Several respondents who have been engaged in cross-border mergers and acquisitions for a long time believe that Chinese enterprises need to demonstrate more flexibility and innovation in global investment and operations.
“We plan to start production in Thailand in the second half of the year, mainly targeting the North American market.” Xia Xiaoli, Sales Director of Zhejiang AD New Energy Technology Co., Ltd., which mainly produces and exports solar panels and solar lawn lights, told First Financial reporters that some major customers have suggested building factories in Thailand to facilitate lower import prices.
In recent years, “going abroad” has become an important way for Chinese enterprises to seek to expand global market share, acquire resources, and utilize labor or technological advantages in overseas markets. According to statistics from the Ministry of Commerce and the State Administration of Foreign Exchange, in the first quarter of this year, domestic investors in China made non-financial direct investments in 3311 overseas enterprises from 147 countries and regions worldwide, with a total investment of 242.92 billion yuan, a year-on-year increase of 12.5%. In 2023, non-financial direct investment accumulated to RMB 916.99 billion, an increase of 16.7%.
However, the process of Chinese companies going global, from regulatory approval to compliance, also faces many risks. How to avoid risks? The First Financial Journalist interviewed several lawyers who have long been engaged in cross-border mergers and acquisitions and foreign direct investment transaction consulting. They believe that Chinese companies need to demonstrate more flexibility and innovation in global investment and operation, and be fully prepared for political and economic challenges when designing industrial chains and investment models.
(‘How Chinese Enterprises Respond to Complex Situations when Going Abroad (Source: Xinhua News Agency Image)’,)
Overseas Chinese enterprises
Gong Yamin, a partner at Ruimin Law Firm, observed that currently, Chinese companies have more diverse motives for overseas investment. Manufacturing companies may need to establish production bases overseas based on customer demand and supply chain restructuring. Some mature enterprises may also seek new markets or strengthen brand building overseas after the domestic market becomes saturated. Meanwhile, in order to prevent potential disruptions to the supply chain caused by environmental changes, some companies may also make overseas investments.
From the perspective of industry preferences, high-end manufacturing, transportation, healthcare, life sciences, and technology, media, and telecommunications (TMT) are still active overseas investment areas. In terms of destination selection, there have traditionally been more M&A transactions conducted in Europe and America, but in recent years, emerging economies have gradually become popular overseas investment destinations, such as Southeast Asia and the Middle East. “This is due to the influence of valuation, regulation, and local government policies, as well as market factors,” said Gong Yamin. However, when facing emerging markets such as India and South America, the legal services market in these regions is not fully developed, which poses challenges to the compliance and safety of enterprises in the local area.
Of course, some Chinese companies have seen opportunities in overseas markets. Guangzhou Minshi Digital Technology Co., Ltd. is mainly engaged in vehicle security and autonomous driving services equipped with next-generation information technology and AI, which are widely used in engineering and agricultural machinery projects. “Due to changes in the international situation, many companies choose to invest in Vietnam, Mexico, and India. This kind of investment and development will inevitably require logistics and construction machinery, which requires the participation of Chinese enterprises,” said Shi Ximin, the general manager of the company, to a reporter from First Financial News
Wang Qing, a partner at Fu Er De Law Firm, gave an example that Ningde Times, an electric vehicle battery supplier, may choose to establish factories in the EU market in order to follow its main customers such as Tesla and large European car manufacturers (Volkswagen, BMW, Audi, Mercedes Benz, etc.). This can not only avoid potential trade barriers in the future, but also enhance competitiveness through local subsidies and preferential policies.
Ben Simpfendorfer, Managing Partner of Ovi Consulting and Asia Pacific Chairman of Ovi Forum, previously told First Financial reporters that Chinese electric vehicle manufacturers will continue to maintain a leading position on the global stage, but their production business will expand overseas and establish important production facilities and factories in Europe and the United States. This transformation means that Chinese electric vehicle companies may develop into multinational corporations like Ford or Toyota.
In the layout of “going abroad”, Gong Yamin found that over time, the overseas layout locations of overseas enterprises have become increasingly concentrated, as cost remains the core consideration factor, including labor costs, venue expenses, taxes, local subsidies, and management costs. “Larger industry companies, such as those in the battery industry, may choose to expand their presence in further regions, while medium-sized manufacturing companies are more inclined to establish new supply chain layouts in Southeast Asia,” she said.
From the perspective of investment methods, enterprises that have been operating locally for a certain period of time may choose to undertake their own green space projects. Some companies that enter overseas markets for the first time are more likely to choose to cooperate or jointly venture with local business partners due to their unfamiliarity with the local environment.
How to avoid
When Chinese companies go global, it not only involves establishing mature supply chains locally, but also needs to consider other factors such as investment environment, employee training, infrastructure construction, and power supply.
Wang Qing stated that when investing, the above conditions may not necessarily meet production requirements and require a large amount of investment. Chinese enterprises should also take preventive measures in advance, such as finding good and capable partners with the local government to establish cooperation, or obtaining more political, tax, and investment protection commitments under the positive attitude of the local government to attract foreign investment.
In addition, in recent years, the challenges in geopolitical and regulatory risks have been particularly significant. How to deal with such risks? Wang Qing suggests that Chinese enterprises should establish a comprehensive information collection and analysis mechanism, actively follow up and predict macro political and economic trends, in order to quickly respond to changes. From the perspective of investment strategy, it is necessary to avoid excessive concentration of investment in a single country and consider how to diversify risks; When designing investment structures, consideration should be given to the protection provided by bilateral investment protection agreements and other international treaties. In legal documents, “stability clauses” and other measures should be used to combat political risks, while considering adding clauses to resist mandatory government expropriation and adopting political risk insurance.
But even in markets with highly mature investment and business environments, it is not entirely worry free.
“To address these challenges, some companies choose to establish their headquarters overseas, such as in Singapore or Europe. However, if the controlling stake is still in China, these measures may not fundamentally eliminate risks.” Wang Qing suggests that from a manufacturing perspective, companies can adopt other strategies, such as setting factories in Mexico instead of the United States. Under the US Mexico Canada Agreement, this can theoretically avoid high tariffs and protective measures imposed by the United States, and meet the requirements of rules of origin.
However, recently, US officials have raised issues related to Chinese investment with Mexico. According to reports, the Biden administration is concerned that Chinese car manufacturers will circumvent the strict restrictions of the Inflation Reduction Act by manufacturing cars in Mexico, thereby surpassing other competitors with technologically advanced and more competitively priced models.
Wang Qing stated that companies need to consider adopting more flexible investment models. For example, in countries that are more friendly to Chinese investors, such as Hungary, green space investment can be considered. On the other hand, in countries with strict regulatory environments such as the United States, Chinese battery suppliers may face many obstacles. In such cases, non direct equity investment methods such as technology licensing or signing operation management agreements can be used to cooperate with local automotive suppliers to achieve business goals.
“This is not only more covert, but also helps to overcome trade barriers in the United States. With possible EU countervailing and antitrust measures, Chinese companies may need to adopt alternative cooperation or investment models in EU member states, rather than just setting up factories directly.” Wang Qing believes.
Gong Yamin stated that when dealing with the “identity issue” of Chinese companies in the US market, it is necessary to distinguish whether it is targeting the company’s own identity identification or the product’s origin identification.
“From the perspective of corporate identity, de identification is relatively more difficult. Whether it is through changing equity structure or adopting cooperative models such as joint ventures, substantial scrutiny is faced, making it difficult to completely eliminate risks. Even if some strategies are adopted, there may still be significant challenges in substance.” Gong Yamin explained that in contrast, dealing with the “identity issue” of products has more technical operational space, such as adjusting the procurement location of raw materials and the distribution of production processes, including production ratios at overseas factories, domestic factories, and other suppliers.