Chinese investors poured a record $40 billion into Europe and North America in 2015, spending $29 billion, or 73% of the total in just four industries across the two regions: real estate and hospitality; automotive; financial and business services; and information technology.
Baker & McKenzie's forthcoming report, "Bird's-Eye View: Chinese Investment into Europe and North America", is unique in revealing for the first time the similarities and differences in trends between the two regions. It also tells the real story of Chinese investment in 2015 by looking only at completed rather than announced investments, and including greenfield investments as well as acquisitions. The full Baker & McKenzie report will be available in May.
"These are turbulent economic times, and yet we see Chinese companies acting with confidence and continuing to make major moves in Europe and North America," said Michael DeFranco, Chair of Baker & McKenzie's Global M&A Practice. "Chinese companies are sophisticated buyers, using varied structures to access new markets or sectors. There is strong growth in small and medium-sized M&A deals, and a willingness to do deals that result in smaller or minority stakes rather than outright acquisitions and greater activity by financial investors, including private equity funds. " He added: "While inevitably not every deal announced so far in 2016 will come to fruition, after such a fast start we could well be seeing another record year."
The first six weeks of 2016 have been the busiest period on record for announced Chinese M&A activity in Europe and North America, with $70 billion of potential deals in the pipeline.
2015 in numbers
Chinese FDI in Europe hit a new all-time record of $23 billion in 2015, about 35% higher than investment in North America. After a brief drop in 2013, investment in Europe doubled to more than $18 billion in 2014. Prior to that it grew from nearly zero before 2008 to an average of $8.6 billion from 2008 to 2012, partially driven by privatization and other opportunities arising from post-crisis restructuring.
2015 was a record year for the US, with investment reaching $15.3 billion in 2015. But FDI in energy declined dramatically in Canada in the past two years, where investment in 2015 was down more than 90% from its 2013 peak. Chinese FDI in North America averaged $11 billion a year from 2008 to 2013, reaching a record combined total of $29 billion in 2013.
Notable 2015 Highlights in Europe
- In 2015 the top five EU countries by investment value were Italy ($7.8bn), France ($3.6bn), the UK ($3.3bn), The Netherlands ($2.5bn) and Germany ($1.3bn), accounting for 78 per cent of total European investment.
- Investment more than doubled in Italy and France driven by megadeals, but declined by 35 per cent in the UK after an exceptional 2014.
- The Netherlands is emerging as a popular location for Chinese companies and acquisitions, particularly in technology and financial services.
- Chinese investment into Switzerland jumped from virtually zero in 2013 and 2014 to $1,27bn in 2015, a very close sixth in Europe behind Germany.
- Norway and Belgium also emerge as significant destinations, with investment in Belgium quintupling from previous year to $835 million driven by financial services and consumer goods, and jumping to $801 million from zero over the past five years in Norway as Chinese investors seek industrial technology.
Notable 2015 Highlights in the US and Canada
- Top three US states for FDI: New York, California and Texas.
- New York: 274% increase to $5.4 billion of investments in 2015, led by three major financial services and real estate deals.
- California: 22% increase in investments for $3.4 billion, led by IT and real estate sectors.
- Canada: Lowest levels of Chinese FDI since 2009. 81% decrease in energy sector investments compared to 2014, although a 15-fold increase in real estate investments, particularly in Ontario, as interest in commercial real estate grows.
In 2015, North America saw 72 greenfield deals over $1 million, totalling $2.1 billion and 114 M&A deals with a combined value of $14.7 billion. Europe saw 58 greenfield deals over $ 1 million, with a combined value of $750 million and 104 M&A deals, with a combined value of $22 billion.
For larger deals, Chinese investors continue to prefer to take majority or full ownership. For deals worth over $500 million in 2015, collectively worth $22.9 billion, 90% of deals ended up in controlling stakes of more than 75%. State-owned enterprises account for the majority of these mega deals (60% of total value).
Similarities and differences
Several clear trends emerge that are common to both regions:
- Chinese companies have been acquiring household names to access technology and advanced manufacturing, build global brands and increase know-how in services
- Buying up real estate and investing in infrastructure for long-term returns on the other hand may be a hedge against an economic slowdown in China. Private investors, state-owned enterprises, and sovereign entities have put more than $18.3 billion into real estate in both regions over the past five years, for example.
- A striking similarity is the rise of financial investors from China in both North America and Europe, driven by the rapid growth of those firms in China, the liberalization of outward investment rules and the streamlining of administrative processes. The combined value of investments by those new players (primarily insurers, private equity investors and conglomerates) in Europe and North America surpassed $15 billion in 2015, up from virtually zero just three years ago.
- Smaller scale investments (under $100 million) totaled $3.4 billion in North America and $2.6 billion in Europe in 2015, representing steady growth from 2014 levels. Private investors are leading the way in this category, accounting for 80% of investment.
"By definition an emerging economy will grow rapidly from a low base and begin to slow as it matures," said Thomas Gilles, head of Baker & McKenzie's EMEA-China initiative. "But Chinese investors' achievements, scale and speed in turning outwards for both growth and global influence as domestic moderation takes place are unprecedented in a single global economic cycle in the modern era. China is now among the world's top three outward investors, which is extraordinary."
However, 2015 showed some differences between Europe and North America:
- Private Chinese companies have eclipsed investments by state-owned enterprises in North America, while in Europe a comeback by state-owned enterprises (SOEs) through large deals in the European industrial sector mean they still account for the majority of Chinese investment (more than 65% in 2015).
- This greater role of State-Owned Enterprises (SOEs) in Europe compared to the US means the volume of mega deals there is greater. In 2015, mega deals of more than $1 billion accounted for 56% of total FDI value in Europe, while in the US that share was only 30%.
- In another area of difference between the two regions, the straightforward need for infrastructure and transportation investment in Europe, and active pursuit of Chinese participation attracted $10.5 billion of Chinese investment in airports, power generation, water supply and other European infrastructure assets, nearly three times the amount recorded in North America ($3.8 billion).
Changing industry focus
Europe has been a much greater attraction for Chinese investors seeking advanced manufacturing assets while North America has received more than twice as much investment in advanced services compared to Europe.
Activity in the US last year was primarily driven by Real Estate & Hospitality and Financial and Business Services sectors, with two thirds of total investment going into services, up from 14% in 2009.
Investment in advanced service sectors in both regions has grown rapidly in recent years, as Chinese companies target brands, talent, and other assets that increase their competitiveness at home and abroad. In the US software is one key sector, with $2.5 billion of investment from 2008 to 2015. Entertainment also jumped in the past two years in both Europe and North America, reaching a record of $2.9 billion in 2015. Investments in hospitality have grown to more than $6 billion in 2015 as Chinese outbound tourism soars.
Chinese companies have recently also developed an appetite for financial sector assets in both Europe and North America, with $4.6 billion invested in 2015 alone—which is more than total Chinese investment in financial services in the previous 14 years.
A few industries show similar levels of investment across the two regions since 2000. These include the real estate and hospitality sector ($13.1 billion in Europe and $13.2 billion in North America) and the agriculture and food sector ($7.1 billion in Europe and $7.4 billion in North America).
"If you look at the big picture, Europe has led the way in developing advanced manufacturing processes, in part because of labour costs, while North America's industrial decline has been offset by a focus on the service sector and, latterly, consumer technology," said Danian Zhang, Chief Representative, Baker & McKenzie Shanghai. "So it's natural Chinese investors would be drawn to the best of what each region has to offer."
Where next?
Chinese FDI into both Europe and North America has in aggregate been breaking records for the past five years. Some $205 billion has been invested since the turn of the century ($108bn in North America and $97bn in Europe). Almost 80% of that has been invested since 2011 alone.
The strong start to 2016 – nearly $50 billion of pending deals in Europe and more than $20 billion in North America - suggests these trends will continue to evolve in both regions with more sophisticated and diverse deal structures.
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