Time is right for Chinese firms to invest in Europe

By Frank-Jürgen Richter

Global Times, April 17, 2017

Is it time to invest? If so, where? If we ask the first question of investment managers they say “… well last week was better than today. Next week might be better.” And their response to the second question is even more opaque. However, IMF Managing Director Christine Lagarde speaking in Berlin in early April said the global economy was “picking up” and that 2017 into 2018 ought to be better than 2016. Furthermore, Reuters reported earlier this month that German manufacturing growth had reached a nearly six-year high in March contributing to a national expansion in the first quarter of 2017 with new export orders to the fore. It would seem that Europe might offer scope for profitable investment by Chinese investors.

Of course the choice of country in which to invest remains a general challenge. Across Europe there are many management styles that differ between East and West and most noticeably North and South, and the UK is formally pledged to leave the European Union taking away its own pragmatic management style that is inclined to be somewhat “mid-Atlantic” rather than “continental.” There are many other factors to be considered such as reduced taxation regimes (often called tax holidays), or reduced land costs if investors regenerate a brown-field site. Some years ago, after the UK deregulated its financial services (called “The Big Bang”) in 1986, many foreign firms invested in a London office site, others in a UK production facility, all enjoying the Schengen open borders policy throughout Europe (otherwise called the European Single Market) for goods or services once they left the UK customs space. This will change after Brexit is formalized, but we have two years to wait for this.

The European labor laws are very different from those operating in China and may be different in each nation. To many overseas managers it seems odd to first verbally warn a worker for an offence, then for the same alleged offence to write a formal warning, and then only on the occasion of the third offence be able to sack the worker. Some nations, notably the UK, have simple rules whereby managers can adjust their total workforce according to production needs, whereas in France and Spain it is almost impossible to reduce staff levels even if their wages are bankrupting the firm.

Many Chinese firms are looking to invest in inland provinces but they are also looking for overseas investments. Coastal firms operating in the special development zones are accustomed to highly efficient local logistics services providing input flows as well as outflow management of finished goods, whereas the logistics from coastal regions to inland customers are often less well developed. Logistics in China still costs too much at 14 percent – roughly twice the level in other advanced economies – so moving manufacturing activity closer to clients in Europe looks attractive.

Investing in brown-field sites will take several years to yield commercial benefits. A merger or acquisition takes less time and should generate success quickly. An example is Geely, who took over the London Black Cab Company headquartered in Coventry, a region of the UK once famous for automotive manufacturing. The black cab is synonymous with London taxi operations, and the vehicles are welcome worldwide but are deemed a little too costly when compared with less practical standard cars. Recently Geely opened a new factory to produce electric taxis that it also hopes to sell overseas to cities that are keen on the famous brand and concerned about pollution.

The IMF has noted a persistent low productivity in all economies and the excessive inequalities that exacerbate it. The former has arisen following years of sluggish growth after the 2008 global financial meltdown. Managers have tended to retain cash, not investing in more productive machinery and retaining workers using the obsolescent machinery. Now, almost one generation after the “crash” we find global demographics aging quickly and there is a greater need to adjust a firm’s machinery to operate with fewer staff. This implies robotization, which is feared by all unionized labour groups as they fight, forlornly, to retain their inefficient jobs.

Firms in Europe and the US generally followed academic council and invested in research to highlight better manufacturing systems, but they have not progressed far along the robotizing route. China has tended to invest in greater automation only to speed up manufacturing, not to make it more effective. Now the time is ripe for Chinese investors – who are knowledgeable about robots and who understand the pressure to make goods to the highest quality standards – to join the ready marketplace for investment in Europe. Manufacturers in Germany, say, have long understood the need for quality management, but have been reluctant to invest in robotics. They could join with Chinese investors looking, like Geely, to increase market penetration globally using fewer staff.

I am sure that many Chinese firms will favor investing in Europe, Brexit notwithstanding. In contrast, the US with its new administration under President Donald Trump has not yet clarified its foreign and trade policies, and uncertainty spooks investors. The time is ripe for greater collaboration between firms in Europe and China, thus expanding China’s modern Silk Road initiative well beyond its historical termination upon the medieval quaysides of Venice.

The author is founder and chairman of Horasis, a global visions community. bizopinion@globaltimes.com.cn