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HOME > PAST ISSUE > REVIEWNovember 2004
SOEs continue to buy up overseas assets. But it will take the private sector to get Chinese brands established.
The news that Chinese oil trader Sinochem Corp reportedly agreed to a takeover of South Korean oil refiner Inchon Oil is not only an industry first for China but is further indication of how domestic Chinese firms are making their presence felt in overseas markets.
The firm is believed to be paying US$549 million for South Korea's smallest refinery, the first outright acquisition of a foreign oil company by a Chinese company. Currently under court receivership, Inchon Oil will, however, require further investment to upgrade its assets and boost capacity utilization, which currently hovers around the 30% mark.
For China, though, this acquisition is of special importance given its future energy needs. This summer's power rationing and sudden blackouts were strong indicators that China already faces problems meeting its growing energy demands. Global security concerns, high oil prices and limited domestic reserves of oil and gas further fuel these worries.
Direct investment in overseas mineral exploration and refining companies like Inchon Oil is one way in which the government is aiming to better ensure the nation's factories don't fall silent, and this thinking accounts for a substantial portion of China's foreign acquisitions.
According to UN figures, China had over US$35 billion invested in 160 countries at the end of 2002 with US$6 billion (late 2003 figures) tied up in overseas oil and gas exploration. Emblematic of China's strategic focus, the state oil company CNOOC is now the largest offshore oil producer in Indonesia, while in Sudan, China is currently the number one foreign investor with myriad business interests, including the drilling of oil and gas wells.
In addition, state-owned enterprises have been busy securing resources as diverse as wood from New Zealand and metals from South America.
China's biggest offshore energy venture to date was a late 2002 A$25 billion agreement on a 25-year contract between Guangdong LNG and an Australian consortium of energy companies to supply liquefied natural gas. Australian Prime Minister John Howard described that as Australia's largest-ever single export deal.
Overall, Chinese foreign investment is still only a tiny percentage of global transnational trade. However, the government continues to place emphasis on Chinese firms 'going global'. In part a praiseworthy indicator of the nation's economic development, government officials have often stated that they hope global exposure will help enhance the business practices and competitiveness of Chinese companies.
And in addition to winning government plaudits, there are valid economic reasons for exploring overseas markets, including domestic market saturation and local provincial protectionism. In the case of Qingdao-based electrical goods supplier Haier, careful positioning can ensure profitable returns, as has been the case with their domination of the US small fridge market.
China's overseas investment is already multifaceted. Examples of direct investments, joint ventures, as well as mergers and acquisitions can be found as Chinese firms aggressively adjust to the conditions of alien markets. For example, the microwave oven manufacturer Galanz now controls some 40% of the European market.
Currently numbering around 30,000, mainland firms that have gone overseas are mainly located in Southeast Asia (including Hong Kong), but increasingly attention is turning to North America as well as Africa and South America. This expansion has not been without cost, both human and financial. Earlier this year Chinese workers were killed in Afghanistan, while more recently warehouses in Spain belonging to Wenzhou shoe traders were destroyed by local rivals.
But their misfortune drew attention to the growing trend of small-scale businesses increasingly having the courage to try their luck overseas. While in the short to medium term the government's focus will remain securing resources to sustain domestic growth, it will be left to the likes of well-established operations like Haier and Galanz to bring Chinese brands into the foreign household.
The firm is believed to be paying US$549 million for South Korea's smallest refinery, the first outright acquisition of a foreign oil company by a Chinese company. Currently under court receivership, Inchon Oil will, however, require further investment to upgrade its assets and boost capacity utilization, which currently hovers around the 30% mark.
For China, though, this acquisition is of special importance given its future energy needs. This summer's power rationing and sudden blackouts were strong indicators that China already faces problems meeting its growing energy demands. Global security concerns, high oil prices and limited domestic reserves of oil and gas further fuel these worries.
Direct investment in overseas mineral exploration and refining companies like Inchon Oil is one way in which the government is aiming to better ensure the nation's factories don't fall silent, and this thinking accounts for a substantial portion of China's foreign acquisitions.
According to UN figures, China had over US$35 billion invested in 160 countries at the end of 2002 with US$6 billion (late 2003 figures) tied up in overseas oil and gas exploration. Emblematic of China's strategic focus, the state oil company CNOOC is now the largest offshore oil producer in Indonesia, while in Sudan, China is currently the number one foreign investor with myriad business interests, including the drilling of oil and gas wells.
In addition, state-owned enterprises have been busy securing resources as diverse as wood from New Zealand and metals from South America.
Biggest deal
China's biggest offshore energy venture to date was a late 2002 A$25 billion agreement on a 25-year contract between Guangdong LNG and an Australian consortium of energy companies to supply liquefied natural gas. Australian Prime Minister John Howard described that as Australia's largest-ever single export deal.
Overall, Chinese foreign investment is still only a tiny percentage of global transnational trade. However, the government continues to place emphasis on Chinese firms 'going global'. In part a praiseworthy indicator of the nation's economic development, government officials have often stated that they hope global exposure will help enhance the business practices and competitiveness of Chinese companies.
And in addition to winning government plaudits, there are valid economic reasons for exploring overseas markets, including domestic market saturation and local provincial protectionism. In the case of Qingdao-based electrical goods supplier Haier, careful positioning can ensure profitable returns, as has been the case with their domination of the US small fridge market.
China's overseas investment is already multifaceted. Examples of direct investments, joint ventures, as well as mergers and acquisitions can be found as Chinese firms aggressively adjust to the conditions of alien markets. For example, the microwave oven manufacturer Galanz now controls some 40% of the European market.
Currently numbering around 30,000, mainland firms that have gone overseas are mainly located in Southeast Asia (including Hong Kong), but increasingly attention is turning to North America as well as Africa and South America. This expansion has not been without cost, both human and financial. Earlier this year Chinese workers were killed in Afghanistan, while more recently warehouses in Spain belonging to Wenzhou shoe traders were destroyed by local rivals.
But their misfortune drew attention to the growing trend of small-scale businesses increasingly having the courage to try their luck overseas. While in the short to medium term the government's focus will remain securing resources to sustain domestic growth, it will be left to the likes of well-established operations like Haier and Galanz to bring Chinese brands into the foreign household.
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