Chinese billions for German businesses

Imagine if an investor came along and bought the company where you were currently working. A normal reaction would be to worry: Will there be spending cuts? Is my job still safe?

But with the recent takeover of the German machine manufacturer Krauss-Maffei by the China National Chemical Corporation, aka ChemChina, it's a different story.

The change of ownership was welcomed by managers and employees alike. Even the unions were on board. And no wonder: Upon announcing the acquisition, ChemChina emphasized its plans to keep Krauss-Maffei's locations intact, workforces and all. Heck, they even said they intended to hire more people.

"The fact that workers and the IG Metall union are welcoming the acquisition is of course positive," Mikko Huotari from the Berlin-based Mercator Institute for China Studies told DW.

In Germany, Chinese investors enjoy a good reputation. Huotari is a co-author of a study for the Mercator Institute that looks at the dimension of China's corporate engagement in Europe.

Increased investment

According to Huotari's research, Chinese investments in Europe in 2014 were at 18 billion euros ($19.5 billion). That's significant because roughly a decade ago, hardly any Chinese were investing in Europe at all.

Between 2000 and 2014, more than 1,000 startups, mergers and acquisitions worth some 46 billion euros took place.

Among the biggest purchases was Lenovo's investment in the German computer maker Medion in 2011 for 530 million euros. The heavy machinery manufacturer Sany paid a similar amount in 2012 for Putzmeister, the Swabian maker of concrete pumps. The takeover of the automotive supplier Hilite International by the aircraft manufacturer Avic in 2014 cost 473 million euros. Weichai Power, a diesel engine specialist, ponied up 467 million euros in 2012 for the engineering and logistics company Kion.

A big deal

The Chinese expansion into Germany's small and mid-sized enterprises reached new heights with ChemChina's purchase of Krauss-Maffei, a specialty producer of plastics and rubber, for 925 million euros.

The guiding principle of these takeovers is nearly always the same: Chinese companies buy themselves access to high-quality technology from Germany and often to long-established brand names. In return, they make it easier for Germans to access the Chinese market.

For Mikko Huotari, strong Chinese investments abroad are a long-standing trend. One of the perks has indeed been reforging the country's image as a manufacturer of low-cost, low-quality goods. Huotari found that this has helped Chinese companies remain competitive.

"We anticipate the currently precarious state of the Chinese economy leading to ever more capital being invested abroad," he said.

For now, the weak euro may also provide additional motivation for Chinese buyers to do their spending in Europe. There's certainly enough money available. Back in 2007, China founded the powerful sovereign wealth fund CIC, or China Investment Corporation. It did so in order to invest part of its huge foreign exchange reserves at home and abroad. Beijing's aim was to reduce its dependence on American bonds, where China has parked most of its 3.7 trillion-dollar currency deposits.

Acquisitions as partnerships

After some initial failures, the Chinese have learned that successful acquisitions have to function like partnerships.

Meanwhile, the government in Beijing is strictly checking all foreign acquisitions, according to the German daily "Süddeutsche Zeitung." Every two years, the government publishes a country-by-country breakdown of recommended takeovers, which investors are required to abide by. In the past, such transactions required the rubber stamp of up to 100 government officials, from the General Consulates in the country in question all the way up to the Economy Ministry.

That process has since been streamlined and today, only 15 authorizations are necessary.

With very few exceptions, Chinese investors have left existing management in place after buying companies. Only once or twice did they install their own managers, who, in turn, led their companies on a very long line. Their primary task was to improve market access to China, the Süddeutsche Zeitung wrote.

"In Europe, there are many small and mid-sized businesses with excellent products. But they're shying away from Asia," Henry Cai from the Chinese financial investor Capital Agic told Germany's "Handelsblatt" newspaper.

Like many of his Chinese colleagues, Cai is especially interested in firms pioneering the area of Industry 4.0, a designation for the production of connected and "intelligent" machines.

An eye on corporations as well

But Chinese companies have long been interested in more than just Germany's small and mid-sized enterprises. They're happy to add larger corporations from Europe's largest economy to their portfolios as well.

ChemChina, for instance, took over the Italian tire specialist Pirelli last year for a staggering 7 billion euros.

The company is reportedly already eyeing another proper mega-deal, too. Late last year, ChemChina inquired about the prospect of buying the Swiss crop protection company Syngenta. If such a deal comes to fruition, it would dwarf all other transactions like it.

With a potential value of 40 billion euros, Handelsblatt wrote, it would be "the absolute high point in the history of Chinese expansion abroad."