China has gone from the "world’s workshop" to "the world’s market" thanks to a development model centred on high value-added production and domestic consumption stimulated by higher wages. The shift of economic power from West to East could be an opportunity.
Milan (AsiaNews) - For the past few years, Chinese investments in Italy have grown exponentially in every sector, from football to engines, fashion to real estate, tourism to energy.
Inter, Milan, Pirelli, Krizia, Ferretti Group, Benelli motorcycles, Terna, Snam, Enel, are just some of the great Italian brands now in Chinese hands.
With US$ 7.8 billion, 2015 was a record year. Thanks to the deal between Pirelli and ChemChina, Italy was the main destination of Chinese capital, ahead of France (US$ 3.6 billion), United Kingdom (US$ 3.3 billion), Netherlands (US$ 2.5 billion) and Germany (US$ 1.3 billion).
The year 2016 was instead the year of Switzerland. ChemChina was once again the main player, buying Swiss chemical giant Syngenta for US$ 43 billion. This was by far the largest Chinese acquisition of a European company in history.
For years, we complained that China was stealing our jobs, especially in manufacturing. Then we got scared as China, through some form of "neo-colonial campaign", grabbed raw materials and oil across Africa.
Today, we must try to accept the fact that China is buying up all sorts of European companies. China is now extracting metals and precious gems not from Africa but from Europe: talent, intellectual property, technology, historical brands, creativity, innovation.
As China buys Europe, the opposite is increasingly rare
If our multinational corporations, attracted by low labour costs, first de-localised production in China, today things seem to have radically changed. Our companies are no longer going to China to manufacture. Labour costs are not competitive. (See Helen’s journey from China to Ethiopia, and hope for better future for Africa).
China is no longer the "world’s workshop". Instead, it has become the "world’s market", trying to overcome a development model based on investments and low-cost exports in favour of a model centred on high value-added production and domestic consumption stimulated by higher wages.
The relationship is thus going into reverse. Fewer Western companies are going to China to manufacture, whilst well structured Chinese companies now coming to Europe are growing exponentially. They come to us in search of quality products and companies that China requires to meet the needs of a middle class that has more and more disposable income.
According to data cited in the latest Baker McKenzie report released a few days ago, in 2016 Chinese investment in Europe (US$ 46 billion, up 90 per cent over 2015) was about four times as much as European investment in China. Chinese investment also reached a record high in North America (US$ 48 billion, up 189 per cent).
What can be expected in 2017? "The rapid growth of global investment activity by Chinese companies has made Chinese leaders nervous and has triggered a re-tightening of administrative controls to crack down on certain types of transactions," says the report.
Whilst Beijing seemingly wants to limit capital outflow, the attitude of European and American political leaders seems to be changing as well, certainly more hostile towards Chinese acquisitions. Therefore, it is unlikely that such growth trends can continue in 2017.
"China opened up to the world in 1979 with Deng Xiaoping’s reforms,” said Chongyun Zhu, a fashion and apparel tycoon who bought the Krizia label, in an interview with RAI 3. “In the past 40 years, [China’s] development has been fast. Today it is the second largest economy after the United States. But the Chinese population is five times that of the United States. Our market is huge. Therefore, fashion [potential] is massive. Thus, I decided to buy Krizia because with such an important label I could set the foundations to break through in the Chinese market where, let me insist on this, Italian labels are very much loved."
"Our economy has lost speed, but its still growing at 6.5 per cent and is looking for quality,” said Tian Guoli, executive chairman of the Bank of China, China’s oldest bank, and Chinese co-chairman of the last Italian-China Business Forum (Marco Tronchetti Provera was the Italian co-chairman). “Italy produces quality but has a small domestic market; China has a big market with 200 million middle-class citizens who need quality products. For this reason, we can do great things together."
Certainly it is sad to see major Italian and European labels fall, wholly or partially, into Chinese hands. Probably we are facing a sea change. Economic power is shifting from West to East. But let us not forget that China was the world's largest economy between 1100 and 1800! Indeed, the Dragon is back; yet this is not the last word.
The question we must ask is how should Europe react? A risk or an opportunity? I think it is an opportunity for two reasons. Many European and even US companies are still having a hard time. Chinese capital injections may be necessary for the survival not only of the company but also of many jobs. Volvo is a case in point. A Chinese company, Geely, bought it when it was owned by Ford. The latter was on the brink of bankruptcy and wanted to sell Volvo, but there were no takers. Volvo was in bad shape and could have folded. After it was bought by Geely, Volvo roared back, creating 10,000 new jobs in two plants in Europe (roughly about 100,000 jobs considering the supply chain of component makers, dealers, logistics, etc.). Above all, one of the jewels of the car industry was saved.
Those who sell our companies to the Chinese receive huge amounts of capital that can be used to acquire and/or develop new businesses. Thus, the cycle can begin anew. What will these entrepreneurs do with the capital? What will Pirelli do with the 7 billion it got from the Chinese? What makes Italy great is not so much its products or brands. What makes it are the brightest and most creative Italian minds themselves who created and continue to create products and exceptional brands. "The best Ferrari is the next one," Enzo Ferrari used to say.
* Giovanni Maria Mazzacani is a researcher with the UN. He studied at Fudan University in Shanghai and Bocconi University in Milan.