High operating costs 'no barrier for Chinese firms'

Companies need to get advice on effective cost of working in Europe

High operating costs should not deter Chinese companies from investing in Europe, according to an expert with a major professional services company.

"Do not try to compare (Europe) with what you have in China (in terms of cost), because it is simply not comparable," Gabriel Attias, an audit partner of Deloitte Touche Tohmatsu France, told China Daily.

Attias has 28 years' experience with a primary focus on auditing local and multinational clients, and emphasis on the supervision of the Chinese Services Group of Deloitte France.

He said it is important for potential Chinese investors to know their effective cost, which often turns out to be higher than the initially estimated cost. Many lines have to be added to the initial cost, depending on the business and specific agreements with workers' unions, Attias said.

A report by the European Union Chamber of Commerce earlier this year said Chinese investors generally see the EU as being open to foreign investment, and are willing to increase investment there. But they also reported many difficulties, which included dealing with European labor laws and high operating costs.

The wrong approach is to have the image that running a business in Europe is expensive, Attias said.

However, working out how much the effective cost will be can be difficult and this is why Chinese companies should be advised by professional agencies first, he said.

"For example, if a US company is targeting the European market, it will give firms such as ours a mandate to do research for it. But Chinese companies are not yet ready for that," Attias said. "The biggest difference is the way you are approaching the market."

He said Chinese people are usually patient about many things, but when it comes to business, Chinese businessmen always want a return on their investment immediately.

"This is not the way we are approaching the market in France. Particularly for those Chinese companies starting from scratch in Europe, it takes time to build your business there and get your investment back."

But he said Chinese investors are increasingly realizing that when it comes to mergers and acquisitions, it is not wise to radically change an acquired company's organization and rules.

"In many cases, acquired companies have very good brands and projects. They just need cash. You should understand that the company's profits were based on its organization and rules. If you change the rules, you change the premise of its profitability."

According to a report by Deloitte, Europe saw the bulk of both outbound foreign direct investment and mergers and acquisitions investment in 2011-12. In terms of total investment volume, 34 percent of Chinese investment went to Europe, while only 27.1 percent and 17.9 percent went to Asia and North America, respectively.

Of all Chinese investment to Europe in 2011-12, manufacturing took the lead, with 46 percent of FDI volume. Technology, media and telecommunications followed, with a 17 percent share.

The latest Chinese investment came at the end of May when conglomerate Fosun International, which was partnered with AXA Private Equity, placed a friendly offer to acquire French resorts company Club Mediterranee for 17 euros per share, or for about 556 million euros ($719 million).

The strategic plan will include the development of resort businesses in emerging and mature markets, with the opening of new villages and consolidation of commercial actions in these markets, the Financial Times reported.

This buyout, according to Attias, is a good example of how Chinese investors should consider investing in Europe - not just targeting a single market, be it either the French market or the European one, but the global market.

He said that in addition to tourism, France's attractiveness also lies in high tech, research and development, the high productivity of its workers, and the food industry.

In the pharmaceutical sector, for example, some Chinese companies are setting up R&D branches in France, and are developing new products targeting the Chinese market, taking advantage of the country's talent pool and generous state subsidies. In France, R&D activities receive a subsidy from the state, which represents a third of the expense, including staff salaries.