on “core” European economies (Germany, France and the UK) but have now become significant investors in Southern, Northern and Eastern Europe as well.

COMING TO AMERICA

Before 2008, meaningful Chinese auto cluster, which recorded over production industry, North investments in North America were 20 deals worth nearly $1 billion Carolina’s research triangle largely concentrated in big coastal in this period, is one example. and Maryland’s pharmaceutical states such as California and New Local economies with existing cluster. Finally, the purchase of York, a few states with singular ties to China saw a big increase the biggest US pork producer and pioneering investments, such as in medium and small-sized processor, Smithfield Foods, and a North Carolina, and Canadian investments across a range of few other transactions have led to provinces hosting the first Chinese industries, most notably big urban Chinese presence in rural areas investments in oil and gas. areas in California. in the Midwest and elsewhere. By the end of 2015, 48 out of 50 Chinese presence broadened The geographic mix of Chinese US states and 10 of 13 Canadian significantly in the period from investment broadened further provinces were hosting Chinese 2008 to 2012, driven by large from 2013 to 2015. A big jump of investments. investments in unconventional oil investment in commercial real and gas assets in Texas, Oklahoma, estate gave Chinese companies Colorado and Wyoming. Alberta, a foothold in most major US and Quebec and British Columbia Canadian cities. Growing interest also received large inflows of in advanced manufacturing By the end of 2015, 48 out Chinese capital in energy, metals capabilities, research and of 50 US states and 10 of and other extractive sectors. development (R&D), and other 13 Canadian provinces Chinese investment also began services has increased Chinese to reach regions hosting industry presence in other industry were hosting Chinese clusters of interest to early clusters, including Silicon Valley’s investments. Chinese globalizers. Michigan’s tech scene, Hollywood’s movie BAKER MCKENZIE 9

FIGURE 5: GEOGRAPHIC DISTRIBUTION OF CHINESE OFDI TRANSACTIONS IN NORTH AMERICA OVER THREE DIFFERENT PERIODS | USD billion

2000–2007 Cumulative Value: $8.5 billion

YT NT NU PE NL Top 5 Deals ME AK BC AB SK MB ON QC NB NS Target Value Location Date VT NH

WA MT ND MN WI MI NY MA RI PetroKazakhstan $4.2 Alberta 2005

ID WY SD IA IL IN OH PA NJ CT IBM PC division $1.8 North Carolina 2005

OR NV CO NE MO KY WV VA MD DE Peru Copper $0.8 British Columbia 2007 CA UT NM KS AR TN NC SC DC MEG Energy stake $0.1 Alberta 2005 AZ OK LA MS AL GA Balas mine $0.1 British Columbia 2006 HI TX FL

$5 bn+ $1 bn-$5 bn $100 mn-$1 bn less than $100 mn 0

2008–2012 Cumulative Value: $38.3 billion

YT NT NU PE NL Top 5 Deals ME AK BC AB SK MB ON QC NB NS Target Value Location Date VT NH

WA MT ND MN WI MI NY MA RI AMC $2.6 Kansas 2012

ID WY SD IA IL IN OH PA NJ CT Devon Energy stake $2.5 Oklahoma 2012

OR NV CO NE MO KY WV VA MD DE EnCana stake $2.2 Alberta 2012 CA UT NM KS AR TN NC SC DC Daylight $2.1 Alberta 2011 AZ OK LA MS AL GA OPTI Canada $2.1 Alberta 2011 HI TX FL

$5 bn+ $1 bn-$5 bn $100 mn-$1 bn less than $100 mn 0

2013–2015 Cumulative Value: $60.3 billion

YT NT NU PE NL Top 5 Deals ME AK BC AB SK MB ON QC NB NS Target Value Location Date VT NH Nexen* $13.6 Alberta 2013 WA MT ND MN WI MI NY MA RI Smithfield $7.1 Virginia 2013 ID WY SD IA IL IN OH PA NJ CT

OR NV CO NE MO KY WV VA MD DE Motorola Mobility $2.9 Illinois 2014

CA UT NM KS AR TN NC SC DC IBM x86 server $2.0 North Carolina 2014 division AZ OK LA MS AL GA Luxury New York City $2.0 New York 2015 HI TX FL hotel

$5 bn+ $1 bn-$5 bn $100 mn-$1 bn less than $100 mn 0

Source: Rhodium Group. *Deal value is split between Nexen’s Canadian assets in Alberta and its US assets in Texas. This value is only for Canada. 10 Bird’s Eye View: Comparing Chinese Investment into North America and Europe

TABLE 1: TOP RECIPIENT US STATES/CANADIAN PROVINCES FOR CHINESE OFDI, 2000–2015 Cumulative value, USD billion

US State/Canadian Value of OFDI Top Industry Largest Investment Province Transactions Alberta $32.94 Energy Nexen ($13.6) New York $9.88 Real Estate and Hospitality Luxury New York City hotel ($1.95) California $9.11 Real Estate and Hospitality Integrated Silicon Solutions ($0.8) Virginia $8.85 Agriculture and Food Smithfield ($7.1) Texas $7.04 Energy Nexen Gulf of Mexico assets ($1.5) British Columbia $4.73 Metals and Minerals Teck Resources stake ($1.5) North Carolina $4.65 ICT IBM x86 division ($2.0) Illinois $3.91 ICT Motorola ($2.9) Oklahoma $3.67 Energy Devon energy assets ($2.4) Michigan $3.04 Automotive Henniges Automotive ($0.6)

Source: Rhodium Group.

EUROPEAN EXPANSION In Europe, Chinese investment over $2 billion in 2012. Coinciding China’s investment footprint followed a similar trajectory with with the global push for natural in Europe further broadened several important differences. resources investment, Chinese from 2013 to 2015. The “Big Before 2008, Chinese companies investors deployed capital in Three” economies of France, generally had a broader geographic European economies that were Germany and the UK continued presence in Europe than in North hosting firms with extractive to register elevated levels of America because language assets and related technological Chinese investment, driven by barriers and national borders capabilities, most importantly strong interest in high-tech necessitated a greater number of the UK, Norway and Switzerland. manufacturing and demand local operations.6 However, most In crisis-stricken Southern for safe-haven assets such of these operations remained Europe, Chinese investors took as commercial real estate. small. Significant investments were advantage of the privatization of Switzerland also became a major concentrated in the big European state assets in utilities and other target, through a mix of industrial economies, most importantly sectors. Chinese companies also and service sector investments. France, Germany and the UK. From made their first major forays into After a brief dip in 2013, 2000 to 2007, these three countries Eastern European economies. Southern Europe attracted large hosted more than half of total Chinese investment in Europe. These patterns evolved from 2008 to 2012 due to shifting Receiving just 2% of total Chinese investment from 2013–2015, Chinese interests as well as Eastern Europe continues to play a small role in China’s opportunities resulting from the European portfolio, but several large pending projects and the European financial crisis. Germany remained a focus of attention, with “One Belt, One Road” initiative could further boost Chinese investment growing steadily from presence in the region in coming years. around $250 million in 2008 to

6. One such example is ICT giant Huawei, which set up more than 30 offices across 16 countries between 2000 and 2008. BAKER MCKENZIE 11

investments from China in the past agriculture, advanced technology several large pending projects two years, accounting for nearly and financials. Receiving just and the “One Belt, One Road” 40% of total Chinese investment in 2% of total Chinese investment initiative could further boost Europe in 2015. Investments in the from 2013–2015, Eastern Europe Chinese presence in the region Benelux countries also increased continues to play a small role in in coming years. markedly in this period, focused on China’s European portfolio, but

FIGURE 6: GEOGRAPHIC DISTRIBUTION OF CHINESE OFDI TRANSACTIONS IN EUROPE OVER THREE DIFFERENT PERIODS | USD billion

IS 2000–2007 Cumulative Value: $4.4 billion NO SE FI Top 5 Deals EE Target Value Location Date IE GB DK LT LV

BE NL DE PL Drakkar Holdings $0.5 Belgium 2006 Rhodia Silicones division $0.5 France 2007 FR LU CH CZ SK TTE joint venture $0.3 France 2004 PT ES IT AT LI HU RO

SI HR BG Antwerp Gateway stake $0.2 Belgium 2004

MT GR Monterrico Metals $0.2 UK 2007 CY

$5 bn+ $1 bn-$5 bn $100 mn-$1 bn less than $100 mn 0

IS 2008–2012 Cumulative Value: $42.5 billion NO SE FI Top 5 Deals EE Target Value Location Date IE GB DK LT LV Addax $7.2 Switzerland 2009 BE NL DE PL Energias de Portugal $3.5 Portugal 2012 FR LU CH CZ SK stake IT AT LI HU PT ES RO GDF Suez stake $3.2 France 2011 SI HR BG Awilco Offshore $2.5 Norway 2008 MT GR CY Elkem $2.2 Norway 2011

$5 bn+ $1 bn-$5 bn $100 mn-$1 bn less than $100 mn 0

IS 2013–2015 Cumulative Value: $49.1 billion NO SE FI Top 5 Deals EE Target Value Location Date IE GB DK LT LV Pirelli $7.7 Italy 2015 BE NL DE PL

FR LU CH CZ SK CDP Reti stake $2.8 Italy 2014 Nidera stake $2.0 Netherlands 2014 PT ES IT AT LI HU RO NXP Semiconductors RF $1.8 Netherlands 2015 SI HR BG division MT GR Louvre Hotels $1.6 France 2015 CY

$5 bn+ $1 bn-$5 bn $100 mn-$1 bn less than $100 mn 0

Source: Rhodium Group. 12 Bird’s Eye View: Comparing Chinese Investment into North America and Europe

TABLE 2: TOP EUROPEAN RECIPIENT COUNTRIES OF CHINESE OFDI, 2000–2015 Cumulative value, USD billion

European Country Value of OFDI Top Industry Largest Investment Transactions UK $19.52 Real Estate and Hospitality Weetabix ($1.9) Italy $12.79 Automotive Pirelli ($7.7) France $11.65 Energy GDF Suez stake ($3.2) Germany $10.01 Industrial Machinery and Equipment Kion Group ($1.7) Switzerland $9.38 Energy Infront Sports ($1.2) Portugal $7.13 Transport and Infrastructure Energias de Portugal ($3.5) Netherlands $6.51 Agriculture and Food Nidera ($2.0) Norway $6.02 Energy Awilco Offshore ($2.5) Hungary $2.70 Basic Materials BorsodChem ($1.9) Sweden $2.11 Automotive Volvo ($1.5)

Source: Rhodium Group. BAKER MCKENZIE 13

NEW DRIVERS OF OUTBOUND INVESTMENT

The recent growth and diversification of Chinese investment in Europe and North America can be traced to changes in China’s growth model, which are incentivizing Chinese companies to buy into advanced technology and manufacturing capabilities, strengthen brands and know-how in services, and diversify into safe-haven assets. At the same time, the patterns of investment in both regions clearly show distinct differences that reflect local economic strengths and specific opportunities in host countries. 14 Bird’s Eye View: Comparing Chinese Investment into North America and Europe

CHINA’S TRANSITION TO A NEW GROWTH MODEL

After more than three decades of debt financing and investments make market forces decisive, to rapid economic modernization, are showing diminishing returns promote industrial upgrading and the drivers of China’s old growth in many sectors. Total factor services sector growth, and to model—abundant low-cost labor, productivity gains are also fading further open up to international high returns to basic investment, as dividends from export-oriented trade and investment flows.7 These and massive economies of scale reforms and economies of scale in reforms will transform the Chinese and scope—are weakening. manufacturing are drying up. marketplace in many areas and Demographic dividends propelled force Chinese companies to These challenges require China to China from the 1980s to the 2000s, rethink their business models. fundamentally overhaul its growth but the labor force is poised to The transition to a new growth model to successfully manage the shrink. Over the past decade, model is a catalyst for the greater transition from a middle-income capital formation and financial international ambitions of Chinese to a high-income economy. In suppression powered investment- companies and a major driver of November 2013, China’s new led growth, but it is increasingly Chinese investment patterns in leadership laid out an ambitious difficult to find productive uses for Europe and North America. overhaul plan that pledges to

THE BOOM AND BUST IN NATURAL RESOURCES INVESTMENT

The first important trend is a abundance and the boom in for extractive assets changed sharp drop in Chinese outbound unconventional oil and gas radically, and investment in Europe investment in natural resources, extraction since the mid-2000s. and North America shrunk to less partially in response to a decline China’s energy and metals OFDI than $2 billion for 2014 and 2015 in global commodity prices, driven in Europe can be attributed to combined. The appetite of Chinese by the outlook of a lower resource investments in global commodity investors was shaken by sweeping intensity of economic growth firms headquartered in Europe and changes to the resource-intensive in China. a few investments in local assets in growth model and a fierce anti- Norway and the UK. corruption campaign, which led to Energy, metals and minerals the detention of several executives were primary targets of the The bulk of this investment at major SOEs.8 The steep drops first wave of Chinese outbound occurred in a five-year period in energy prices and company investment, and they account for (2008–2013), driven by soaring valuations since 2013 have not yet more than one-third of combined Chinese demand and strong spurred meaningful opportunistic Chinese investment in Europe policy support for upstream buying by Chinese investors, and North America from 2000 resources investment. State- but secular demand growth and to 2015 ($70.9 billion, or 35%). owned enterprises and declining domestic production North America received twice as government-owned investment suggest a rationale for expanding much Chinese extractive OFDI as funds accounted for virtually and diversifying stakes in overseas Europe ($43 billion compared to all investment in this sector. upstream oil assets in the long run. $20.8 billion) due to geographic Starting in 2013, China’s quest

7. See Daniel H. Rosen (2014): Avoiding the Blind Alley: China’s Economic Overhaul and Its Global Implications, Rhodium Group. 8. Chinese Corruption Probe Stretches into Canada, Wall Street Journal, July 28, 2014. http://www.wsj.com/articles/chinese-corruption-probe- stretches-into-canada-1406588882 BAKER MCKENZIE 15

FIGURE 7: SECTOR BREAKDOWN OF CHINESE OFDI IN EUROPE AND NORTH AMERICA, 2000–2015 Cumulative value in both regions, USD billion

$7,000 5,000 5,000 Agriculture and Food Financial and Business Services

2,500 2,500

0 0

$8,500 5,000 5,000 Automotive Health and Biotech

2,500 2,500

0 0

$6,500 5,000 5,000 Aviation ICT

2,500 2,500

0 0

5,000 5,000 Basic Materials Industrial Machinery and Equipment

2,500 2,500

0 0

5,000 5,000 Consumer Products and Services Metals and Minerals

2,500 2,500

0 0

$8,000 $12,000 5,000 5,000 Real Estate and Electronics Hospitality

2,500 2,500

0 0 $8,000 $9,500 $8,000 $19,000 5,000 5,000 Energy Transport and Infrastructure

2,500 2,500

0 0

5,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Entertainment

2,500

0 Source: Rhodium Group. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 16 Bird’s Eye View: Comparing Chinese Investment into North America and Europe

MOVING UP THE VALUE CHAIN manufacturing capabilities. The most attractive sectors are In 2015 alone, Chinese One critical driver of Chinese automotive, industrial machinery, investors poured a combined investment activity in North America renewable energy and information $4.6 billion in banking, and Europe since the mid-2000s, and technology equipment. In North particularly over the past three years, America, Chinese companies are insurance and asset is a strategic push for upgrading mostly looking for information management investments, technology and know-how. Rising technology equipment, which is more than the total factor input costs (especially labor automotive parts, biotechnology, Chinese OFDI in this sector and environmental compliance) semiconductors and aviation. and local impediments to greater in the previous 14 years. economies of scale are putting GETTING CLOSER TO THE unprecedented pressure on Chinese manufacturers to escape their focus CUSTOMER on low-end production and move up In addition to upgrading their started to dip their toes into retail the value chain and transition to a technology and product mix, markets in large European and new growth model. The majority of Chinese manufacturers need US cities. Private companies are manufacturing firms facing these to build out local capacities leading the way, leveraging their pressures are private entities, but for selling more sophisticated consumer-oriented dominance in state-owned companies in industries products and services to their China. like automotive and aviation are facing European and North American similar challenges. North America consumers. Switching from GEARING UP FOR A and Europe offer an abundance exporting electronics, toys SERVICES BOOM of companies with world-class and underwear to selling cars, In addition to investments aimed technology, know-how and talent, and machinery and higher-end at upgrading industrial technology, Chinese investors are increasingly consumer goods will require Chinese capital is also increasingly tapping those assets through Chinese companies to focus on flowing to advanced service assets both acquisitions and greenfield brands, as well as distribution and as Chinese companies try to ramp investment in R&D facilities. retail networks. up their competitiveness and seize With a high number of small, The significant Chinese investment opportunities from a new era of privately owned companies with activity in both North America and service sector growth in China. world-class technology, Europe is Europe reflects these long-term Most of these investors are private a preferred geography for Chinese goals. In recent years, Chinese companies, with the exception of investors trying to access advanced investors have largely focused service sectors with a significant on acquiring Western consumer presence of state-owned firms brands. Brand-building activity such as financial services and is particularly high in industries hospitality. North America beats where manufacturing margins in Europe in attracting investment China are most at risk, including in these areas based on its world- Switching from exporting furniture, textiles and fashion, leading assets and brands. electronics, toys and consumer electronics and major Software is a key sector, with $2.8 underwear to selling cars, appliances. Another trend is billion of investment from 2000 the acquisition of American and machinery and higher- to 2015, 70% of which flowed European household brands end consumer goods will to the US. Investment in the that give Chinese companies a require Chinese companies entertainment industry has also competitive edge with the fast- to build out local servicing jumped over the past two years, growing middle class at home, hitting a record $2.9 billion in capabilities, brands, and including food, luxury goods and 2015. North America received distribution and retail automotive. While Chinese retail the bulk of Chinese investment networks. presence is still small in both in entertainment targeting regions, Chinese investors have BAKER MCKENZIE 17

movie production and theaters, slowing economic growth in China. infrastructure assets such as sports, and performing arts. Most Chinese companies currently utilities, ports and airports also North American healthcare and hold the vast majority of their reflects the desire to move into pharmaceuticals sectors are also assets in China, as they did not stable assets with long-term attracting Chinese capital, ranging have the permission or capability returns. Investment in safe-haven from pharmaceutical ingredients to to invest overseas. More freedom assets has increased markedly diagnostics and drug development. to invest overseas through the since the first half of 2014, OFDI channel now allows them to driven by a slowdown in Chinese The growing Chinese appetite for diversify their assets, and safe- economic growth and fears financial services and hospitality haven economies with strong about a further weakening of the assets is apparent in both North protection of property rights are Chinese currency. America and Europe. In 2015 alone, attractive targets. Chinese investors poured a combined $4.6 billion in banking, insurance Both North America and Europe and asset management investments, have experienced a gradual which is more than the total Chinese increase of Chinese investment OFDI in this sector in the previous 14 in sectors that promise relatively years. Combined Chinese investment stable long-term returns. The in hotels and other hospitality assets most visible trend is the increase exceeded $6 billion in 2015, as in commercial real estate investors bet on the rapid growth of investments in major European Chinese outbound tourism. and American cities. Private Private investors, state- investors, state-owned enterprises owned enterprises and ASSET DIVERSIFICATION AND and sovereign entities have sovereign entities have put INTERNATIONALIZATION put nearly $18 billion into real nearly $18 billion into real estate in both regions over the Another driver for Chinese OFDI in past five years, compared to less estate in both regions over Europe and North America in recent than $1 billion from 2000–2010. the past five years, compared years is the growing desire among Investment has been split evenly to less than $1 billion from Chinese companies to diversify between the two regions. Growing 2000–2010. their asset base in response to Chinese investment in European 18 Bird’s Eye View: Comparing Chinese Investment into North America and Europe CHINESE PRESENCE ACROSS INDUSTRIES

China’s OFDI reached a broad range of industry sectors in Europe and North America from 2000 to 2015. Below we offer an overview of investment in 15 sectors followed by individual sector snapshots, including total investment, annual investment patterns, geographic location, investment drivers and key transactions.

FIGURE 8: AGGREGATE VALUES OF CHINESE OFDI TRANSACTIONS BY INDUSTRY IN EUROPE AND NORTH AMERICA, 2000–2015 | USD million

Europe North America

Agriculture and Food

Automotive

Aviation

Basic Materials

Consumer Products and Services

Electronics

Energy

Entertainment

Financial and Business Services

Health and Biotechnology

Information and Communications Technology

Industrial Machinery and Equipment

Metals and Minerals

Real Estate and Hospitality

Transport and Infrastructure

40,000 20,000 0 20,000 40,000

Source: Rhodium Group. BAKER MCKENZIE 19 Agriculture and Food

Total: $7.42 bn Total: $7.13 bn North Europe 7% of Chinese OFDI in 7% of Chinese OFDI in Europe America North America

Annual Investment Value | USD million Annual Investment Value | USD million 8,000 8,000 Food Processing and Distribution Food Processing and Distribution 7,000 Farming, Logging and Husbandry 7,000 Farming, Logging and Husbandry 6,000 6,000 5,000 5,000 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1,000 0 0 2000 2001 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Geographic Distribution Geographic Distribution

IS NO SE FI YT NT NU PE NL ME EE AK BC AB SK MB ON QC NB NS VT NH IE GB DK LT LV WA MT ND MN WI MI NY MA RI BE NL DE PL ID WY SD IA IL IN OH PA NJ CT FR LU CH CZ SK OR NV CO NE MO KY WV VA MD DE PT ES IT AT LI HU RO CA UT NM KS AR TN NC SC DC SI HR BG AZ OK LA MS AL GA MT GR CY HI TX FL

$5 bn+ $1 bn-$5 bn $100 mn-$1 bn less than $100 mn 0

Food sectors have attracted $14.5 billion years, for example Synutra’s milk drying series of food safety scandals. Another in transactions across both regions. facilities in France and Ausnutria’s emerging investment driver is access to The majority occurred after 2012, and milk powder processing plant in the global trading and pricing of agricultural patterns have been volatile. Nearly 90% Netherlands. commodities, as demonstrated by of total value can be attributed to just four COFCO’s stake in Nidera. Chinese investors have focused almost mega deals: Hony Capital’s acquisition of exclusively on food processing and Almost 70% of investment originates British chain PizzaExpress ($1.5 billion), distribution, with lower interest in from private investors, reflecting Bright Food’s $1.9 billion stake in British primary production. This shows a strong commercial opportunities and the cereal maker Weetabix, COFCO’s stake desire to learn from the Western food competitive landscape in China’s food in Dutch grain trader Nidera ($2 billion), industry and leveraging existing assets in industry. Changing food consumption and Shuanghui’s $7.1 billion purchase the Chinese market. Western expertise habits of China’s middle class and a of US pork producer Smithfield. Smaller is particularly relevant for modernizing strong asset base in the West suggest transactions have been notably absent, food value chains in China, and food continued interest in European and but a handful of greenfield projects in safety know-how can help companies North American food investments in recent years signal growth in the coming win back consumers’ trust after a coming years. 20 Bird’s Eye View: Comparing Chinese Investment into North America and Europe Automotive

Total: $3.16 bn Total: $15.14 bn North Europe 3% of Chinese OFDI in 16% of Chinese OFDI in Europe America North America Annual Investment Value | USD million Annual Investment Value | USD million 9,000 9,000 Automotive Equipment and Components Automotive Equipment and Components 8,000 Other Transportation Equipment 8,000 Other Transportation Equipment 7,000 7,000 6,000 6,000 5,000 5,000 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1,000 0 0 2000 2001 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Geographic Distribution Geographic Distribution

$5 bn+ $1 bn-$5 bn $100 mn-$1 bn less than $100 mn 0

The automotive and transportation component manufacturers and suppliers. State-owned enterprises account for equipment sector is one of the earliest Traditional centers such as Germany more than 85% of total investment across recipients of Chinese investment in both and Michigan have attracted the majority both regions, reflecting their dominance Europe and North America. Trickling in of investment, all through deals of in China’s auto industry. Recently, private since the early 2000s, investment started to less than $600 million. However, some investors have become more important take off in the wake of the global financial big exceptions stand out, including players, especially in high-technology crisis, which offered opportunities to ChemChina’s purchase of Italian tire areas such as electric vehicles, where purchase automotive assets at low prices. maker Pirelli for over $7 billion, Geely’s private companies such as Wanxiang, From 2000 to 2015, Chinese companies acquisition of Volvo for $1.5 billion, BYD and Faraday Futures have been very invested more than $18.3 billion across and Dongfeng’s $1 billion minority active in the North American market. both regions, accounting for nearly 9% stake in Peugeot. Investments in other Another important recent development of total Chinese investment. Europe has transportation equipment remained is the construction of the first Chinese- attracted four times as much investment as comparably small and were mostly owned auto factory in the US market—a North America. concentrated in niche luxury industries greenfield facility by Geely-owned Volvo like yacht-building (Weichai’s purchase in South Carolina, scheduled to begin Investment is primarily concentrated in of Ferretti and Wanda’s acquisition of production in 2018. small- and medium-sized automotive Sunseeker). BAKER MCKENZIE 21

Aviation

Total: $0.80 bn Total: $0.28 bn North Europe 1% of Chinese OFDI in 0.2% of Chinese OFDI in Europe America North America Annual Investment Value | USD million Annual Investment Value | USD million 600 600

400 400

200 200

0 0 2000 2001 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Geographic Distribution Geographic Distribution

$5 bn+ $1 bn-$5 bn $100 mn-$1 bn less than $100 mn 0

China has invested in both regions’ purposes, Chinese investment to date boom in small general aviation, fueled aviation industries, but the scale is has been mostly limited to smaller civil by the opening of Chinese airspace for comparably small. From 2000 to 2015, aviation and component-manufacturing private aircraft. cumulative investment amounted to $1.1 firms without dual-use technology. The With more than 85% of total value, billion, only 0.5% of the regions’ total. biggest acquisitions include aircraft investments are dominated by Practically all investments occurred components manufacturer FACC in state-owned entities, most of them after 2009 and can be attributed to Austria ($150 million), commercial subsidiaries of AVIC. At the same acquisitions by state-owned aviation aircraft manufacturer Cirrus in time, private firms and other state- giant AVIC. North America has attracted Minnesota ($210 million), aircraft engine owned companies are also investing almost three times more investment manufacturer Continental Motors in in aviation-related services, including than Europe. Alabama ($186 million), and helicopter air transportation, aviation financing, manufacturer Enstrom in Michigan Due to political sensitivities related airport services and transportation ($60 million). One motive for buying into to the dual application of aviation infrastructure (which are not captured in overseas value chains is an anticipated technology for civil and military this category). 22 Bird’s Eye View: Comparing Chinese Investment into North America and Europe Basic Materials

Total: $1.22 bn Total: $3.23 bn North Europe 1% of Chinese OFDI in 3% of Chinese OFDI in Europe America North America Annual Investment Value | USD million Annual Investment Value | USD million 2,500 2,500 Chemicals Chemicals Plastic, Rubber and Plastic, Rubber and 2,000 other Materials 2,000 other Materials

1,500 1,500

1,000 1,000

500 500

0 0 2000 2001 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Geographic Distribution Geographic Distribution

$5 bn+ $1 bn-$5 bn $100 mn-$1 bn less than $100 mn 0

Chinese investment in basic materials as Chinese interest in plastic, rubber More than 75% of the investment to across Europe and North America and other materials has remained date originates from state-owned totaled $4.5 billion from 2000 to 2015, small. The two biggest transactions enterprises. One important recent accounting for approximately 2.5% were ChemChina subsidiary Bluestar’s trend is the strong interest of Chinese of total Chinese investment. Europe acquisition of French firm Rhodia’s companies in greenfield facilities in has attracted more than two-thirds silicones business in 2007 for $500 North America, driven by lower natural of this investment to date due to two million and Wanhua’s $1.8 billion gas prices. In 2015, Yuhuang Chemicals significant acquisitions. However, North acquisition of Hungarian chemicals broke ground on a $2 billion chemical America has attracted greater interest manufacturer BorsodChem through complex in Louisiana. Other significant in recent years on the back of cheap two investments in 2010–2011. Those Chinese greenfield projects currently natural gas. transactions were largely motivated by planned include investment in two $1.8 the desire to build know-how and local billion methanol plants in Washington The chemicals industry accounts for manufacturing capabilities in Western and Oregon by a consortium of Chinese over 80% of basic materials investment, markets. investors. BAKER MCKENZIE 23 Consumer Products and Services

Total: $1.06 bn Total: $1.62 bn North Europe 1% of Chinese OFDI in 2% of Chinese OFDI in Europe America North America Annual Investment Value | USD million Annual Investment Value | USD million 600 600

400 400

200 200

0 0 2000 2001 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Geographic Distribution Geographic Distribution

$5 bn+ $1 bn-$5 bn $100 mn-$1 bn less than $100 mn 0

Chinese investment in consumer Almost all investment (89%) originates leverage overseas and at home. Fosun, products and services has remained from private sector companies. for example, has purchased a number of small in both regions but is expanding smaller clothing brands in Europe and Clothing, home appliances and furniture quickly as Chinese companies ramp up North America, including Folli Follie, have attracted the most attention from their capabilities to serve consumers Tom Tailor and St. John. Investments Chinese investors. One goal of investors more directly. Cumulative investment in retail activities have also grown, in these industries is to localize in Europe and North America since for example department store group production and build “Made in the USA” 2000 totals $2.7 billion, or 1.2% of total Nanjing Xinjiekou’s stake in the holding products. Examples are the operations Chinese OFDI. Europe has received company of UK clothing chain House of of appliance maker Haier, one of the higher levels of investment than Fraser in 2014. Haier’s announced $5.4 first Chinese greenfield investors in North America. The average deal size billion acquisition of GE’s appliance unit the US with its plant in South Carolina remained under $20 million, with no indicates that deal activity and values in 2000. Another focus is to acquire medium or large-scale acquisitions. could soar higher in 2016 and beyond. existing US consumer brands to 24 Bird’s Eye View: Comparing Chinese Investment into North America and Europe Electronics

Total: $0.62 bn Total: $1.53 bn North Europe 1% of Chinese OFDI in 2% of Chinese OFDI in Europe America North America Annual Investment Value | USD million Annual Investment Value | USD million 600 600

400 400

200 200

0 0 2000 2001 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Geographic Distribution Geographic Distribution

$5 bn+ $1 bn-$5 bn $100 mn-$1 bn less than $100 mn 0

Chinese companies have invested deals are small in size. Greenfield OFDI or built manufacturing assets in the $2.2 billion in Europe’s and North accounts for 20% of total investment. two regions to move closer to their America’s electronics sectors. customer base. For example, Leyard One potential driver for investment is Europe accounts for 75% of this Optoelectronics acquired digital Chinese interest in tapping advanced investment, concentrated in France, signage manufacturer Planar in 2015 R&D capabilities and talent in Western the Netherlands, Germany and to utilize its manufacturing bases in the economies. Joyson acquired Preh, Austria. North America had virtually US, with multiple facilities in Oregon. a German electronics developer no investment until 2015, when three and manufacturer for cars, in 2011 The growing pressure on Chinese light medium-sized acquisitions closed, to access talent and technology. In manufacturers to move up the value bringing investors to California, North 2015, China Electronics Corporation chain should lead to greater investment Carolina and Oregon. Private companies acquired Bridgelux, a cutting-edge levels with a focus on R&D capabilities are responsible for more than half of the startup developing LEDs. Some and human capital. investment (60%), and the majority of Chinese companies have acquired BAKER MCKENZIE 25

Energy

Total: $42.99 bn Total: $20.75 bn North Europe 40% of Chinese OFDI in 22% of Chinese OFDI in Europe America North America Annual Investment Value | USD million Annual Investment Value | USD million

20,000 Renewable Energy 20,000 Renewable Energy Coal, Oil and Gas Coal, Oil and Gas

10,000 10,000

5,000 5,000

0 0 2000 2001 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Geographic Distribution Geographic Distribution

$5 bn+ $1 bn-$5 bn $100 mn-$1 bn less than $100 mn 0

Energy has been the most important have received the most investment in assets. Cheap valuations and declining recipient of Chinese OFDI across Europe. The biggest transactions were domestic production could revive Chinese Europe and North America over the China National Offshore Oil Corporation interest in acquiring global upstream past 15 years. Combined investment (CNOOC)’s 2013 acquisition of Canadian oil and gas assets, if SOEs manage to in both regions in energy assets totals firm Nexen ($15.1 billion), and Sinopec’s regain support for overseas investments. $64 billion, accounting for 31% of total $7.2 billion purchase of Swiss-based Several recent transactions in North Chinese OFDI. The majority of Chinese Addax in 2009. State-owned companies America also suggest that private sector investment can be attributed to large account for more than 90% of cumulative entities are looking into opportunities in transactions in the capital-intensive oil energy investment from 2000 to 2015. global oil and gas markets, but the scale and gas sector. Renewables account for a of these transactions remains small. Energy investments have fallen in the small share of total investment. Chinese investment in renewable energy past two years, as changes in the growth has been more stable in past years. North America has attracted twice model, China's anti-corruption campaign, Utilities and other energy infrastructure as much energy OFDI as Europe, and big write-downs on prior overseas also continue to attract Chinese capital concentrated in Alberta, Oklahoma and ventures have dampened the appetite of (see Transport and Infrastructure). Texas. Norway, the UK and Switzerland state-owned energy firms for overseas 26 Bird’s Eye View: Comparing Chinese Investment into North America and Europe

Entertainment

Total: $4.65 bn Total: $1.45 bn North Europe 4% of Chinese OFDI in 2% of Chinese OFDI in Europe America North America

Annual Investment Value | USD million Annual Investment Value | USD million

3,000 3,000

2,500 2,500

2,000 2,000

1,500 1,500

1,000 1,000

500 500

0 0 2000 2001 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Geographic Distribution Geographic Distribution

$5 bn+ $1 bn-$5 bn $100 mn-$1 bn less than $100 mn 0

Entertainment received virtually no Dalian Wanda, with its purchase of Wanda plans to acquire US film studio investment before 2012 in either region, US theater chain AMC for $2.6 billion Legendary Pictures for $3.5 billion and but has attracted great interest in the and the acquisitions of Swiss sports US movie theater chain Carmike for past three years. Over this period, marketing group Infront for $1.2 billion $1.1 billion. In Europe, Chinese firms Chinese investors have spent $6.1 billion and Florida-based “Iron Man” triathlon are showing interest in football and on entertainment deals. Acquisitions operator World Triathlon Corporation other traditional sports assets. Film are the dominant entry mode, with for $650 million. Chinese interest has and sports are attracting attention as North America attracting 75% of total also extended to gambling (World Poker Chinese companies seek to invest in investment. Tours), sports (a stake in Manchester established Western entertainment City FC’s parent company), and ventures and to leverage Western Entertainment is the sector most heavily performing arts (Cirque du Soleil). brands and content in the rapidly dominated (96%) by private company growing Chinese market. investment. The biggest player is real Recently announced transactions point estate and entertainment conglomerate to even greater momentum in 2016. BAKER & MCKENZIE 27 Financial and Business Services

Total: $4.09 bn Total: $4.08 bn North Europe 4% of Chinese OFDI in 4% of Chinese OFDI in Europe America North America Annual Investment Value | USD million Annual Investment Value | USD million

4,000 Business Services 4,000 Business Services Financial Services and Insurance Financial Services and Insurance 3,000 3,000

2,000 2,000

1,000 1,000

0 0 2000 2001 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Geographic Distribution Geographic Distribution

$5 bn+ $1 bn-$5 bn $100 mn-$1 bn less than $100 mn 0

Chinese investment in European and major state-owned Chinese banks. These transactions have moved the North American financial and business More recently, new players such needle from greenfield projects to services was small for most of the as financial conglomerates and acquisitions (85% of total transaction past two decades, but has grown insurance companies have expanded value from 2000 to 2015) and from rapidly in recent years and expanded into overseas markets, including state-owned to private investors (now into new areas. Combined investment Europe and North America. Financial 81% of the total value). The stability and reached $8.2 billion by the end of 2015, conglomerate Fosun is responsible expertise in European and American accounting for 4% of total FDI in both for the two largest transactions: the financials will continue to attract regions. Nearly 80% of that investment acquisition of US property and casualty Chinese investors. Anbang Insurance’s took place in the past two years. insurer Ironshore for $2.3 billion in bid for US insurer Fidelity & Guaranty 2015 and the takeover of Portuguese points at continued Chinese investment For many years, Chinese presence insurer Cia de Seguros for $1.4 billion activity in developed financial markets in developed financial markets was in 2014. in 2016. limited to greenfield branches by 28 Bird’s Eye View: Comparing Chinese Investment into North America and Europe Health and Biotechnology

Total: $2.91 bn Total: $1.33 bn North Europe 3% of Chinese OFDI in 1% of Chinese OFDI in Europe America North America

Annual Investment Value | USD million Annual Investment Value | USD million

1,500 Healthcare and Medical Devices 1,500 Healthcare and Medical Devices Pharmaceuticals and Biotechnology Pharmaceuticals and Biotechnology 1,000 1,000

500 500

0 0 2000 2001 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Geographic Distribution Geographic Distribution

$5 bn+ $1 bn-$5 bn $100 mn-$1 bn less than $100 mn 0

Health and biotechnology is emerging Saude in 2014 for $610 million. In 2015, divided between the two regions, but as an important sector for Chinese Chinese entities also visibly expanded activity in Europe can be attributed to investment in both regions. Cumulative their role as financiers for early-stage one large deal (Espirito Santo Saude). Chinese OFDI from 2000 to 2015 amounts growth companies such as AltheaDx In pharmaceuticals, North America has to $4.2 billion. Most of the investment (Wuxi PharmaTech), Cynvenio Biosystems been the preferred destination, attracting occurred after 2008, with particularly (Livzon Pharmaceutical), and CliniCloud more than 80% of total investment from fast growth in the past two years. While (Ping An and Tencent). 2000 to 2015. M&A activity accounts for the growth trajectory is similar, North over 90% of that investment. An aging Investment is relatively evenly split America has received more than twice the population, an inefficient healthcare between pharmaceuticals and investment of Europe. Most acquisitions system, and strong interest in advanced biotechnology (60% of total investment) are focused on small and medium-sized technology should continue to draw and healthcare and medical devices companies, with the largest transaction Chinese investors to North American and (40%). Investment in healthcare and being Fosun’s purchase of Portuguese European health and biotech assets. medical devices has been similarly healthcare provider Espirito Santo B AKER MCKENZIE 29 ICT

Total: $11.17 bn Total: $5.99 bn North Europe 10% of Chinese OFDI in 6% of Chinese OFDI in Europe America North America Annual Investment Value | USD million Annual Investment Value | USD million

5,000 IT Equipment 5,000 IT Equipment 4,000 Software and IT Services 4,000 Software and IT Services Semiconductors Semiconductors 3,000 3,000

2,000 2,000

1,000 1,000

0 0 2000 2001 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Geographic Distribution Geographic Distribution

$5 bn+ $1 bn-$5 bn $100 mn-$1 bn less than $100 mn 0

Information and communications the highest level of greenfield investment capital and early-stage financing in recent technology (ICT) is a key sector for of any sector in the two regions. The US years. For example, in 2015, Chinese Chinese investors on both sides of IT equipment sector also has attracted a investment grew quickly in the booming the Atlantic. Cumulative investment handful of major acquisitions from China. technology sector in the San Francisco exceeded $17 billion at the end of Lenovo is a key player, with three large Bay Area, with Chinese firms increasingly 2015, accounting for more than 8% acquisitions in the US and one in Germany taking stakes in startups (e.g., Didi of combined Chinese OFDI in both in the past decade for a combined $7.4 Kuaidi’s investment in taxi app Lyft). In regions. With the exception of Lenovo’s billion (IBM’s personal computer and x86 California alone, Chinese investors closed acquisition of IBM’s PC business in 2005, server divisions, Motorola Mobility and a record 21 deals in software and IT most investment occurred from 2011 to Medion). services in 2015. In addition to these FDI 2015. North America accounts for more stakes, Chinese technology companies Software and IT services have become than 70% of investment. and funds have also become significant attractive targets for Chinese investors players in early stage financing. Chinese investment was initially in recent years, mostly through smaller- concentrated on IT equipment, as scale acquisitions and greenfield Another emerging trend is strong Chinese major companies such as Huawei and investments. More than 70% of all interest in semiconductor assets in both ZTE expanded their presence through IT services and software investment the United States and Europe, fueled greenfield investments. With more than occurred in North America, with by Beijing’s goal to promote a domestic $3 billion invested since 2000, ICT has particularly strong growth in venture semiconductor industry. 30 Bird’s Eye View: Comparing Chinese Investment into North America and Europe Industrial Machinery and Equipment

Total: $0.89 bn Total: $6.54 bn North Europe 1% of Chinese OFDI in 7% of Chinese OFDI in Europe America North America Annual Investment Value | USD million Annual Investment Value | USD million 2,500 2,500

2,000 2,000

1,500 1,500

1,000 1,000

500 500

0 0 2000 2001 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Geographic Distribution Geographic Distribution

$5 bn+ $1 bn-$5 bn $100 mn-$1 bn less than $100 mn 0

With more than $7 billion of cumulative 75%) on the continent. In North America, acquisitions in the industry across both investment since 2000, industrial investment is concentrated in Michigan regions were small and medium-sized machinery and equipment is an and New Hampshire. The largest transactions below $1 billion. important attraction for Chinese OFDI. transactions in industrial machinery More than 60% of all investment in the Europe accounts for nearly 90% of that were Weichai’s acquisition of German machinery industry originated from investment, highlighting its competitive forklift manufacturer Kion for $1.7 state-owned enterprises, reflecting strengths in this sector and the billion (between 2012-2015), Jinsheng’s the strong position of state players abundance of smaller and medium- acquisition of the textile division of in China’s domestic machinery sized private companies that are Swiss machine manufacturer Oerlikon industry. Growing pressure on Chinese technology leaders. for $700 million in 2012, and Shanghai manufacturers to move up the Electric’s stake in power generation Most investment occurred after 2011, technology ladder will continue to make equipment manufacturer Ansaldo for with Germany and Italy accounting for overseas acquisitions in Europe and $530 million in 2014. The vast majority of the lion’s share of investment (nearly America an attractive proposition. BAKER MCKENZIE 31 Metals and Minerals

Total: $9.38 bn Total: $3.1 bn North Europe 9% of Chinese OFDI in 3% of Chinese OFDI in Europe America North America Annual Investment Value | USD million Annual Investment Value | USD million 3,000 3,000 2,500 2,500 2,000 2,000 1,500 1,500 1,000 1,000 500 500 0 0 2000 2001 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Geographic Distribution Geographic Distribution

$5 bn+ $1 bn-$5 bn $100 mn-$1 bn less than $100 mn 0

Over the past 15 years, China invested global mining companies. The largest Changes in China’s growth model, a $13.3 billion in metals and minerals deals in North America include China large drop in global metals prices, assets across the two regions. Most Investment Corporation’s investment and a problematic track record of past of this investment was concentrated of $1.5 billion in Teck Resources in overseas investments have dampened between 2007 and 2012, with Chinese 2009, Minmetals’ acquisition of Anvil China’s appetite for global metals interest declining dramatically in the Mining in 2011 for $1.3 billion, and assets in recent years. Opportunities past three years. Chalco’s acquisition of Peru Copper for arising from consolidation in the $770 million. The biggest transaction mining industry and growing demand Canada received more than 70% in Europe was the acquisition of for gold and other precious metals of Chinese metals and minerals Norwegian aluminum and silicon due to China’s growing middle class investment from 2000 to 2015, producer Elkem by ChemChina could catalyze investments in the near reflecting its abundance of resource through its subsidiary Bluestar for future; however, a return to pre-2012 deposits and its position as host for $2.2 billion in 2011. investment patterns is unlikely. 32 Bird’s Eye View: Comparing Chinese Investment into North America and Europe Real Estate and Hospitality

Total: $12.90 bn Total: $13.76 bn North Europe 12% of Chinese OFDI in 14% of Chinese OFDI in Europe America North America

Annual Investment Value | USD million Annual Investment Value | USD million

7,000 Hospitality and Tourism 7,000 Hospitality and Tourism 6,000 Real Estate 6,000 Real Estate 5,000 5,000 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1,000 0 0 2000 2001 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Geographic Distribution Geographic Distribution

$5 bn+ $1 bn-$5 bn $100 mn-$1 bn less than $100 mn 0

Real estate and hospitality are major development in London for $1.3 billion, for $1.95 billion, Jinjiang’s acquisition of attractions. Chinese investment from China Life’s stake in 10 Upper Bank Street French hotel group Louvre Hotels for $1.6 2000 to 2015 adds up to $26.6 billion (13% (also London) for $740 million, and Fosun’s billion, and Fosun’s purchase of vacation of total Chinese OFDI) and is evenly split purchase of 1 Chase Manhattan Plaza in resort operator Club Med for $1 billion. between both Europe and North America. New York for $725 million. A recent trend Hotel investments continued to make Most investment has occurred since 2013 is the strong growth of Chinese investment headlines in early 2016 with Anbang’s and is primarily concentrated in tier-one in new developments, with major projects bids for US-based Strategic Hotels and cities such as London, Paris, New York underway in New York, Boston, Chicago, Starwood Hotels. Continued investment and Los Angeles. The sector attracts San Francisco, Los Angeles, Toronto, in the industry is likely as China’s middle private (60% of total investment) as well London, and Madrid. class is large and increasingly eager to as state-owned and sovereign capital travel overseas. The number of outbound Chinese investors have also turned to investment (40%). trips to the US surpassed 2.5 million in hotels and other hospitality assets, both 2015 and the US Department of Commerce Commercial real estate in safe havens is as a real estate play and to tap revenues projects Chinese tourist arrivals to a primary target for Chinese companies from booming Chinese outbound tourism. exceed 5 million by 2020. In addition to and financial investors as they diversify Investments took off in 2015, with more hospitality, Chinese investors are also their holdings globally. The largest deals than $6 billion invested across the two ramping up their FDI in travel logistics and include China Investment Corporation’s regions. The largest deals include Anbang's infrastructure. investment in the Chiswick Park purchase of a luxury New York City hotel BAKER MCKENZIE 33 Transport and Infrastructure

Total: $3.75 bn Total: $10.52 bn North Europe 3% of Chinese OFDI in 11% of Chinese OFDI in Europe America North America

Annual Investment Value | USD million Annual Investment Value | USD million

5,000 Utilities 5,000 Utilities Transportation Services Transportation Services 4,000 Construction Services 4,000 Construction Services

3,000 3,000

2,000 2,000

1,000 1,000

0 0 2000 2001 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Geographic Distribution Geographic Distribution

$5 bn+ $1 bn-$5 bn $100 mn-$1 bn less than $100 mn 0

Along with real estate, Chinese areas. More than 90% of investment billion stake in Italian utility CDP Reti long-term investors are increasingly in this sector originates from state- in 2014. France, Germany and the UK interested in infrastructure assets owned firms. have all attracted investment as well. in the Western world. Investment The biggest investments in North Utilities have become a preferred asset is concentrated in Europe, which America were stakes in Virginia-based for Chinese investors, accounting for accounts for over 73% of the $14.3 AES in 2010 and Massachusetts- more than 70% of total OFDI in this billion invested since 2000. Crisis- based InterGen in 2011. Chinese category. Italy and Portugal are the driven privatization efforts and participation in infrastructure projects, main recipients due to Three Gorges’ lower national security sensitivities such as the UK’s Hinkley Point nuclear $3.5 billion stake in Portuguese utility have contributed to Europe’s lead in plant, could further boost Chinese EDP in 2012 and State Grid’s $2.7 attracting Chinese capital in these investment in Europe. 34 Bird’s Eye View: Comparing Chinese Investment into North America and Europe

DEAL STRUCTURES AND INVESTOR MIX

The recent growth of investment levels and the shift in the industry mix have transformed deal structures and the landscape of Chinese companies in both regions. Acquisitions account for the majority of Chinese capital entering Europe and North America, but greenfield OFDI has jumped in recent years. Similarly, while multibillion-dollar deals grab the headlines, transactions below $1 billion have accounted for the majority of Chinese capital entering both regions in the past two years. Privately owned companies are now driving outward investment growth in many sectors. The role of state-owned companies remains more prominent in Europe than in North America, but it varies across sectors. One trend visible in both regions is the growth of financial investors such as insurance companies, financial conglomerates and sovereign entities. At the same time, surprisingly few Chinese companies have a strong presence on both sides of the Atlantic.

ACQUISITIONS STILL FIGURE 9: VALUE OF CHINESE OFDI TRANSACTIONS BY ENTRY MODE IN DOMINATE, BUT EUROPE AND NORTH AMERICA, 2000–2015 USD million, both regions combined GREENFIELD INVESTMENT JUMPS 40,000 4,000 M&A Transactions (Left Axis) 35,000 3,500 Keen on rapid catch-up, Chinese Greenﬁeld Transactions (Right Axis) investors have primarily focused 30,000 3,000 on acquisitions for the past 25,000 2,500 decade. Mergers and acquisitions account for more than 90% of 20,000 2,000 the total value of Chinese OFDI 15,000 1,500 transactions in North America 10,000 and Europe from 2000 to 2015. 1,000 Greenfield investments dominate 5,000 500 the number of transactions, but 0 0 have remained small in size for the

most part. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Rhodium Group. BAKER MCKENZIE 35

Investments announced over the annual transaction value. The Investments announced past three years suggest a more total value of those transactions over the past three years pronounced increase in greenfield increased in parallel in both OFDI spending in the coming regions, reaching an average of $5 suggest a more pronounced five years. As of early 2016, the billion in 2014 and 2015. The biggest increase in greenfield OFDI announced combined value of growth in both regions occurred in spending in the coming pending and ongoing greenfield deals of $100 million to $1 billion, five years. projects across North America and jumping from an average of only Europe exceeds $20 billion.9 three per year before 2011 to 66 deals in 2015. The value grew from MEGA DEALS CAPTURE virtually zero to more than $3 billion At the same time, Chinese HEADLINES, BUT SMALL in 2010, jumped to $8 billion in 2011 and 2012, and doubled to more than investment in greenfield projects AND MEDIUM-SIZED has increased in both regions. $16 billion in 2015. INVESTMENTS DRIVE Greenfield investment has moved Transactions in the $1 billion to up from under $1 billion per year GROWTH $3 billion range also helped push in 2009 to nearly $3 billion per year While large billion-dollar deals investment to unprecedented levels. in 2015, showing a similar growth still command the most attention, From 2011 to 2015, we recorded trajectory as acquisitions over transactions with a value of $1 an average of six deals in this the 2000–2015 period, albeit at a billion and below account for the range every year, adding more than much lower scale. This trajectory majority of Chinese investment in $10 billion in each year except reflects greater confidence and both regions in the past two years. 2013. Large-scale acquisitions over capability to grow organically $3 billion have shaped deal flow in Investments below $100 in highly regulated overseas certain years (2005, 2009, 2013), million made up almost 90% of markets, along with Chinese but have declined in importance transactions from 2000 to 2015, investors’ interest in new areas over time as deal flow in other but only a small share of the total such as real estate development. categories has become more stable.

FIGURE 10: VALUE OF CHINESE OFDI TRANSACTIONS BY TRANSACTION SIZE IN EUROPE AND NORTH AMERICA, 2000–2015 | USD million

EUROPE NORTH AMERICA

25,00025,000 25,00025,000 $28,700$28,700 $0-$100$0-$100 mn mn $0-$100$0-$100 mn mn $100$100 mn-$1 mn-$1 bn bn $100$100 mn-$1 mn-$1 bn bn 20,00020,000 20,00020,000 $1-$3$1-$3 bn bn $1-$3$1-$3 bn bn $3 $3 bn bn and and more more $3 $3 bn bn and and more more 15,00015,000 15,00015,000

10,00010,000 10,00010,000

5,0005,000 5,0005,000

00 00 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015

Source: Rhodium Group.

9. For greenfield investments, the dataset records investment incrementally over time, as opposed to full values at announcement. See the Data Appendix for details. 36 Bird’s Eye View: Comparing Chinese Investment into North America and Europe

THE UNEQUAL RISE OF PRIVATE INVESTORS

State-owned enterprises have a less onerous approval process 40% in 2013 to almost 80% in 2015, dominated China’s global OFDI for outbound investment. Private driven by a boom in high-tech, activities for most of the past investors’ share of total combined advanced manufacturing, and decade, accounting for more than investment in both geographies services investments. In Europe, 70% of Chinese OFDI in Europe has gradually increased from 12% private investment continued to and North America from 2008 in 2009 to 53% in 2015. grow, but was outpaced by strong to 2013. Private investment has growth in acquisitions by state- In the past two years, however, been growing however, reflecting owned and sovereign investors. As divergent paths have emerged greater confidence and capability a result, private investors’ share of between the two regions: in North of those entities to invest in total investment declined from 41% America, private companies’ share larger overseas deals, as well as in 2013 to 35% in 2015. of total investment jumped from

FIGURE 11: SHARE OF PRIVATE 90 CHINESE INVESTMENT IN EUROPE Share of Investment by Private Companies in North America 80 AND NORTH AMERICA,* 2009–2015 Share of Investment by Private Companies in Europe

Percent of total 70

Source: Rhodium Group. *Private companies” 0 refers to entities with less than 20% ownership by the government, sovereign entities and/or central SOEs. 2009 2010 2011 2012 2013 2014 2015

The presence of SOEs and private focused on grain trading, while legacy of state ownership in China, companies also strongly diverges food processing and retail elicit including aviation, automotive and across sectors, and in most cases greater interest from private industrial machinery. One notable mirrors the ownership structures investors. Similarly, while private outlier is financial and business in those sectors in China. Private investors dominate investment in services. While China’s financial companies account for more software and IT equipment, state sector continues to be dominated than two thirds of Chinese capital players are driving investment in by state-owned players, more than invested in consumer-facing semiconductors. two thirds of cumulative investment industries, including entertainment, in North America and Europe Investment in capital-intensive consumer products, and healthcare. originates from private companies. industries such as energy, Private companies also account This reflects the relatively modest infrastructure, metals or basic for the majority of investment in FDI presence of Chinese banks in materials is dominated by agriculture and food, ICT, real both regions and the recent surge in state-owned investors. SOEs estate, and electronics, but state large-scale acquisitions by private also account for the majority capital also plays an important role players such as Fosun and Anbang of investment in a handful of in those industries. In agriculture in the insurance sector. manufacturing industries with a and food, SOE interests are BAKER MCKENZIE 37

Looking forward, China’s private FIGURE 12: SHARE OF STATE-OWNED AND PRIVATE COMPANIES IN sector will drive the secular CHINESE FDI TRANSACTIONS IN EUROPE AND NORTH AMERICA, 2000–2015 growth of OFDI, but SOEs will Percent of total cumulative investment from 2000 to 2015 remain important players in Share of Private Investors Share of State-Owned Investors Chinese outbound investment activity, particularly in energy, Entertainment industrials and other capital Consumer Products & Services Health and Biotech intensive sectors. ChemChina’s Financial and Business Services proposed $43 billion takeover Agriculture and Food of Syngenta and other pending ICT Real Estate and Hospitality transactions suggest that SOEs Electronics will account for a significant share Industrial Machinery and Equipment of China’s 2016 OFDI. Basic Materials Metals and Minerals Aviation Automotive Energy Transport and Infrastructure

0% 25% 50% 75% 100% Source: Rhodium Group.

THE EMERGENCE OF FINANCIAL INVESTORS

Another important development in players in the China outbound financial players managing both markets is the growing role of space, including private funds and large pools of capital, including financial investors. For most of the state-owned or sovereign entities. financial conglomerates, trust past decade, strategic investors— companies, wealth management The greater role of financial real economy companies making firms, insurance companies and investors in China’s OFDI can be long-term investments to exploit private equity funds. Declining attributed to growth in China’s advantages, access markets returns for investments at home domestic non-bank financial or increase competitiveness— and new policies that reduce services and greater uncertainty accounted for the vast majority of regulatory impediments for global about future investment returns Chinese outbound deals. In the investment have incentivized these in China. The maturation of past two years, financial investors new players to look outward for China’s financial services industry (companies and funds investing opportunities in North America, beyond commercial banks and primarily for financial returns) Europe, and elsewhere. the rapid expansion of credit have emerged as important have created new Chinese

FIGURE 13: CHINESE OFDI Europe North America

BY FINANCIAL INVESTORS IN 16,000 EUROPE AND NORTH AMERICA, 2000–2015 14,000 USD million 12,000

10,000

8,000

6,000

4,000

2,000

Source: Rhodium Group. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 38 Bird’s Eye View: Comparing Chinese Investment into North America and Europe

In Europe, OFDI by Chinese recent years the mix of financial private companies make up the financial investors climbed investors has broadened to include majority of big financial investors. from virtually zero to $6 billion financial conglomerates, private However, state-owned activity has in 2015, or 26% of the total. equity firms and other players. increased in the past two years. Sovereign entities such as China They mostly target real estate, Key target industries resemble Investment Corporation and consumer brands and financial those in Europe, except for the various entities affiliated with the services assets. big increase in venture capital State Administration of Foreign and private equity investments In North America, financial Exchange (SAFE) were early targeting US companies in high- investors spent $8.7 billion in 2015, investors in Europe and now have tech hubs such as Silicon Valley accounting for 52% of total Chinese a significant portfolio of direct and Massachusetts. OFDI. In contrast to Europe, investments in the region. In

TABLE 3: TOP CHINESE FINANCIAL INVESTORS IN EUROPE AND NORTH AMERICA, 2000–2015 USD billion

Investor Ownership Total Investment Largest Investment Europe China Investment Corp. (CIC) State $5.9 GDF Suez exploration assets ($3.2) Fosun Private $3.3 Fidelidade ($1.4) Jianguang Asset Management Private $1.8 NXP Semiconductors RF assets ($1.8) SAFE State $1.6 UPP Group Holdings stake ($0.9) Hony Capital Private $1.5 PizzaExpress ($1.5) North America China Investment Corp. (CIC) State $1.6 AES stake ($1.6) Fosun Private $3.5 Ironshore ($2.3) Anbang Private $2.5 Luxury New York City hotel ($2.0) Yantai Xinchao Private $1.3 Texas oilfields ($1.3) Zhang Xin Family Private $1.3 GM building ($0.7)

Source: Rhodium Group.

A TRANSATLANTIC DIVIDE? shows that 15 companies have a clear preference for Europe, 12 Most Chinese companies are Only a few truly global companies have the vast majority still focused on one region or companies have been able of assets in North America, and the other. Only a few truly global only 6 companies have a relatively to build a strong presence companies have been able to even split of investments between on both sides of the build a strong presence on both the two regions. Atlantic. sides of the Atlantic. Plotting all 34 Chinese investors with a Those preferences are partially combined investment of more attributed to industry clusters than $1 billion in Europe and or resource deposits drawing North America against the investors to one of the two regions. relative distribution of their Mining company Minmetals, investment across both regions for example, is largely focused BAKER MCKENZIE 39

on Canada because of metal preference for European expansion, both sides of the Atlantic have endowments and attractive or the greater presence of utilities only dipped their feet in the water acquisition targets in its core such as State Grid or Three Gorges through deals in one region rather industry. ICT and software in EU economies. than taking a plunge in both. More investors such as Lenovo than half the companies that have At the same time, this snapshot or Tencent are drawn to the invested more than $1 billion in the highlights that China Inc. is still abundance of talent and industry two regions have done fewer than in the early stages of its global clusters in the US. Political and 10 deals in both regions combined. expansion. Many companies that regulatory dynamics also play Companies like Fosun with more should have a strong position on a role: for example, Huawei’s than 20 deals are a rare exception.

FIGURE 14: CHINESE INVESTORS’ PREFERENCES FOR EUROPE OR NORTH AMERICA, 2000–2015 USD billion

$10 bn+ CNOOC

Sinopec $5-10bn

ChemChina CICCIC CNPC Total Investment Level $3-5bn Fosun Lenovo Shuanghui Three Gorges Wanda Bright Food China Life Anbang Dongfeng Jianguang Jin Jiang Sinochem Yantai Xinchao State Grid AVIC COFCO Huawei Wanxiang $1-3bn Wanhua Weichai Geely Greenland Minmetals SAFE Hony Capital HNA CITIC Tencent Huaneng

EUROPE FOCUS TRANSATLANTIC NORTH AMERICA FOCUS

Relative Share of Investment

Source: Rhodium Group. 40 Bird’s Eye View: Comparing Chinese Investment into North America and Europe

THE ROLE OF POLICY AND REGULATIONS

While the growth of Chinese OFDI in Europe and North America is primarily driven by commercial motives, government policy and regulations are also shaping investment patterns. On the Chinese side, the liberalization and streamlining of OFDI regulations are important prerequisites of the recent boom. Industrial policies and the behavior of sovereign funds can also explain certain trends in outbound investment. On the recipient side, the policies, regulations and attitudes of European and North American countries are shaping the inflow of Chinese capital. While governments generally have been very welcoming and open toward Chinese investment, differences in the efforts to attract Chinese investment, as well as in the defensive policies to screen investment for security and economic risks, account for some of the observed differences in China’s footprint in the two regions.

POLICY LIBERALIZATION IN CHINA AS PREREQUISITE

Growing government support for In recent years, the process of policy flux. In April 2016, the National outbound FDI and the gradual liberalization has accelerated and Development and Reform removal of administrative barriers China has moved from a regime Commission (NDRC) issued draft were key prerequisites for China’s that required multiple approvals amendments to the current rules OFDI boom. During the early to a system under which most which—if enacted—could remove decades of Chinese economic investments can go through a the pre-approval selection process reforms, China largely prohibited simpler and quicker recordal by the NDRC ("road pass system" outbound investments due to fears (备案) process.10 Those reforms - 路条) and enable competing about capital flight and the loss of were critical to overcome past Chinese investors to bid for the much needed foreign exchange. patterns of state-dominated same overseas asset, a significant Since 2000, this attitude changed as investment in extractive industries, step in further liberalizing China’s leaders and bureaucrats recognized and give the private sector a OFDI regime. At the same time, the the importance of outbound greater role in China’s outbound Chinese government is reluctant FDI for economic development, investment—a key factor for the to give up its ultimate control over the competitiveness of Chinese continued growth and diversification OFDI flows, which remains one companies, and the structure of of Chinese investment in North of the main downside risks for China’s international investment America and Europe. the growth of Chinese outbound position. investment in certain assets (see The current status of the Chinese Outlook section). OFDI regime continues to be in

10. For the latest update of China’s foreign investment review regime, see Catalog of Investment Projects Requiring Government Approval, State Council, October 31, 2014, http://www.gov.cn/zhengce/content/2014-11/18/content_9219.htm. Though approvals have been lifted for most investments except for those in sensitive industries and countries, uncertainties remain about how these reforms are implemented in practice, particularly in recent months as China experiences record-level capital outflows. BAKER MCKENZIE 41

CHINESE REFORMS AND INDUSTRIAL POLICY AS PUSH FACTORS

As noted earlier, the government’s Some of the observed investment electric vehicle technology and ambitious agenda to overhaul patterns in both geographies can semiconductors. The draft of the China’s growth model and also be traced to China’s industrial 13th Five Year Plan released in transition to a consumption, policies: in particular in the March 2016 puts forward a number service and innovation-driven past decade, strong support for of new initiatives that have the economy is a key driver of Chinese Chinese state firms buying equity potential to shape future outbound OFDI growth. Chinese companies stakes in global upstream oil and investment patterns, including face increased pressure to gas, driven by energy security “Internet Plus” and “Made in China reinvent their business models, concerns. More recently, industrial 2025,” which aim to accelerate which is linked to greater interest policy initiatives have translated the technological upgrading of in advanced economy assets, mostly into outbound investment China’s manufacturing capabilities including technology, brands and in European and American through integration with Internet human talent. technology assets, including and advanced robotics.11

SOVEREIGN ENTITIES AND NEW INVESTMENT INITIATIVES

The Chinese government’s role in instruments and equities), but government is also an indirect shaping OFDI flows also extends to they have also expanded direct limited partner in a number of the behavior of sovereign entities investments as part of their Western private equity funds and and specific policy initiatives alternative investment portfolio. is indirectly invested in a series that encourage investment in While their holdings are not fully of specific funds set up by China certain geographies. In the past, transparent, both CIC and SAFE Development Bank targeting the most relevant vehicles were have generally favored Europe European assets (for example the China Investment Corporation over North America for disclosable China-Belgium Fund, the China- (CIC) and various investment arms FDI stakes. Together they have Ireland Fund and the China-France under the State Administration invested nearly $8 billion in direct Fund). However, the role of those of Foreign Exchange (SAFE). The investment assets in Europe, funds in outbound FDI patterns overseas investment activity of compared to just under $4 billion remains marginal. those vehicles is mostly focused in North America. The Chinese on portfolio investment (debt

FIGURE 15: CHINESE OUTBOUND 600 FDI TRANSACTIONS IN EASTERN EUROPEAN OBOR ECONOMIES* 500 USD million 400

300

200 Source: Rhodium Group. *Includes Bulgaria, Croatia, Czech Republic, Estonia, Hungary, 100 Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. 0 2012 2013 2014 2015

11. See “Li Keqiang: ‘Internet+’ can be an engine of economic transformation,” June 24, 2015, http://www.gov.cn/xinwen/2015-06/24/ content_2883554.htm; “State Council Announcement on ‘Made in China 2025’,” State Council, May 8, 2015. http://www.gov.cn/zhengce/ content/2015-05/19/content_9784.htm. 42 Bird’s Eye View: Comparing Chinese Investment into North America and Europe

China also recently announced a To date, big announcements have stability of Europe and North major strategic initiative aimed at paired with relatively few executed America. After more than a decade of strengthening China’s commercial investments, and the value of extractive investments in politically ties with economies along the Chinese investment in Eastern unstable developing economies, ancient Silk Road. The “One Belt, Europe’s OBOR economies has Chinese investors are increasingly One Road” (OBOR) program is not materially increased from its looking for high-quality assets in projected to catalyze hundreds of historical trend line. politically safe destinations. billions of dollars of investment in Europe and North America not only many European economies.12 This EXCEPTIONAL AMERICAN have a huge and diverse stock of may give Europe another edge for AND EUROPEAN OPENNESS these assets but also a long history of attracting capital from China, as AND STABILITY embracing foreign direct investment there is no similar program for North On the recipient side, the most and a more welcoming stance on America. At the same time, the important prerequisites for the OFDI than Asian economies with impact the OBOR initiative will have recent growth of Chinese investment similar income levels and industrial on investment patterns is unclear. are the openness and political structures, such as Japan or Korea. Moreover, European and American countries generally offer mature legal systems and strong protection of property rights to foreign After more than a decade of extractive investments in investors.13 These characteristics— politically unstable developing economies, Chinese investors which are acknowledged by Chinese are increasingly looking for high-quality assets in politically assessments of global openness and investment risk—make Europe and safe destinations. North America natural destinations for Chinese capital.

TABLE 4: A CHINESE PERSPECTIVE ON OVERSEAS INVESTMENT RISK*, 2015 Ratings of overseas investment risks for Chinese companies ranging from B (most risky) to AAA (least risky)

Western North APAC Africa South Europe America America AAA Germany AA United Kingdom, United States, Australia, New Zealand, South Netherlands Canada Korea, Singapore A Japan, Israel, United Arab Emirates, Saudi Arabia, Kazakhstan BBB Romania, Mexico Malaysia, Indonesia, The Philippines, South Africa, Bulgaria, Sri Lanka, Cambodia, Thailand, Kenya Greece Iran, Uzbekistan, Pakistan, India, Laos, Mongolia, Myanmar, Vietnam, Turkmenistan, Tajikistan BB Bangladesh, Kyrgyzstan Ethiopia, Nigeria, Brazil, Angola, Zambia, Egypt Argentina B Iraq Sudan Venezuela

Source: Chinese Academy of Social Sciences. *Table shows the results of an exercise by researchers at the Chinese Academy of Social Sciences with the goal of assessing overseas investment risks for Chinese companies. Not all countries were rated. See Zhang Min (2016).

12. The list of European OBOR countries is Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. See Vision and Actions on Jointly Building the Silk Road Economic Belt and 21st Century Maritime Silk Road, National Development and Reform Commission, Ministry of Foreign Affairs, Ministry of Commerce, March 28, 2015. http://news.xinhuanet.com/world/2015- 03/28/c_1114793986.htm. 13. Mira Wilkins, the History of Foreign Investment in the United States, 1914–1945, Harvard University Press (1989). BAKER MCKENZIE 43

DIFFERENT ROLES OF GOVERNMENTS AS FACILITATORS OF INVESTMENT

While countries in both regions investors to state-owned companies, often connected to have similar levels of openness, companies to raise capital. This project financing or greenfield there are distinct differences opened up opportunities for cash- OFDI to set up local operations. in the government’s role in the rich Chinese investors to step in, Recent examples include China economy and in facilitating foreign and European governments were General Nuclear’s bid to construct investment. European federal open to Chinese participation (or (and take a stake in) the Hinkley governments have been more were forced to sell to the highest Point nuclear power plant in proactive in promoting the inflow bidder due to existing tender the UK at a total cost of $26 of Chinese OFDI in past years rules). In the past five years, billion, a Chinese Rail Group-led compared to the United States, Chinese companies have spent consortium’s $1.6 billion contract where the federal government $8.6 billion on newly privatized to build a high-speed rail line has primarily delegated that assets in Southern Europe between Budapest and Belgrade, responsibility to the 50 states. (Portugal, Italy, Greece), as well and China Harbour Engineering as in the European core, including Company’s $440 million contract However, what really moved the France and the Netherlands. to build the Swansea tidal needle in terms of aggregate In North America, federal power plant in the UK. Chinese investment values was the government ownership remained companies have recently been readiness of European leaders to limited despite crisis bailouts, and able to win contracts in North sell assets to Chinese investors, the US government largely chose America as well, for example forge strategic partnerships, and public markets to exit its stakes. China CNR’s contract to supply award them public contracts. subway cars in Boston and BYD’s Since 2008, the financial and fiscal European governments have also electric bus contract with the City crises in Europe have pressured shown more willingness to award of Los Angeles. governments to privatize existing large and high-profile public assets or add new strategic procurement contracts to Chinese

TABLE 5: CHINESE INVESTMENT IN PREVIOUSLY GOVERNMENT-OWNED ASSETS IN EUROPE

Year Target Country Industry Investment Stake Motivation

2012 Energias de Portugal Utilities $3.5 billion 21% Privatization Portugal

2014 CDP Reti Italy Utilities $2.8 billion 35% Privatization

2014 Caixa de Portugal Financial Services $1.4 billion 100% Privatization Seguros

2014 Peugeot France Automotive $1.1 billion 14% Capital injection

Pending Port of Piraeus Greece Transportation Services $0.7 billion 67% Privatization

2015 Vivat Netherlands Financial Services $0.7 billion 100% Privatization

2013 EDP Renovaveis Portugal Utilities $0.5 billion 49% Privatization

2012 REN Portugal Utilities $0.5 billion 25% Privatization

Source: Rhodium Group. 44 Bird’s Eye View: Comparing Chinese Investment into North America and Europe

NATIONAL SECURITY SENSITIVITIES AND REVIEWS

Most open economies reserve the on the other hand, does not have actual and perceived CFIUS right to review foreign investment a coherent European framework challenges have also impacted for potential threats to their vital to review foreign investment for Chinese M&A activity in US high- security interests, but the design, national security risks, and the technology sectors, most notably process and application of review screening of investment for security in semiconductors. processes varies greatly across risks depends on geopolitical Recent cases highlight that North America and Europe.14 interests and sensitivities of Chinese investors increasingly national government. As a result, In the US, the Committee on face security reviews in the US investment reviews can vary greatly Foreign Investment in the United for transactions in Europe. For among European economies, but States (CFIUS) has a mandate to example, the intended Chinese they are generally perceived as less review foreign acquisitions for acquisition of Philip's LED onerous than in the US.15 potential national security risks. business, Lumileds, fell apart due While many Chinese investors have These realities and perceptions to CFIUS concerns, which asserted successfully navigated through are visible in the observed patterns jurisdiction because the company the CFIUS process, some Chinese of Chinese investment: Europe had significant assets in the United companies have had difficulties has attracted more than $10 States. CFIUS is also expected to in obtaining approval for their billion of Chinese investment in review ChemChina’s $43 billion investments, including several infrastructure assets including acquisition of Swiss agriculture transactions involving technology airports, utilities and ports, company Syngenta, which has R&D assets with potential military use compared to only $3.8 billion operations and other assets in or operations with close proximity in North America. Europe has North America. In short, the heavy to US military installations. A few also received more greenfield presence of European companies failed transactions have created the investment from Chinese in North America makes it perception that Chinese companies telecommunications equipment increasingly important for Chinese are subject to a higher scrutiny makers Huawei and ZTE, reflecting buyers to assess CIFIUS-related by CFIUS, which can work as the difficulties those entities have risks for potential acquisitions of impediment for greater investment accessing certain segments of European companies. levels in specific industries. Europe, the US market. More recently,

OTHER RULES TO ADDRESS ECONOMIC CONCERNS

Mechanisms in place to address methods and depth of merger share.17 To date these reviews have potential economic concerns also review processes vary, but are not materially impacted Chinese differ across the two regions. generally perceived as more deal-making in either region The most common framework stringent in Europe than in North because Chinese firms have a in major European and North America.16 Moreover, European miniscule market share; however, American economies (as well as competition authorities are closely they could become important in the EU level) is the review of deals watching acquisitions by state- the near future, particularly in by competition authorities for owned Chinese entities and have light of the recent jump in Chinese potential threats to fair competition considered counting all SOEs as outbound M&A activity. and consumer welfare. The one entity when calculating market

14. See OECD Investment Policy Reviews, available at: http://www.oecd.org/investment/countryreviews.htm, and UNCTAD-OECD Reports on G20 Investment Measures, available at http://unctad.org/en/Pages/DIAE/G-20/UNCTAD-OECD-reports.aspx. 15. Recent cases such as the intended Chinese acquisition of Philip's LED business, Lumileds, which was not seen as problematic by European governments but fell apart due to CFIUS concerns, reaffirm the notion of different sensitivities. 16. See the Global Merger Control Index for a comprehensive comparison, available at http://www.mergerdata.net/. 17. See European Commission case document of China Bluestar and Elkem merger: http://ec.europa.eu/competition/mergers/cases/decisions/ m6082_20110331_20310_1967334_EN.pdf. BAKER MCKENZIE 45

Commission must approve certain indirect demand generation and The methods and depth of telecommunications investments. trade effects.19 It also places so-called merger review Other examples for industry special requirements (including processes vary but are restrictions include fisheries in lower financial thresholds and Norway, real estate in Hungary additional “net benefit” criteria) generally perceived as more and electricity generation in on state-owned companies, stringent in Europe than in Switzerland.18 which it tightened in 2012 in North America. reaction to two takeovers in the Canada is an outlier and has an Canadian oil and gas sector – one expansive mandate for reviewing by a Chinese investor.20 Chinese foreign investment. Under the investment overall, and by SOEs in Investment Canada Act, Canada particular, subsequently plunged. Countries also have certain can review and block foreign While causation is difficult to restrictions for foreign investment investments of any size for potential assess (commodity prices and and/or additional regulatory security threats. It also applies a deal volumes collapsed globally checks applicable to certain “net benefit” test to the approval of in this period), the lack of major industries, which is visible in the all large investments that examines, investment activity by Chinese data. In the US, for example, the among other factors, employment SOEs since 2013 suggests that the Federal Reserve must approve effects, the impact on domestic new rules have deterred potential acquisitions in the banking sector, decision-making, R&D and capital state investors.21 and the Federal Communications investment, effects on competition,

THE THREAT OF POLITICIZATION

Aside from formal regulations, The United States has a long the politicization of specific history of politicization of China’s special economic transactions may also impact Chinese investments, and several and political systems elicit Chinese investment patterns. transactions have fallen through particular fears about Europeans, Americans and because of strong public opposition. Chinese takeovers among Canadians often have a skeptical The most notable example was parts of the electorate. attitude toward foreign acquisitions, CNOOC’s bid for California oil and China’s special economic and company Unocol in 2005, which the political systems elicit particular company abandoned after Congress fears about Chinese takeovers threatened legislation to slow down among parts of the electorate in and impede the transaction. Other those countries. This has given high-profile controversial cases politicians, competitors and special include Lenovo’s acquisition of interest groups fertile soil to IBM’s personal computer division politicize individual transactions. in 2005, the 2013 acquisition of The frequency and impact of such Smithfield Foods by Shuanghui, and politicization varies depending on most recently, Chongqing Casin’s the political system and the ability proposed acquisition of the Chicago of elected politicians and outsiders Stock Exchange. to influence the investment screening process.

18. See OECD FDI Regulatory Restrictiveness Index, http://stats.oecd.org/Index.aspx?datasetcode=FDIINDEX#. 19. Investment Canada Act (1985), last amended on 2015-04-24. http://laws-lois.justice.gc.ca/eng/acts/I-21.8/FullText.html. 20. Guideline of Investment Canada Act: Statement Regarding Investment by Foreign State-Owned Enterprises (2012). http://www.ic.gc.ca/eic/ site/ica-lic.nsf/eng/lk81147.html. 21. It remains to be seen whether Canada’s new Liberal government, elected in late 2015 after 10 years of Conservative governments, will have a more welcoming attitude toward Chinese state-owned investment. 46 Bird’s Eye View: Comparing Chinese Investment into North America and Europe

In Canada, CNOOC’s 2012 ultimately went through, but the high-profile deals have failed acquisition of oil producer Nexen debate illustrates the vulnerability because of politicization, which (coupled with Malaysia-based of investment reviews to political may partially explain Europe’s Petronas’ contemporaneous sentiment. small lead in attracting investment acquisition of natural gas producer from China in recent years, and in Europe also has its fair share of Progress Energy) sparked fierce particular the somewhat larger controversial Chinese deals, but the public debate on state-owned presence of state-owned and degree of politicization of individual investment, which resulted in the sovereign entities (which are the investments has been limited Canadian government tightening subject of controversy more often compared to North America. No its review process. The acquisitions than private companies).

FIGURE 16: SHARE OF CITIZENS WHO HAVE A POSITIVE VIEW OF FOREIGN ACQUISITIONS OF DOMESTIC COMPANIES, 2014 Selected countries and country groups; percent

60%

50%

40%

30%

20%

10%

0% Spain Poland UK France Greece US Italy Germany Developing Emerging Advanced Economies Economies Economies Average Average Average

Source: Pew Research Center, Spring 2014 Global Attitudes Survey. BAKER MCKENZIE 47 OUTLOOK

CHINA’S OFDI BOOM IS GOING STRONG

China’s OFDI boom is still in its early global and seek assets abroad that cemented a more liberal policy stages and promises many more increase their competitiveness and stance, and China’s leaders remain years of high activity. The fundamental profitability. Volatility and slower supportive of outbound investment. changes in China’s domestic economy growth in China will also fuel desires Recent projections by high-level support this outlook, as a slowdown to diversify its asset base beyond officials see Chinese outbound FDI in growth, shrinking margins and domestic holdings. Recent reforms growing by another $1 trillion by structural reforms will further to implement a registration-based 2020, which translates into average pressure Chinese companies to go outbound investment regime have outflows of $200 billion per year.22

FIGURE 17: PROJECTIONS FOR CHINA’S GLOBAL OUTWARD FDI FLOWS AND STOCK TO 2020* USD billion

250 2,500 Chinese Global OFDI Stock (Right Axis) Projected Chinese Global OFDI Stock (Right Axis) 200 Chinese Global OFDI Flow (Left Axis) 2,000 Projected Chinese Global OFDI Flow (Left Axis)

150 1,500

100 1,000

50 500

0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: State Administration of Foreign Exchange, Ministry of Commerce, Rhodium Group; *2015 estimated by combining financial and non-financial OFDI. 2016–2020 data based on projections by Li Keqiang, see Footnote 22.

22. See “李克强：中国未来五年海外投资可望超1万亿美元 [Li Keqiang: China’s foreign investment over the next five years could exceed $1 trillion],” Sina Finance, http://bit.ly/1ODFP0s. 48 Bird’s Eye View: Comparing Chinese Investment into North America and Europe

EUROPE AND NORTH AMERICA SHOULD REMAIN AT THE CENTER OF THE BOOM

If those projections hold, Europe slowdown in China, uncertainty Anbang’s acquisition of Strategic and North America can expect about the renminbi exchange rate, Hotels for $6.5 billion, HNA’s to land hundreds of billions of and the threat of additional capital $6.1 billion purchase of Ingram dollars of Chinese OFDI in the controls have boosted Chinese Micro, Haier’s acquisition of coming decade. The economic and deal-making activity in the past six General Electric’s appliance political factors currently shaping months. The first quarter of 2016 division for $5.4 billion, and Chinese investment patterns on was the busiest period on record Wanda’s purchase of film studio both sides of the Atlantic will be for Chinese M&A activity in Europe Legendary Pictures for $3.5 billion. important to watch: namely, the and North America, with nearly $6 relative attractiveness of specific billion new deals completed and industry segments in the context more than $80 billion currently of China’s development trajectory, pending—the strongest pipeline the long-term outlook for economic ever. Among them is the biggest- growth and competitiveness, the ever Chinese takeover attempt: evolution of the regulatory and ChemChina’s $43 billion bid for The first three months of legal environment, and the public Swiss agrochemical and seed 2016 suggest we will see attitude toward Chinese investors. producer Syngenta. Chinese investors also had a heady start strong growth of Chinese The first three months of 2016 to 2016 in North America, with investment activity in both suggest continued strong growth of more than $20 billion worth of economies this year. Chinese investment activity in both deals currently pending, including economies this year. The economic

A FEW RISK FACTORS EXIST

Conversely, the recent jump in in China’s long-term growth host economies. In Europe and Chinese overseas deal making also prospects pose short-term risks to North America, the most important highlights the biggest downside outbound investment. For example, question will be whether growing risks to a bullish outlook for reducing the levels of debt and public concerns about equal Chinese OFDI. Growing OFDI is reforming the system of credit market access can be addressed amplifying already significant allocation must be considered through bilateral investment levels of capital outflows. If those key pillars of reform. However, if agreements and other policies. If trends continue in the remainder of implemented, those steps could Chinese investors continue to ramp 2016, the government may need to seriously disrupt domestic and up investments in industries that impose additional capital controls global financing channels for are heavily restricted to foreign to slow down outflows. While these already over-leveraged Chinese investment in China but reforms to efforts will mostly target portfolio firms, weighing on their ability to level the playing field are further and other investment flows, they finance overseas investments. delayed, the risk of a broader could affect the ability of Chinese political backlash against Chinese The reactions to the latest wave companies to access foreign OFDI in Europe and North America of Chinese overseas acquisitions exchange for overseas investment. will increase substantially. also point to growing political Similarly, the reforms that are risks for Chinese investment in needed to reinstill confidence BAKER MCKENZIE 49

REFERENCES

- Baker & McKenzie (2015): “Reaching New Heights: An Update on Chinese Investment in Europe,” Baker & McKenzie. http://www.bakermckenzie.com/emea/reachingnewheights/

- Dunning, John H., and Sarianna M. Lundan (2008): “Multinational Enterprises and the Global Economy,” 2nd ed. Northampton, MA: Edward Elgar.

- Dunning, John H., Changsu Kim and Donghyun Park (2008): “Old Wine in New Bottles: a Comparison of Emerging Market TNCs Today and Developed Country TNCs Thirty Years Ago,” The Rise of Transnational Corporations from Emerging Markets: Threat or Opportunity?, http://www.qeh.ox.ac.uk/pdf/pdf-slptmd/ SLPTMD%20WP%20011-Dunning.pdf

- Graham, Edward M., and Paul R. Krugman (1995): “Foreign Direct Investment in the United States,” 3rd ed. Washington, DC: Peterson Institute for International Economics.

- Hanemann, Thilo, and Cassie Gao (2016): “China’s Global Outbound M&A in 2015,” Rhodium Group. http://rhg.com/notes/chinas-global-outbound-ma-in-2015

- Hanemann, Thilo, and Mikko Huotari (2015): “Chinese FDI in Europe and Germany: Preparing for a New Era of Chinese Capital,” Mercator Institute for China Studies. http://www.merics.org/fileadmin/user_upload/pdf/ COFDI_Chinese_Foreign_Direct_Investment_EN.pdf

- Hanemann, Thilo, and Daniel H. Rosen (2012): “China Invests in Europe: Patterns, Impacts and Policy Implications,” Rhodium Group. http://rhg.com/wp-content/ uploads/2012/06/RHG_ChinaInvestsInEurope_ June2012.pdf

- Moran, Theodore H., and Lindsay Oldenski (2013): “Foreign Direct Investment in the United States: Benefits, Suspicions, and Risks with Special Attention to FDI from China.” Washington, DC: Peterson Institute for International Economics.

- Daniel H. Rosen (2014): “Avoiding the Blind Alley: China’s Economic Overhaul and Its Global Implications”, Asia Society Special Report. http://asiasociety.org/files/pdf/AvoidingtheBlindAlley_FullReport.pdf

- Rosen, Daniel H. and Thilo Hanemann (2009): “China’s Changing Outbound Foreign Direct Investment Profile: Drivers and Policy Implications,” Peterson Institute for International Economics. http://www.iie.com/ publications/pb/pb09-14.pdf

- Rosen, Daniel H. and Thilo Hanemann (2011): “An American Open Door? Maximizing the Benefits of Chinese Foreign Direct Investment,” Asia Society, Center on U.S.–China Relations. http://asiasociety.org/files/pdf/ AnAmericanOpenDoor_FINAL.pdf

- Wilkins, Mira (1989): The History of Foreign Investment in the United States to 1914. Cambridge, MA: Harvard University Press.

- Wilkins, Mira (2004): The History of Foreign Investment in the United States, 1914-1945. Cambridge, MA: Harvard University Press.

- Zhang Min (2016): “中国海外投资国家风险评级 [Country-risk Rating of Overseas Investment from China]” Chinese Academy of Social Sciences. http://mat1.gtimg.com/finance/cj/touzi2016.pdf 50 Bird’s Eye View: Comparing Chinese Investment into North America and Europe

DATA RESOURCES

- American Enterprise Institute. “China Global Investment Tracker” 2005-2016. http://www.aei.org/china-global- investment-tracker/

- Bureau of Economic Analysis. “Foreign Direct Investment in the United States (FDIUS)” 2007-2013. http://www.bea.gov/ international/di1fdiop.htm

- Bureau of Economic Analysis. “Expenditures by Foreign Direct Investors for New Investment in the United States, 2014” 2015. http://www.bea.gov/newsreleases/international/fdi/2015/fdi1115.htm

- China Institute, University of Alberta. “China-Canada Investment Tracker” 2016. https://chinainstitute.ualberta.ca/

- Eurostat. “Balance of Payments Statistics and International Investment Positions” 2016. http://ec.europa.eu/ eurostat/web/balance-of-payments/data/database

- Eurostat. “European Union Direct Investments” 2015. http://ec.europa.eu/eurostat/web/balance-of-payments/ data/database

- Ministry of Commerce of the People’s Republic of China, National Bureau of Statistics of the People’s Republic of China, State Administration of Foreign Exchange. “2014 Statistical Bulletin of China’s Outward Foreign Direct Investment” 2015. China Statistics Press.

- Organization for Economic Cooperation and Development. “OECD FDI Regulatory Restrictiveness Index” 2014. http://stats.oecd.org/Index.aspx?datasetcode=FDIINDEX#

- Rhodium Group. “China Investment Monitor” 2009-2016. http://rhg.com/interactive/china-investment-monitor

- State Administration of Foreign Exchange. “China’s Balance of Payment Statistics” 2016. http://www.safe.gov.cn/

- Statistics Canada. “Foreign Direct Investment in Canada” 2015. http://www.international.gc.ca/economist- economiste/statistics-statistiques/investments-investissements.aspx?lang=eng

- Statistics Norway. “Direct Investment in Norway” 2015. https://www.ssb.no/en/utenriksokonomi/statistikker/di

- Swiss National Bank. “Direct Investment in Switzerland” 2015. http://www.snb.ch/en/iabout/stat/statpub/statpub_ fdi/id/statpub_fdi_actualdesc BAKER MCKENZIE 51

APPENDIX: DATA METHODOLOGY

The data presented in this report headquarters location, even if the DATA USE AND CAVEATS build on Rhodium Group datasets company has substantial assets The data resulting from this on Chinese FDI transactions in the outside of the covered economies transaction-based approach are not United States and the European (for example mining companies directly comparable to FDI statistics Union, which have been available headquartered in the West but with compiled according to Balance of since 2011 and 2012, respectively. assets in other parts of the world). Payments (BOP) principles. The For this report, those datasets Within the covered countries, transactions data capture the were augmented with data on however, we try to attribute total value of investment projects Chinese FDI transactions in investment to the location of the by Mainland Chinese companies Canada and non-EU European main operations. For example, if in the coverage countries, but do countries (the EFTA economies: a mining company is registered in not distinguish between financing Iceland, Liechtenstein, Norway and Vancouver, British Columbia, but all from China and domestic sources. Switzerland), compiled with the substantial assets are in the Yukon The data also do not take into same methodologies and standards. Territories, it is counted in the latter. account any intra-company flows The result is a dataset that allows between Chinese parent and an in-depth and apples-to-apples COMPILATION coverage country subsidiary. Any comparison of Chinese investment METHODOLOGY cumulative figures reflect the patterns in North America and aggregation of annual transaction Europe from 2000 to 2015. The data are compiled from a transactional approach, where values, without any adjustments for inflation, exchange rate changes COVERAGE single transactions are counted and then aggregated to quarterly or and divestitures. As such, the data The data captures all investments annual totals. The data compilation cannot be used to analyze BOP- by ultimately Mainland Chinese– relies on a research strategy that related problems and other issues owned firms since 2000 with includes a wide range of different that require a national accounting an investment value exceeding channels including company reports, perspective. $1 million. The dataset covers regulatory filings, commercial Conversely, the transactions greenfield projects (newly built databases, media reports, industry approach avoids the problems facilities), acquisitions that results associations, investment promotion commonly related to BOP data: for in at least 10% stake (which is the agencies, industry contacts and example, the distortions caused common threshold for direct as other sources. Each transaction by the extensive use of pass- opposed to portfolio investment), is coded for a number of relevant through locations. Moreover, it is and the expansion of existing variables including investment able to avoid the significant time establishments. value, geographic location, industry, lags and gaps in official data, The data captures those business activity and investor supporting the public debate with transactions for the US, Canada, characteristics. All information real-time information on aggregate the 28 member states of the EU, either comes from official company investment patterns, as well as the and the EFTA economies. For sources or is estimated based on the distribution of those investments acquisitions, each transaction type of operation, revenue, number by industry, modes of entry, is attributed at full value to the of employees and other criteria. geographical spread and ownership. location of the target firm’s 52 Bird’s Eye View: Comparing Chinese Investment into North America and Europe

GLOSSARY OF TERMS

TWO-LETTER COUNTRY CODE ABBREVIATIONS

European Union North America

Austria AT Canada - Alberta AB US - Kansas KS Canada - British Belgium BE BC US - Kentucky KY Columbia Bulgaria BG US - Louisiana LA Canada - Manitoba MB Croatia HR US - Maine ME Canada - New NB Cyprus CY Brunswick US - Maryland MD Czech Republic CZ Canada - Newfoundland US - Massachusetts MA NL Denmark DK and Labrador US - Michigan MI Canada - Northwest US - Minnesota MN Estonia EE NT Territories Finland FI US - Mississippi MS Canada - Nova Scotia NS France FR US - Missouri MO Canada - Nunavut NU Germany GB US - Montana MT Canada - Ontario ON Greece GR US - Nebraska NE Canada - Prince PE US - Nevada NV Hungary HU Edward Island US - New Hampshire NH Iceland IS Canada - Quebec QC US - New Jersey NJ Ireland IE Canada - Saskatchewan SK US - New Mexico NM Italy IT Canada - Yukon YT Latvia LV Territories US - New York NY Lithuania LT US - North Carolina NC Liechtenstein LI US - Alabama AL US - North Dakota ND Luxembourg LU US - Alaska AK US - Ohio OH Malta MT US - Arizona AS US - Oklahoma OK Netherlands NL US - Arkansas AZ US - Oregon OR Norway NO US - California CA US - Pennsylvania PA Poland PL US - Colorado CO US - Rhode Island RI Portugal PT US - Connecticut CT US - South Carolina SC Romania RO US - Delaware DE US - South Dakota SD US - District of US - Tennessee TN Slovakia SK DC Columbia Slovenia SI US - Texas TX US - Florida FL Spain ES US - Utah UT US - Georgia GA Sweden SE US - Vermont VT US - Hawaii HI Switzerland CH US - Virginia VA US - Idaho ID United Kingdom GB US - Washington WA US - Illinois IL US - West Virginia WV US - Indiana IN US - Wisconsin WI US - Iowa IA US - Wyoming WY www.bakermckenzie.com

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