What can Chinese investment do for your British SME?
9 min read
28 April 2016
It may have slowed down, but China’s economy is still growing at three times the speed of the UK’s and there are still massive opportunities for outbound investment. Recent figures attribute a record-breaking $101bn worth of global deals to Chinese buyers in the first three months of 2016 alone.
China is on track to have the biggest M&A year on record in 2016. The country is changing fast and opportunities don’t just lie with the big, state-owned players any more.
There is plenty of interest in the UK’s mid-market from privately owned businesses, looking to invest in companies with brands or products that give them competitive advantage in their home market, as well as a foothold in developed Western markets
The bottom line is that speed of evolution in China is creating a “win win” opportunity for European mid-market businesses to access new sources of investment and new markets at the same time.
Transitioning from Old China to New China
The Chinese economy is shifting gears. It wants to grow sustainably into the future following decades of incredible growth, so it’s a pivotal time. Exports and infrastructure that used to provide assured profits are no longer doing so.
The focus has moved to developing the domestic economy with higher value-added businesses like those in the technology, media and telecommunications (TMT), healthcare and service industries.
What Chinese investors find particularly attractive are profitable, established businesses with stable management in consumer-focused sectors.
In many cases the Chinese investor will be making a strategic change, maybe from infrastructure to consumer markets, so typically will leave the existing management in place, to continue leading success in Europe.
Remember, China is still growing much faster than Europe, so their top priority is the go-to-market plan for China. No matter how fast a business grows in Europe, the big prize will be from the 1.2bn brand new consumers in China.
This creates a dual-pole approach, the “win win”, with Chinese investors wanting the business to thrive in its home markets of the UK and Europe, as well as the potentially huge revenue growth from taking the Western business products and brands into the Chinese market.
Of course it is less familiar, maybe more complex to develop a Chinese partnership than it is one with a European or US investor, but arguably the rewards in post-merger autonomy and growth just cannot be equalled.
So what are the challenges to business?
China might be the world’s second biggest economy, but it can be challenging to engage. There are three main hurdles to overcome: the Great Firewall, the great culture wall and the great language wall!
China has its own digital ecosystem, forget Google, it stops at the firewall. Say hello to Baidu instead. Chinese consumers are hugely digitally connected, ecommerce is incredibly well developed, more so even than the west. WeChat is like a much more advanced version of WhatsApp. There maybe a digital wall but behind it is the biggest digital economy in the world
China is one of the most complex and sophisticated cultures in existence. Through understanding the differences, it becomes much easier to understand the similarities, and that is that business in Europe and China have exactly the same objectives and motivations. So how can you bridge the gap?
Continue reading on the next page for how to connect with China, what you get out of doing so and why looking towards the Far East isn’t a brave or risky decision, but n intelligent, highly rational decision.
Connecting with China
The scale of China in geography and number of businesses is huge. For example, there are more than 45m businesses, many in cities the west has hardly heard of, so it’s no easy task to find strategic partners – even if you do speak Mandarin.
And this is why digital technology has become so important in China, it’s powering the B2C retail revolution and is just as important for B2B.
If there’s one thing the Chinese are, it’s connected, so the best way to communicate effectively for both parties is through an “online to offline” digital platform.
The beauty of a digital tool is that it’s possible to automate the first stages of matchmaking in each party’s cultural environment, which makes it easier and helps alleviate the fear of the unknown.
Read more on China’s involvement with the UK:
- Five ways the Queen influences Chinese buyers – and why it’s good for UK business
- Sajid Javid hopes to rev up £222bn Midlands Engine with investment from China
- Chinese investors pave the way for European M&A activity
What you get out of it
A new source of investment, revenue growth from access to more than 1.2bn consumers and the realistic possibility of minimal change to existing corporate governance are advantages that shouldn’t need too much explaining.
The economic growth in China is slower than it has been in the past, but this year will still be similar to adding an economy the size of the Netherlands to the G20.
Of course in Europe we’re much more familiar with working with European, US or western-focused businesses from Asia. In most cases businesses either know, or can predict, exactly who potential investors or buyers might be. And can probably describe in detail what post-merger integration will look like.
So it’s understandable that when a Chinese business they’ve never heard of, that might even be operating in a totally different industry, shows interest in investing or acquiring them. There can be surprise and hesitation to take it seriously.
Especially as the “courting” process can seem difficult to understand.
We have probably all heard stories of Chinese “fact finding” visits that seemingly were not focused on anything concrete. Equally we can hear frustration from China that European businesses don’t always support their need to build understanding and confidence in what is still a very radical decision to invest overseas. We’re as unknown to China as China is to us.
Today only a small, but increasing, number of Chinese businesses are making overseas investments and already China is on track to be the biggest source of M&A in 2016.
I say that looking towards China isn’t a brave or risky decision, it’s an intelligent, highly rational decision that combines access to a massive, fast-growing new consumer market with access to a brand new source of funds.
Sure, there are a few more factors to manage than if you take the predictable option, but the predictable option just cannot compete with the upside in business value that success in China will bring, today and in the long term.
In January, Chinese investment firm Cocoon Networks launched a £500m VC fund in London for UK and European tech startups.
David Brimson is the director of DealGlobe, an online to offline China-Europe M&A specialist combining investment banking experience with matchmaking systems.