Investment wisdom that lasts forever

New wave of mid-sized private Chinese companies in Europe shows the way

Investments by big Chinese companies in Europe have made the headlines in recent years, but it is the entrance of mid-sized private Chinese companies into the continent through acquisitions that is now gaining attention.

These companies, motivated by taking advanced technology and know-how back to China as well as gaining sales channels in Europe, are very focused on acquisitions, often moving ahead of state-owned and mega private Chinese companies.

These private companies are particularly keen to access the wealth of opportunity at the so-called mid-market level, where smaller European companies, often manufacturers, are eager to do deals in Europe with Chinese companies.

In particular, investments in and strategic acquisitions of European manufacturing companies are starting to happen, and this trend looks set to continue.

Chinese and European manufacturing companies in the same business sector can often quickly understand each other and may already be working together. An initial small investment can lead to closer cooperation, giving the Chinese manufacturer the opportunity to build its reputation with its partner and in the relevant market before making larger strategic acquisitions later.

Such strategic acquisitions can provide crucial access to technology, know-how and key customers and be a winner for both the Chinese and European companies.

The recent acquisition in the automotive sector by Shandong Yongtai of Covpress in the Midlands region of England is a good example.

Shandong Yongtai is recognized to have built a strong local reputation through its partnership with another Midlands company that then introduced it to Covpress, which it later bought. That reportedly gave Shandong Yongtai access to Covpress' key customer, Jaguar Land Rover, the Midlands-based British car maker that was bought by India's Tata Group in 2008.

The deal was welcomed by the local media and will definitely open the way for other similar investments by Chinese companies in that region, especially in its buoyant automotive sector.

One important recipe for synergy to be achieved in these deals is for Chinese buyers to look after their new employees and build mutual trust with their European management team in the post-acquisition integration stage.

In this area, Chinese companies could perhaps learn from Japanese companies such as Toyota and Nissan, which became model employers in Western people's eyes when they set up factories in Britain in the 1980s.

The resulting positive reputation has rubbed off on many Japanese companies that followed them into Britain.

Additionally, it is useful for Chinese companies to localize after making the acquisition, or maintain some local European characteristics of the target companies they have bought.

It is not necessary for all of the senior managers to be European. It is expected that a Chinese company will have senior Chinese managers at the very top and that they will have to regularly communicate with their headquarters in China. However, having European managers in certain key management positions, such as in human resources, is often welcomed, as are other local staff.

Another important factor for establishing a good reputation and local credibility is engagement with local businesses. Fostering relationships with accountants, corporate finance specialists, law firms and local banks is crucial. It gives a local edge and access to key local contacts who are more than happy to help secure deals for Chinese clients.

A top tip is not just to focus on businesses in the capital cities. If the deal you want is in a region, focus on that region, as Shandong Yongtai apparently did so well in the English Midlands.

Europe has an abundance of opportunities for Chinese companies, and Britain has declared itself "open for business".

How Chinese companies make their moves over the next few years will dictate whether China is seen in Europe as a great business partner, or one to avoid.

The time is right for Chinese companies to invest in Europe. The Chinese proverb "A good reputation lasts a hundred generations" is as true as another one that says "A bad reputation lasts for 10,000 years". If, in the next few years, Chinese companies establish a reputation as great business partners in Europe, we can look forward to many years of Chinese companies working alongside European ones to the benefit of both economies.

The author is a partner at Gateley LLP, a law firm based in the UK.

(China Daily Africa Weekly 10/11/2013 page9)