COVID-19 has slowed down the pace of Chinese enterprises “going abroad” in the short term but China continues holding onto win-win cooperation and multilateral development to build an open world economy. Loletta Chow, Global Leader of EY China Overseas Investment Network, said, “In the longer run, as Chinese enterprises increase their competitiveness, they will be participating in the adjustment of the global industrial chain and supply chain more broadly. Growing at home and overseas with a global vision is essential to globalize Chinese enterprises and thus ‘going abroad’ remains a compelling trend ahead.”
China’s economy rebounds fast with companies gaining momentum. Benefitted from effective control measures against COVID-19, China’s economy recovered markedly in 2020 Q2 and Q3. The country achieved a V-shape rebound largely driven by a quick return of industrial activities, which in turn boosted exports and stabilized employment. This has helped companies stabilize their domestic businesses and ease some financial pressure. When looking for outbound investment opportunities, Chinese companies may focus on targets that are more synergistic with the domestic real economy.
Global economy slides into recession while globalization in face of transformation. Due to the pandemic, the global economy has entered recession. Economic uncertainty brought by the pandemic makes it challenging to estimate investment return. Travel restrictions also reduce cross-border investment appetite. Nonetheless, economic distress can lead to an increase in demand for corporate restructuring and divestiture. Lower business valuation further increases investment attractiveness of the projects. Loletta Chow said, “In the face of uncertainty, interested investors from China should assess their own strategies and portfolios while exploring quality opportunities. Chinese enterprises should take a closer look at macro-economics of the host country and have an in-depth assessment of the investment environment and growth potential at the regional level.” In terms of the trend of globalization transformation, Loletta Chow said, “Going forward, the movement of production factors may enter a new phase. The international movement of tangible factors such as goods and people may slow down whereas the regional movement could accelerate. Multinationals will manage a more complex supply chain system. The international movement of intangible factors such as technology, information, capital and management expertise will accelerate with the fast-developing digital technology.”
Technology stimulates economic upgrade. The pandemic has been a catalyst for boosting technology and innovation in many virtual businesses, teaching as well as online medical care. With the increased efficiency and cost reduction these technologies bring, enterprises and institutions may continue to adopt them beyond COVID-19. Multinationals will become more agile in business and team management, and a new way of cross-border teamwork will help Chinese companies attract more international talent to expand overseas.
The economic recession caused by COVID-19 has triggered revaluation of enterprises globally. Some countries have introduced foreign investment restrictions to regulate the operation and trading of foreign companies in the host country to protect local companies. For instance, they have expanded the scope of review in the healthcare and life sciences sector and the digital economy. During the acquisition process, they have also lowered screening thresholds for shareholding ratio or investment amount to prevent local enterprises or management from losing executive power or ownership. Some countries have also imposed stricter inspection on companies with special backgrounds.
As stated in the report, increased review requirements and longer screening periods have pushed up the cost of pre-investment. In light of this, Jesse Lv, Global Tax Leader of EY China Overseas Investment Network, said, “Chinese investors should read policies carefully, take a deep dive into approved cases, evaluate feasibility and develop appropriate planning.”
Chinese enterprises proactively “going abroad” can broaden the global market for the development of their goods, services and technology. They may also invest in and work with leading overseas players so as to advance faster along the global value chain. EY has identified five emerging trends when Chinese enterprises “go abroad” as follows.
1. Focus on digitalizing traditional industries
New applications and integration of digital and real economic activities will become the focus. Looking ahead, enterprises in traditional manufacturing and consumer goods will accelerate their digital transformation. Although many overseas countries have introduced stricter screening mechanisms and stringent measures on investment in cutting-edge science and technology, there are investment opportunities in less sensitive areas driven by digitalization, such as advanced manufacturing and apps/ software development.
2. “China + N" model for supply chain development
The security and flexibility of the supply chain need to be guaranteed. It is critical to explore a two-pronged response. For export-oriented enterprises in China, both domestic and overseas markets are important. Therefore, the “China + N” model could be an ideal approach. Jesse Lv said, “When selecting ‘N’, developing countries with a younger population, ample growth potential and proximity to mature markets could be preferred. A number of eligible countries are located along the Belt and Road (B&R). We expect that Chinese enterprises will speed up the deployment of regional supply chain centers in B&R countries and regions.”
3. Traditional and new infrastructure drives Chinese companies to “go abroad”
The pandemic has increased infrastructure investment demand in traditional infrastructure, represented by transport construction; and new infrastructure, represented by medical facilities and information infrastructure. Chinese infrastructure constructors have delivered projects overseas and are highly regarded for their operation and cost efficiency in the market. They have also improved the quality in technology, operation and management. China has been able to provide a world-class level of some new infrastructure. Jesse Lv emphasized, “Information infrastructure is the backbone of the digital economy. Looking forward, countries around the world are increasing investment for developing information infrastructure. This may bring remarkable ‘going abroad’ opportunities for relevant Chinese companies with leading advantages.”
4. New energy – new opportunities for outbound investment
The report points out that the pandemic can foster new possibility for more sustainable use of energy. Green initiatives and recovery will be key to lasting sustainability. The new energy sectors outside China can become attractive to Chinese investors in the future. Jesse Lv said, “Chinese enterprises should invest in advanced technologies in overseas new energy fields, strengthen technology cooperation with advanced countries, and actively explore diversified cooperation methods to achieve win-win situation. They should also promote the ‘going abroad’ of Chinese enterprises’ production capacity and equipment in the new energy fields as well as invest in and work with companies along the upstream and downstream of overseas industrial chains.”
5. Geopolitical risk prevention and control has become the “new normal”
Geopolitical risks were exacerbated by COVID-19 and have become a continuing risk to consider. When Chinese enterprises expand overseas, extra attention in changes of FDI policy is required in the pre-deal stage, while risk management and compliance should be taken seriously afterward. Furthermore, Chinese investors need to pay more attention to the cultural understanding of the host countries, build trust with local governments and the public, enhance corporate social responsibilities and work on a mutually beneficial partnership with the host countries.
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The China Overseas Investment Network (COIN) connects EY professionals around the globe, facilitates collaboration and provides consistent and coordinated services to our Chinese clients to make outbound investments. Building on the existing China Business Group in the Americas, EMEIA, and Asia-Pacific areas, COIN has expanded our network to over 70 countries and territories around the world. COIN is part of EY’s commitment to provide seamless and high-quality client services, worldwide, to Chinese companies going overseas and doing business overseas. Our globally integrated structure enables us to deploy dedicated teams with strong local experience and deep industry knowledge to provide seamless services to our clients.
This press release has been issued by Ernst & Young, China, a part of the Ernst & Young global organization.