Download KEY TO INVESTMENT March 2015

KEY TO INVESTMENT
March 2015
(Issue 23)
The Key to Investment, a collection of international investment information, is
jointly prepared by the International Committee of Investment Experts and the
Secretariat of the International Investment Forum for policymakers, investment
firms, transnational corporations, and academia. The journal is mainly published
electronically
and
is
intended
to
communicate
dynamic,
pragmatic
forward-looking views on industries, as well as findings of related research.
Managing Editor: Lu Jinyong
Editors: Shao Haiyan, Zou He, Tian Yunhua, Yang Jie, Wang Guang
DISCLAIMER: Copyrights for the texts which comprise all issues of the Key to
Investment are held by the Organizing Committee of the China International Fair
for Investment and Trade. The texts may not be copied, reproduced, published,
distributed, modified, reused, re-posted or otherwise used in any form, without
the express written permission of the relevant copyright holder. All opinions
expressed in the journal are those of the named author alone. They do not
necessarily reflect the views of the publisher, editors, intellectual support
providers, or translators.
CONTENTS
Column for Members of International Committee of Investment Experts
☆Opening up to the Outside World and Building Chinese Global Companies
☆Four Prerequisites for Chinese Enterprises to Become Global Companies
（1）
（4）
International Investment Highlights
☆Best January for Global M&A Since 2011
☆Asia Leads the World in Global FDI Inflows
（6）
（7）
Chinese Investment in Review
☆China’s Outward Investment in 2014
☆FDI Inflows Surge 29.4% in January
（8）
（10）
China’s Macroeconomic Situation
☆China Continues to Lead the World in FDI Inflows, Rebutting Claims of Mass Exodus
☆Foreign Trade Declines but Opportunities Abound
（11）
（12）
Developments in Global Economy
☆AU Promote Continental Free Trade Area
☆IMF Revises Downward Global Economic Growth Projections
（13）
（14）
Industry Dynamics
☆ Central Government-Controlled SOEs Slow Down Pace of Overseas Expansion, Private
Companies Pick up the Slack
（15）
☆Reform of Natural Gas Pricing Speeds up, Presenting More Opportunities for Gas Suppliers
（16）
Overseas Perspective
☆ Chinese Companies Are Big But Not Strong and Face Four Obstacles in Raising Their
Competitiveness
（17）
☆How the China Carry Trade Could Unwind
（18）
Case in Focus
☆Mindray Acquires ZONARE, Moving up the Value Chain
（20）
● Column for Members of International
Committee of Investment Experts ●
Opening up to the Outside World and Building Chinese Global
●
Companies
Wu Jianmin (Vice Executive President, China Institute for Innovation & Development
Strategy)
China has opened to the outside world for more than 30 years, and yet there is no
consensus in China on how to perceive the contemporary world, nor is there unanimous
opinion on how the world changes. Lack of consensus has lead to divergence of actions on
many fronts, such as ideological policy.
On November 9 last year, I attended a seminar in Berlin which explored the international
situation over the quarter century since the fall of the Berlin Wall. Mikhail Gorbachev was
also in attendance. He painted a gloomy picture of the changes of the world. I talked about
whether the global economy had moved forwards or backwards since the collapse of the
Soviet Union in 1991. That was a crucial question. Deng Xiaoping always considered the
development of productive forces to be of paramount importance. In terms of productive
forces, global GDP soared from $23 trillion in 1991 to $71 trillion in 2013. What accounted
for the phenomenal growth over the 22 years? I think that it was thanks to the formation of
a global market in the wake of the Cold War. In a market economy, the market is the key. In
the process of global economic development, global companies play an important role.
This calls for us to gain a better understanding of global companies. Global companies have
mostly evolved from multinational companies. It has taken us quite a lot of time to
understand global companies. At the sixth special session of the UN General Assembly,
Deng Xiaoping delivered an important speech. The meeting, proposed by the representative
of Algeria as the chairman of the Non-Aligned Movement, was meant to discuss the
creation of a new world economic order. At the meeting, all developing countries, China
included, were critical of multinational companies, lashing multinational companies as
tools of neo-colonialism. Also at the session, some Western countries put forward the
concept of codependence. We rejected the idea, arguing that there could be no
codependence if Western countries rode roughshod over developing countries.
At that time, developing countries wanted to restrict multinational companies; they formed
a committee to devise a code of conduct for multinational companies. However, we failed to
restrain them; instead, they expanded rapidly and simply couldn’t be stopped. When we
began opening-up, who were we looking to bring in? Multinational companies. Professor
Wang Zhile characterizes multinational companies as “engines, catalysts, and allies”. This
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makes perfect sense. What are multinational companies all about? From a global point of
view, I think that they represent advanced productive forces. Things that represent
advanced productive forces are invincible.
Since the launch of the reform and opening-up campaign, our mentality has changed, and
the national economy has grown by leaps and bounds. In the process, many multinational
companies have come. We warmly welcome them, though they were once considered to be
tools of neo-colonialism, and we have benefited from their presence in our country. Our
country wouldn’t have developed so much if they hadn’t come, and nowadays we have our
own multinational companies.
China has a long history, which is obviously an advantage. But every coin has two sides. Our
long history is surely laudable, but it has also created a heavy baggage and strong inertia.
We must pay close attention to the tenacious inertia of over than two thousand years of rule
of feudal autocracy.
During the New Democratic Revolution, we seemed to have eliminated imperialism and
feudalism, but the inertia of imperialism runs deep. Three are mainly three types of inertia.
The first one is the “officialdom first” mentality, which affects people’s mentality and
behavior. The second one is the inertia of isolation. As Deng Xiaoping put it, China began
isolating itself from the rest of the world after Emperor Yongle of the Ming Dynasty.
Emperor Yongle reigned from 1402 to 1424. The nearly six centuries of self-imposed
isolation after Emperor Yongle resulted in strong inertia. The third one is the inertia of
revolutions. After the Opium Wars, one revolution came after another, giving rise to strong
inertia as well. Revolutionary parties and ruling parties are not the same. Even today, we
have yet to complete the transformation from a revolutionary party to a ruling party.
Under the effect of the three types of inertia, we might again slide into isolation. The other
day I attended a seminar on homegrown brands at the Great Hall of the People, and I was
shocked to hear someone argue that Western brands are the carrier of Western values. This
sounds absurd. Can we stop using products of Western brands? His argument makes no
sense. We drink Nestle coffee and fly in Boeing jets. Does it mean that we accept their
values? The influx of Western products to China is the result of the opening-up and
progress of our nation.
Some people call for closing the country to the outside world. They cite a few plausible
reasons. They argue that when it comes to a value chain, Silicon Valley takes away 35%,
Wall Street gets 30%, multinational companies grab 30%, and China has just 5%. I have no
idea who they have arrived at this statistics. Since the beginning of our reform and
opening-up campaign, multinational companies have flocked to our country to utilize our
ample labor, and in the process, our manufacturing sector has taken off and our exports
have soared. Is there anything wrong with the remarkable economic growth? Is China a
loser in the process? If so, our opening-up campaign would have been wrong! Quite a few
people believe that the West is “bent on wiping out China”. When did this phrase first
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appear? It first occurred when we were opposed to Soviet revisionism. At that time, we said
that Soviet revisionists were bent on wiping out China. After the Soviet Union collapsed, we
stopped saying that “Soviet revisionists were bent on wing out China.” In 1989, however,
some people started arguing that “American imperialists are bent on wiping out China”.
They cited all sorts of evidence to support their argument. Undoubtedly, some people in the
U.S. might have sinister plots against China, but opinion is diverse in the U.S. If the U.S.
were seeking to wipe out China, why bother to build a new form of relations with America
as large powers?
The great changes in China are primarily attributable to the nation’s reform and opening-up
policy. However, if the world has not changed, can China stand where it is today? It’s
impossible. So, how the world has changed? What has driven the changes? And what are
the tides of the world? As I mentioned earlier, global GDP has expanded three times over a
22-year period. What has driven such an extraordinary growth? It is the result of the
liberalization of productive forces and the force of the tides of the world. To modernize our
nation, as President Xi Jinping often stresses, we must keep abreast of the tides of the
world, in particular the tides of peace, development, cooperation and win-win initiatives;
otherwise, we will fall behind. This is a fundamental matter.
The formidable effect of the three types of inertia should not be underestimated. Today in
China, some people engage in a heated debate, branding others as traitors; this is largely
the result of the influence of the Cultural Revolution and ultra-leftist thought, which has a
fertile land in China and which we must guard against. Two days ago, the Office of
Counselors at the State Council hosted a seminar on enterprises’ “going global” strategy. I
said at the seminar that the ultimate purpose for Chinese enterprises “going global” is to
become global companies, rather than make a little money. Once they become global
companies, they will provide products and services for the international community, and
that means that Chinese people are directly involved in the causes that promote the
advancement of humanity.
We are all very concerned about information security arising from the development of
global companies. What should we do? There are basically two ways. The first way is that
everyone sits down and makes rules together and then abides by the rules. Global
companies have most of the interests overseas, and therefore they always make decisions
with their overseas interests in mind. But things would be different if global companies are
made to serve the world. And the other way is not to use foreign products and make
everything by ourselves by engaging in indigenous R&D. If this happens, China will move
backwards. It’s crucial to study global companies. The global market builds global
companies; it is the key and has changed many things. How will global companies continue
to grow? What impact will they exert? How can we work with global companies? What do
Chinese companies “going global” lack? What are our strengths? What are our weaknesses?
And how can we build Chinese global companies? All these questions require research on
our part, and such research can be very meaningful.
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● Four Prerequisites for Chinese Enterprises to Become Global
Companies
Zhao Jinping (Director, Department of Foreign Trade & Economic Cooperation,
Development Research Center, State Council)
A crucial task for us is to figure out how we can nurture and promote Chinese multinational
companies so that they can grow faster. We encourage enterprises to “go global”; we expand
outward investment; we entered into various free trade pacts and investment agreements;
and we seek to improve our investment environment across the board. All these efforts are
meant to secure the foothold of Chinese firms in global competition, as we know that in this
era of globalization, multinational companies have the greatest influence on the economy,
accounting for the bulk of global production, trade and investment and enjoying a great say
in the pricing of goods and services. If we do not have truly competitive Chinese
multinational companies, we cannot say that our economy is globally competitive. One of
the objectives of our ongoing efforts to build an open-style economic system is to promote
the growth of Chinese multinational companies – Chinese global companies.
This begets a question. How can Chinese firms become global companies or multinational
companies with a global presence? Based on my research over the past two years, I believe
that there are four prerequisites for Chinese firms to meet before they can become global
companies.
First, to become a global company, a Chinese firm must secure a place on the global stage.
Sure, you can do this through trade. When your products or services are marketed globally,
you’re a global company. But essentially, to secure your interests globally, you must export
capital. This is a rule that has been proved by many multinational companies in developed
countries; you can’t just circumvent the rule.
Our efforts to encourage Chinese firms to go global dovetail with our nation’s strategic
requirements. We’ve talked a lot about the “going global” campaign of Chinese firms. Such
a campaign is necessary and important, at both the macro and micro levels. Nevertheless,
there is some misunderstanding. Some view it as an effort to move our excess industrial
production capacity abroad, while some see it as a sign of the saturation of the domestic
market. Some even believe that the movement of our industrial production capacity abroad
has been compelled by rising labor costs in our country; they argue that to remain
competitive and maintain their shares of the international market, Chinese firms have to
“go global” by extending their production chains. I think none of these interpretations
capture the true meaning of the “going global” campaign of Chinese firms.
The success stories of many Chinese firms has show that once a firm engages in a massive
merger or acquisition abroad, it can resolve many of its weaknesses and problems. By going
global, a firm can start to secure a place on the international stage and achieve some
influence. Some firms which have “gone global” have achieved remarkable changes, in the
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home country as well. Some local governments mistakenly think that the “going global” of a
firm constitute the drain of local resources and therefore adopt a negative attitude. Some
people insist that a firm “going global” must invest abroad; they also argue that such
investment must be profitable, and that if there is a loss, it is a drain of resources. In
making such an argument, these people fail to see the true essence of investment.
Second, to become a global company, a firm has to embed itself into a global value chain
which has taken shape as a result of the division of responsibility in the global industry.
Without such an embedment, you can’t take part in the division of responsibility in the
industry. When we talk about processing trade, we tend to think that the bulk of its profits
lies at both ends of the trade and that we never get a decent share of them, and we also
believe processing trade is poor in producing technological premium effects. In fact, we
must look beyond this. We can’t afford to be short-sighted. Our industrial chains and value
chains are expanding. From processing trade, we’ve accumulated a wealth of experience in
industrialization, but stuck at the low end of value chains, we gain very limited profits.
Take iPhone for example. Most iPhone handsets are made in China, but America gets 47%
of the profits of an iPhone handset as they control the design, brand and management of
the product; Japan gets 34% of the profits as they make the core components of the phone
and have superior technology that others don’t have; South Korea gets 13% of the profits as
they control part of the core technology; and we get merely 3% to 4% of the profits as we are
on the low end of the industry and simple provide manual labor to complete the
manufacturing. We must move up the value chain step by step. This is a pathway that we
must embark on.
As a matter of fact, some Chinese firms have been rather successful in their “going global”
campaign. Geely, for example, has directly embedded itself into a global value chain,
meeting the second prerequisite for becoming a global company.
Third, to become a global company, a firm must strictly abide by international rules. Most
of the world’s rules have been made by multinational companies in developed countries;
this is not going to change anytime soon, and we have to live with it. Going forward,
however, we may try to adjust our strategic positioning and change our role from a follower
to a leader. I don’t think that such a change will take long.
But there is another rule – an unspoken rule which is hindrance to Chinese firms aspiring
to become global companies. For example, many Chinese firms undercut each other while
bidding on international projects or competing for international business, and eventually
none gets the business.
Let’s take a look at how Japanese and Korean companies do. They often refrain from
bidding on large international projects which some other companies from their own
country are bidding on. They know that if they get in as well, a vicious competition may
result, damaging the macro interests of their nation, and that they may not be able to make
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a profit in the first place. In contrast, our firms tend to engage in vicious competition with
each other internationally. China’s top two IT giants, Huawei and ZTE, for instance, are
locked in a vicious fight with each other, causing tremendous damage to both themselves
and the macro economy. Cases like this are plenty, including the case of CSR and CNR,
China’s top two bullet train makers. China’s high-speed rail industry is facing
unprecedented opportunities for growth, but the vicious competition between our firms
reduces the results of our “going global” push. Sometimes, foreign governments take some
restrictive measures. We can’t see such measures as entirely aimed at containing China;
some of them may have been taken precisely because our firms’ own problems.
Fourth, for firms to become a global company, it’s essential to create a truly
business-friendly environment. China has transformed from a net importer of capital into a
net exporter of capital; as such, our tasks in global FDI flows may need to change. When we
were a net importer of capital, we worked hard to improve our investment environment and
we were under pressure to improve our investment environment to attract more investment
from multinational companies to stimulate our economic development. Conversely, when
we are a net exporter of capital, we hope that the host country can provide a truly
business-friendly environment for our firms.
Such changes are reflected by our intentions to sign investment agreements with the US
and the EU and by our efforts to fully upgrade the existing free trade pacts. We are aspiring
to stimulate reforms through opening-up and to create new engines of growth. This
requires us to enhance our business environment and to create an open, transparent, stable
and predictable business environment in accordance with international practices. This is
essential to our efforts to build more Chinese global companies. The four free trade zones in
Shanghai and three other cities have taken steps to this end. An open, transparent, stable
and predictable business environment for both domestic and foreign investors will be
conducive to investment by multinational companies and to the growth of domestic firms as
well.
If we can meet these four prerequisites, more Chinese multinational companies and global
companies will emerge.
● International Investment Highlights ●
● Best January for Global M&A Since 2011
Global merger and acquisition (M&A) deals totaled $232.9 billion in January, up 28% from
a year ago, according to data from Thomson Reuters. Asia-Pacific deals accounted for 43%
of the activity by value, up from 20% last January and surpassing Europe and U.S. M&A
targeting U.S. and European companies felt 13% and 1%, respectively, from last January.
6
U.S. companies acquired the most foreign targets, with 118 outbound deals valued at $50.3
billion, accounting for almost half of the month’s global M&A activity and making the best
annual start on record since 2006.
The restructuring of Hong Kong tycoon Li Ka-shing’s Cheung Kong Group and Hutchison
Whampoa is the largest M&A deal so far this year. The deal is valued at $47.7 billion, larger
than the combined value of the next three biggest deals. This Hong Kong deal is one of the
eight mega-deals in January. The combined value of these deals is $114.0 billion, the
highest level since January 2011. Of this year’s eight mega-deals, three were in
the financial sector, two were telecoms deals, and there was one each in the energy and
power, materials and healthcare sectors.
(Source: http://sydney.mofcom.gov.cn/article/jmxw/201502/20150200900425.shtml)
● Asia Leads the World in Global FDI Inflows
In 2014, developing economies absorbed 56% of global FDI, double the pre-crisis level and
52% higher than in 2013, according to a report released on January 29 by the United
Nations Conference on Trade and Development (UNCTAD). At the regional level, FDI flows
to developing Asia were up. Preliminary estimates demonstrate that combined inflows to 40
economies in the region grew by an estimated 15% to a historical level of around US$492
billion in 2014.
According to the report, in 2014, China became the largest destination for FDI, surpassing
the U.S. to claim the title for the first time since 2003. Of the world’s top five recipients of
FDI, the U.S. is the only developed economy, and the four others are China, Hong Kong,
Singapore and Brazil. Over the years, China has experienced phenomenal growth, becoming
the world’s second largest economy. China has always wanted to dethrone the U.S. China’s
rise in the ranking reflects the ongoing switch of FDI from developed economies to
developing economies. In 2014, developing economies’ FDI inflows rose 4%, while
developing economies saw their FDI inflows fell 14%.
James Zhan, Director of Investment and Enterprise at the UNCTAD, said that the Chinese
economy has grown steadily over the years and that this growth momentum will continue.
He pointed out that capital inflows to China have changed structurally, switching from
manufacturing to service and from labor-intensive industries to technology-intensive ones.
Global FDI flows in 2014 were heavily influenced by economic uncertainty and geopolitical
risks including regional conflicts, and by the US$130 billion mega-buy-back of shares by
Verizon (the U.S.) from Vodafone (the U.K.), which significantly reduced the equity
component of FDI inflows to the U.S. Considering that its economic growth is faster than
most other developed economies, the U.S. is expected to become the world’s most favored
7
destination for foreign investment again.
According to the report, the U.S. was not the only developed economy seeing falling FDI
inflows. As the euro zone’s economy stuck in recession, FDI inflows to Germany and France
fell by $2.1 billion and $6.9 billion, respectively. In comparison, the United Kingdom saw
its inflows rise to an estimated $61 billion, becoming the largest FDI recipient in Europe.
Flows to transition economies more than halved, reaching $45 billion as regional conflict,
sanctions on the Russian Federation, and negative growth prospects deterred foreign
investors (especially from developed countries) from investing in the region. FDI flows to
the Russian Federation are estimated to have fallen by 70%. In Ukraine, FDI flows turned
negative to -$200 million.
Although developing countries as a whole saw a rising share of FDI flows, Asia is the only
region experiencing a spike in FDI flows. In contrast, FDI flows to Latin America are
estimated to have decreased by 19% to $153 billion in 2014, after four years of consecutive
increases, and inflows to Africa fell by 3% to an estimated $55 billion.
In 2014, global FDI inflows declined by 8% to $1.26 trillion, the lowest level since the 2009,
when the global financial meltdown plunged the global economy into a recession.
Trends in global FDI flows are uncertain for 2015. The fragility of the world economy, with
growth tempered by hesitant consumer demand, volatility in currency markets and
geopolitical instability will act as a deterrent for investors. The decline in commodity prices
will also lower investments in the oil and gas and other commodity industries. One of the
lasting effects of the financial crisis is that foreign investors are pulling out of developed
economies. Businesses are not yet ready for expansion. A solid rise in FDI remains distant.
(Source: http://www.tnc.com.cn/info/c--d-3505003.html)
● Chinese Investment in Review ●
● China’s Outward Investment in 2014
In 2014, Chinese investors made direct investment in a total of 6,128 foreign businesses in
156 countries and territories worldwide, recording a cumulative non-financial overseas
direct investment of RMB 632.05 billion or $102.89 billion, an increase of 14.1%
year-on-year. In December, non-financial overseas direct investment totaled RMB 80.41
billion or $13.09 billion, a surge of 31.8%. At the end of 2014, China’s cumulative
non-financial overseas direct investment totaled RMB 3.97 trillion or $646.3 billion. China’
s foreign investment in 2014 had the following characteristics:
8
First, China’s inward and outward investment moved closer to a balance. According to
statistics from the Ministry of Commerce and the State Administration of Foreign Exchange,
in 2014 China’s total foreign direct investment surged 15.5% to $116 billion, with financial
investment jumping 27.5% to $13.11 billion and non-financial investment climbing 14.1% to
$102.89 billion. The difference between outward investment and inward investment stood
at merely $3.56 billion, the closet ever level on record to a balance.
Second, Chinese firms’ overseas M&A activity surged. In 2014, Chinese firms engaged in
substantial M&As in a diverse range of sectors, with the energy and mineral sectors
continuing to receive the bulk of Chinese investment. A consortium led by Minmetals
Resources Limited acquired the Las Bambas copper mine in Peru for $5.85 billion, while
the State Grid Corporation bought a 35% stake in Italian energy grid unit Cassa Depositi e
Prestiti (CDP) Reti for 2.1 billion euros ($2.54 billion). M&A activity in the manufacturing
sector also rose. Lenovo purchased Motorola’s mobile phone business for $2.91 billion,
while Dongfeng Motor took a 14.1% stake in France’s PSA Peugeot Citroen for $1.09 billion.
Cross-border M&A deals in agriculture rose sharply. COFCO acquired Singapore’s Noble
Agriculture for $1.5 billion and Dutch company Nidera for $1.29 billion, completing the two
largest ever overseas investment deals by a Chinese agricultural firm.
Third, the mix of industries receiving Chinese investment continued to optimize. In 2014,
Chinese firms invested in a wide range of industries in 15 major sectors, including leasing
and business services, mining, wholesale and retail, construction, manufacturing, real
estate, transport, warehousing, and telecoms. Direct Chinese investment totaled $37.25
billion in leasing and business services, $19.33 billion in mining industry, and $17.27 billion
in wholesale and retail. These three sectors were the top recipients of direct Chinese
investment.
Fourth, outward investment by regional companies jumped. In 2014, direct outward
investment by regional companies surged 36.8% to $45.11 billion, accounting for 43.8% of
the nation’s total direct outward investment in the year, an increase of 7.2 percentage
points over the previous year. Guangdong, Beijing and Shandong were the top three
outward investors, pouring $9.601 billion, $5.547 billion and $ 4.411 billion overseas,
respectively.
Fifth, Chinese firms were more aligned with local stakeholders and became more proactive
in fulfilling their social responsibility. China State Construction Corporation, for instance,
hired nearly 300 local construction teams in Algeria and locally sourced 85% of the supplies
for its housing projects in the country. In 2014, the company made local procurements of
close to $400 million and subcontracted 20% of its Bahamas island resort project, worth
$350 million, to local builders and suppliers. CSR built an ASEAN manufacturing and
maintenance center in Malaysia and localized its manufacturing, marketing and service. For
its copper mining project in Peru, Aluminum Corporation of China built a wastewater
treatment plant before extraction began, resolving the water contamination problem which
had beset local residents for more than 70 years. Moreover, the company spent over $200
9
million to build modern urban facilities in the mining area.
(Source: http://china.huanqiu.com/News/mofcom/2015-01/5491671.html)
● FDI Inflows Surge 29.4% in January
In January, FDI inflows to China continued to grow robustly. In the month, 2,266 more
foreign-invested enterprises were set up, up 31.8% year-on-year; contracted FDI soared
126.2% to $33.21 billion, while utilized FDI surged 29.4% to $13.92 billion.
FDI inflows to the financial service sector rose sharply. In January, the service sector
received inflows of $9.18 billion, accounting for 66% of the total inflows to the country, an
increase of 45.1% year-on-year. Financial service industries other than banking, securities
and insurance witnessed the establishment of 313 more foreign-invested enterprises, a
surge of 317.3%. These industries saw their contracted FDI jump 476.5% to $9.49 billion
and utilized FDI soar 1,261.7% to $4.62 billion.
FDI inflows to high-end manufacturing industries continued unabated. In January, the
manufacturing sector received FDI inflows of $3.95 billion, accounting for 28.4% of the
total inflows to the country, a year-on-year increase of 13.9%. The transportation
equipment manufacturing industry experienced a 34.8% increase in its number of new
enterprises and a 103.3% surge in utilized FDI. The telecom, computer and other electric
equipment manufacturing industries saw their contracted FDI and utilized FDI climb 19.5%
and 48.8%, respectively.
Investment by major countries and regions in China continued to grow. In January, Hong
Kong, South Korea, Singapore, Taiwan, Japan, Germany, the US, the UK, Sweden and
Saudi Arabia were the top ten investors in China in January. Investments from these
countries and regions totaled $13.44 billion, representing 96.5% of the total FDI inflows to
China, up 34.3% year-on-year. Except Singapore, Taiwan and the US, all top ten investor,
including Hong Kong, South Korea, Germany, the UK, Sweden and Saudi Arabia,
significantly increased their investment in China. The number of new Japanese-invested
enterprises and contracted FDI and utilized FDI from Japan increased 3.5%, 46.9% and
3.2%, respectively.
M&A deals by foreign firms increased. In January, the number of new enterprises set up by
foreign investors through M&A declined 3.6% to 107, but the contracted FDI and utilized
FDI soared 1,083.7% and 1,268.6% to $8.25 billion and $850 million, respectively, with the
amount of the contracted FDI representing 24.8% of the total sum for the country.
(http://sydney.mofcom.gov.cn/article/jmxw/201502/20150200900427.shtml)
10
● China’s Macroeconomic Situation ●
● China Continues to Lead the World in FDI Inflows, Rebutting Claims
of Mass Exodus
Japanese watch-maker Citizen abruptly shut down its factory in Guangzhou on February 25.
Citizen isn’t the only one. Another Japanese company, Panasonic, has pulled two TV
production factories out of China. And U.S. software giant Microsoft has also shuttered two
Nokia factories in China. As a result, claims of mass exodus surfaced. On February 10,
Qualcomm was slapped with a $975 million fine by Chinese regulators, sparking more
speculation on how foreign companies will redeploy their investments in China.
Numbers speak for themselves. According to the Global Investment Trends Monitor report
released by UNCTAD on January 29, FDI inflows to China reached about $128 billion in
2014, an increase of about 3% compared with 2013, turning China into the largest recipient
of FDI inflows. China’s service sector in particular proved a magnet for foreign investors. In
2014, the Chinese service sector received FDI inflows of some $66.3 billion, rising 7.8%
year-on-year and accounting for about 56% of the total inflows to the country, while the
manufacturing sector recorded inflows of around $40 billion, down 12.3%.
The mix of Chinese sectors receiving FDI is undergoing a profound change. Although rising
labor and production costs have driven some foreign companies in the labor-intensive
low-end manufacturing industries to move their manufacturing operations to low-income
countries, FDI inflows to China’s high-end manufacturing industries and high-tech
industries have been increasing. China’s high-end manufacturing industries, such as
telecom equipment, computers, electronic equipment and transportation equipment
continue to draw significant levels of FDI, while the service industries, such as healthcare,
eldercare, logistics transport and e-commerce, also see steadily rising FDI inflows.
The switch of many transnational corporations to the service sector has largely been driven
by their need to cope with China’s ongoing economic restructuring and to reposition in the
global market. China’s service sector has grown by leaps and bounds over the years in the
midst of industrial upgrading and economic restructuring, and FDI inflows to service
industries with high levels of technological requirements have surged. Moreover, with the
robust growth of China’s manufacturing sector, foreign companies’ advantages in
manufacturing in China are diminishing. Their switch from low-end manufacturing to
high-end manufacturing is necessitated by their desire to cope with China’s economic
growth.
(http://money.163.com/15/0213/11/AIB3S88T00253B0H.html)
11
● Foreign Trade Declines but Opportunities Abound
The first set of macro economic data in 2015 is out. In January, China’s foreign trade
declined 10.8% year-on-year, with exports and imports falling 3.2% and 19.7%, respectively.
Although the Lunar New Year holiday is a factor, the larger-than-expected drop in foreign
trade is largely attributable to weak global economy and rising downward pressure on the
domestic economy.
Sluggish demand in the global market is the culprit of the decline of exports. Performance is
mixed for major economies. Among the developed markets, the U.S. has turned in an
impressive performance, while Europe and Japan continue to suffer from weak growth
momentum. Among the emerging markets, the ASEAN and Indian economies fare better,
while the growth of commodity-dependent Brazil and Russia has stalled, and Russia is also
under economic sanctions imposed by Western countries. In January, the export
performance of China’s major trading partners was largely consistent with their economic
conditions.
Although the falling prices of commodities are the culprit of plunging imports, the
deceleration of China’s economic growth is an equally important reason. In January, almost
all of China’s major imported commodities saw falling prices, with the prices of crude oil,
refine oil, iron core, coal, soybean and copper down by 41.4%, 34.6%, 45.1%, 18.4%, 14.5%
and 10.9%, respectively. In the month, with the exception of soybeans, all commodities saw
falling imports. While falling import prices are largely the result of the conditions in the
international commodity market, declining imports reflect the deceleration of China’s
economic growth and excess production capacity back at home.
China’s foreign trade still enjoys considerable favorable conditions for growth this year. The
Chinese government’s diplomatic initiatives over the past year have created a favorable
atmosphere for the nation to broaden its economic and trade cooperation with the rest of
the world. Moreover, with commodity prices hovering at low levels, China can increase its
strategic energy reserves at lower costs, and the widening of the trading band of the yuan in
the medium and long run will help make Chinese export products more competitive.
Domestically, the measures aimed at sustaining foreign trade growth and bolstering exports
will continue to produce results, while efforts to streamline administrative procedures and
facilitate trade will continue to help companies reduce their operating costs. Furthermore,
the “going global” push for China’s competitive heavy-duty equipment manufacturing
industry is expected to create a new driver of growth. As such, China’s foreign trade is likely
to pick up after the Lunar New Year.
(Source: http://money.163.com/15/0211/01/AI4TBHPF00253B0H.html)
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● Developments in Global Economy ●
● AU Promote Continental Free Trade Area
The Executive Council of the African Union (AU) met in Addis Ababa, the capital of
Ethiopia, on January 27. AU officials stated that the joint launch of the tripartite free trade
area by the Common Market for Eastern and Southern Africa (COMESA), the East African
Community (EAC) and the Southern African Development Community (SADC) is a crucial
move towards the creation of a Continental Free Trade Area in Africa in 2017.
To promote African trade, the heads of state of AU member states approved an action plan
in January 2012 to create a Continental Free Trade Area in 2017 which will merge the
disparate small economies in Africa into a single large market.
According to AU officials, COMESA, EAC and SADC will establish a new free trade area in
the Egyptian capital of Cairo in May this year.
At the press conference of the 24th AU Summit, Fatima Haram Acyl, Commissioner for
Trade and Industry of the African Union, said that the COMESA-EAC-SADC Tripartite Free
Trade Area is to be lauded as it is a major step towards the creation of a Continental Free
Trade Area.
The AU official noted that the Tripartite Free Trade Area will comprise 26 countries with a
combined population of nearly 600 million people and a total GDP of approximately 1
trillion U.S. dollars.
She pointed out that the AU has been working hard with the regional economic
communities to promote the free movement of people and goods within the continent.
She further announced that the Commission is striving towards providing a common AU
passport to facilitate a continental free movement of people across the borders of the
respective African countries which will enhance trade within Africa.
The Commissioner underscored the need for the statistics of the free trade areas to be
reviewed so as to provide African business men with updated data to enable them do their
business transaction and networking efficiently.
(Source: http://finance.huagu.com/gj/1501/332277.html)
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● IMF Revises Downward Global Economic Growth Projections
Global growth will receive a boost from lower oil prices, butt this boost is projected to be
more than offset by negative factors, including investment weakness as adjustment to
diminished expectations about medium-term growth continues in many advanced and
emerging market economies. Global growth in 2015–16 is projected at 3.5 and 3.7 percent,
downward revisions of 0.3 percent relative to the October 2014 projections.
According to the IMF, four key developments have shaped the global outlook since October
2014.
First, oil prices in U.S. dollars have declined by about 55 percent since October. The decline
is partly due to unexpected demand weakness in some major economies, in particular,
emerging market economies—also reflected in declines in industrial metal prices.
Second, while global growth increased broadly as expected in the third quarter of 2014, this
masked marked growth divergences among major economies. Specifically, the recovery in
the United States was stronger than expected, while economic performance in all other
major economies fell short of expectations.
Third, with more marked growth divergence across major economies, the U.S. dollar has
appreciated some 6 percent in real effective terms relative to the values in October 2014. In
contrast, the euro and the yen have depreciated by about 2 percent and 8 percent,
respectively.
Fourth, interest rates and risk spreads have risen in many emerging market economies,
notably commodity exporters, and risk spreads on high-yield bonds and other products
exposed to energy prices have also widened.
The IMF predicts a growth rate of 2.4% for advanced economies, 3.6% and 3.3% for the U.S.,
1.2% and 1.4% for the euro zone, 0.6% and 0.8% for Japan, and 4.3% and 4.7% for
emerging markets and developing economies in 2015 and 2016, respectively, compared
with a projected 6.8% and 6.3% for China and 6.3% and 6.5% for India. Russia’s economic
outlook has markedly weakened, reflecting the impact of falling oil prices and rising
geopolitical tensions on foreign investment inflows, domestic production, and confidence.
Its economy is expected to contract 3% and 1% in this year and next year.
Weaker projected global growth for 2015–16 further underscores that raising actual and
potential output is a policy priority in most economies. There is an urgent need for
structural reforms in many economies, advanced and emerging market alike, while
macroeconomic policy priorities differ.
In most advanced economies, the boost to demand from lower oil prices is welcome, but
14
additional policy measures are needed in some economies. In particular, if the further
declines in inflation, even if temporary, lead to additional downdraft in inflation
expectations in major economies, monetary policy must stay accommodative through other
means to prevent real interest rates from rising.
In many emerging market economies, macroeconomic policy space to support growth
remains limited. But in some, lower oil prices will alleviate inflation pressure and external
vulnerabilities, thereby allowing central banks not to raise policy interest rates or to raise
them more gradually.
Lower oil prices also offer an opportunity to reform energy subsidies and taxes in both oil
exporters and importers. In oil importers, the saving from the removal of general energy
subsidies should be used toward more targeted transfers, to lower budget deficits where
relevant, and to increase public infrastructure if conditions are right.
(Source: http://finance.china.com.cn/news/gjjj/20150210/2955567.shtml)
● Industry Dynamics ●
●
Central Government-Controlled SOEs Slow Down Pace of Overseas Expansion,
Private Companies Pick up the Slack
In 2014, the overseas equity oil and gas production of Chinese oil companies rose about
10% to exceed 130 million tons of oil equivalent, but their overseas oil and gas investment
slumped. In the year, China’s top three oil companies (PetroChina, Sinopec and CNOOC)
reported new project acquisitions of less than $3 billion, down 90% from the previous year.
The top three oil giants have slowed down their pace of overseas business expansion and
switched the focus of their attention from scale expansion to the profitability of their
overseas assets. They need time to absorb and consolidate the large quantity of the overseas
assets that they have acquired in the past few years. Despite a moderating pace of overseas
acquisition last year, the oil giants’ overseas equity oil and gas production has risen
significantly. According to a PetroChina report on the oil and gas industries, the overseas
equity oil and gas production of Sinopec surged 30% to 40 million tons of oil equivalent last
year; CNOOC experienced a 20% growth to 22 million tons; but PetroChina, which boasts
the largest overseas equity oil and gas production as a share of its overall production among
the three oil giants, had almost zero growth at 60 million tons.
In comparison, private companies were more active in overseas investment last year, with
preliminary investment agreements more than doubled to RMB 2.2 billion. Since the start
of this year, many publicly listed companies, such as Zhenghe Co., Sail Co., Goldleaf Jewelry,
15
Yaxing Chemicals, Guanghui Energy and Haimo Tech, have announced plans for overseas
oil and gas investments. Bomo Polymer purchased a 51% stake in Rally Canada Resources
for RMB 120 million. Fosun International acquired Australia-based Roc Oil Co. for $440
million in cash. Private firms have actively explored opportunities abroad as the domestic
oil and gas industries are largely controlled by the three oil giants and therefore offer few
investment opportunities.
(Source: http://money.163.com/15/0211/01/AI4S27J600253B0H.html)
● Reform of Natural Gas Pricing Speeds up, Presenting More
Opportunities for Gas Suppliers
At an economic and financial conference for the central leadership on February 10, Chinese
President Xi Jinping called on officials to press ahead with the reform of the oil and gas
pricing system and to develop non-conventional energy. As planned, the prices of existing
and incremental gas supplies for non-residential use will be merged this year. The
introduction of market principles to gas pricing mechanisms and increasing gas
consumption downstream are expected to open up growth opportunities for fuel gas
suppliers.
With rising demand and the reduced use of coal, the shortfall of natural gas supplies in
China has steadily increased. In 2013, the apparent consumption of natural gas reached
167.6 billion cubic meters, and for the first time, the rate of dependence on overseas
supplies exceeded 30%, reaching 31.6%. If all demand were to be met, China would have
needed 22 billion more cubic meters of natural gas in 2013. The apparent consumption in
2014 totaled 183 billion cubic meters, up nearly 9%, lower than the 13.9% in 2013. Given
increasing environmental pressure, however, consumption is expected to rise rapidly in the
years ahead. Under the government plan, by 2020, natural gas will account for 10% of the
consumption of primary energy, and the total consumption of natural gas will rise to 360
billion cubic meters, almost double the level of 183 billion cubic meters in 2014. This
enormous room for growth is expected to boost the market space of gas suppliers.
To bring the share of clean energy in total energy consumption to the desired level and
optimize the energy mix, China is aggressively expanding natural gas importation channels
and stepping up domestic exploration of natural gas reserves. Imported gas supplies will be
transmitted to the country via pipeline networks in northwestern, southeastern and
northeastern parts of the country, while LNG imports will be delivered via the seaports
along the eastern coast. Considering the production growth rates and importation status,
domestic supplies of natural gas are expected to have an annual compound growth rate of
12% in the period 2015-2020.
With plunging oil and gas prices in the international market, the hikes of prices of natural
gas stocks this year may be lower than previously expected. With the introduction of market
principles to pricing mechanism and the maintenance of prices at reasonable levels in
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comparison to alternative energy, gas suppliers will have more downstream users.
Moreover, as more urban residents switch to natural gas and industrial enterprises
consume more gas, terminal gas distributors will enjoy greater profitability.
(Source: http://business.sohu.com/20150213/n408983175.shtml)
● Overseas Perspective ●
● Chinese Companies Are Big But Not Strong and Face Four Obstacles
in Raising Their Competitiveness
These days, we take the march of China for granted. Though its economic juggernaut has
slowed, Chinese output is now bigger than that of the US by some measure. So, will Chinese
companies too take the world by storm? Is it only a matter of time before many of us are
chatting on Chinese-made mobile phones and driving Chinese-built cars?
It certainly might look that way, according to a report in a British newspaper on Feb. 4. Last
year, Alibaba, the ecommerce giant, completed the biggest initial public offering in history.
Other technology groups such as Baidu and Tencent have established dominant positions in
China’s massive online marketplace. Even Xiaomi, a company that did not exist five years
ago, has come from nowhere to become one of the world’s biggest smartphone
manufacturers.
There are at least four reasons why the likes of Google, BMW and Goldman Sachs need not
be shaking in their boots just yet.
The first was highlighted this month by Alibaba, which is facing a class action suit in the US
over allegations that it failed to disclose important information ahead of its IPO. The suit
relates to claims that Alibaba covered up discussions with Chinese regulators over its
alleged failure to clamp down on fakes. In the short term, the incident reveals a gulf
between the regulatory environment in China and the US. That gulf may play a part in other
industries too. Banks used to a state-mandated spread between deposit and lending rates
may struggle to assess risk outside China.
Second, fairly or unfairly, Chinese companies may be penalized because of their perceived
relation to the Chinese state. The classic example is Huawei, a world-class telecoms
company that has been unable to break into the US market because of suspicions in
Washington that it poses a security threat.
Third is the question of brands. Until last year, not a single Chinese company made
Interbrand’s top 100 ranking. Last year, Huawei broke into that elite club at number 94.
The quality of cars produced by companies such as Great Wall and Chang’an has risen
17
markedly in recent years, according to industry surveys. Yet none has acquired anything
like the cachet to make a serious assault on US or European markets.
A fourth and more subtle obstacle to international expansion is the sheer size of China’s
domestic market. While South Korean, Taiwanese and even Japanese companies had little
choice but to venture abroad, many Chinese businesses can grow fat at home.
None of these obstacles is insurmountable. Besides, barriers to entry in fast-growing
developing markets are far lower. Even in advanced markets such as the US, only the
reckless would bet against at least one or two Chinese companies making it big before too
long. Though hardly a household name, who could have predicted that China CNR would
make history by winning a $570 million contract to supply subway cars to Boston’s transit
system? As to the question of whether Americans will be driving Chinese cars any time soon.
The answer is they already are: Zhejiang Geely bought Volvo five years ago.
(Source: http://opinion.hexun.com/2015-02-08/173178289.html)
● How the China Carry Trade Could Unwind
Could changing tides in “carry trade” capital flows suddenly drain value from Chinese
property and equities, causing the renminbi to depreciate rapidly and darken investor
perceptions of China’s prospects? Such an outcome is more likely than generally realized.
China has undeniably boomed in recent decades, thus engendering a general bias that
Chinese state planners will prevail or triumph – as suggested by the more than 60 percent
run-up in the Shanghai Composite Exchange Composite Index since mid-2014.
Yet, as widely noted, China for decades has misallocated capital to unproductive sectors of
the economy, partly because state governments and a growing cadre of crony
state-capitalists reap related benefits. With global lenders hungry for yield, China
private-sector debt has surged to ratios that eclipse equivalents in the US or UK before
2008, while reported mainland China banking assets stand at $25 trillion, or three times
the size of economy — at a time when Chinese economic growth is losing steam, and
official figures are suspect.
New Chinese home prices are falling, industrial production looks vulnerable, with factory
output growth easing between 2013 to 2014. Loan growth has also slowed. Producer prices
are deflating, and have been for three years.
China’s foreign exchange (FX) reserves are already shrinking, falling by more than $150
billion since the peak in August 2014, the largest drop ever. This FX drop reflects a
too-strong renminbi that is undercutting mainland competitiveness, compounding the
effects of escalating China business cost.
18
The People’s Bank of China (PBoC), the central bank, finds itself on the horns of a dilemma.
Should they make more credit available by cutting interest rates and allowing a weaker
currency or maintain an artificially strong currency with the risk of suffocating the economy?
The parallels between the Far East in 1997 and 2015 China are disconcerting, to put it
mildly. Consider that in 1997 Thailand’s economy was one of the most rapidly developing in
the world, fueled by carry-trade hot money, a situation mirrored in Malaysia and Indonesia.
All three nations were defined by crony capitalism in the allocation of credit and business
opportunities. Thailand, Indonesia and South Korea had large current account deficits,
encouraged by fixed-exchange rates. The cheap external borrowing led to heavy exposure to
overseas hot money.
As the US economy recovered from a recession, the US Federal Reserve raised US interest
rates, thus making the US a more attractive hot-money home relative to Southeast Asia by
1997. Carry-trade flows reversed. Famously, Thailand tried to maintain the exchange value
of its baht, but could not.
The fallout in 1997 was ugly; the Thai stock market fell 75 percent, the baht lost more than
half its exchange value, and the nation’s largest financial outfit collapsed. Thailand’s
employers undertook massive layoffs, and, in a nation of 60 million, 600,000 foreign
workers were sent home.
Unfortunately for the PBoC, history from yesteryear shows that the omnipotence of central
banks against market forces is just a myth. The Bank of England was forced to withdraw
their peg to the ERM, the Thais could not hold the baht in place 17 years ago, nor could
even the Swiss National Bank freeze the Swiss franc just days ago.
The PBoC has been maintaining the renminbi-US dollar managed peg, while the
export-rival Japan has succeeded in cheapening the yen by a nearly 25 percent in the last
two years. The euro is also sinking against the dollar, as the ECB executes quantitative
easing. Thus, China-based exporters are becoming less competitive.
It won’t be long before the PBoC changes heart and endorses a substantially weaker
renminbi/US dollar rate. Surely it will create problems at home as mainlanders will struggle
to cover their foreign currency liabilities, which could evolve into snowballing capital flight
and a rapid plunge of domestic asset prices. For Chinese banks, and the heavily exposed
“shadow banks”, a real-estate retreat could be financially fatal. But this is where their war
chest of $3.8 trillion of FX reserves can be put to use instead of propping up the renminbi
to stem an exodus of capital.
It is the nature of sudden financial and market reverses to be unexpected, such as the
collapse of crude oil prices, the fall of the Russian ruble, or radical policy reverses. Today,
the market is not anticipating a U-turn in Chinese fortunes, nor a weaker renminbi. But
19
tomorrow may be different.
(Source: http://opinion.hexun.com/2015-02-10/173226749.html)
● Case in Focus ●
● Mindray Acquires ZONARE, Moving up the Value Chain
On June 12, 2013, Mindray Medical, China’s largest medical device maker, sealed up its
nearly $105 million bid for California’s Zonare Medical Systems, giving its imaging business
a major international market boost, plus access to a well-developed global direct sales force.
Mindray said it planed to use the acquisition to strengthen its focus on the high-end
ultrasound market, and that ZONARE would help the company speed up the launch of its
next-generation high-end ultrasound tech. With the sealed deal, Mindray Medical took
another big step forward in its internationalization process. In the previous two years, the
company had acquired 10 firms, with eight in China and two abroad.
I.
About the Parties
Mindray is one of the leading global providers of medical devices and solutions,
dedicated to innovation in the fields of patient monitoring & life support, in-vitro
diagnostics, and medical imaging. Headquartered in Shenzhen and listed on the New
York Stock Exchange, Mindray possesses a sound distribution and service network
with subsidiaries in 22 countries in North and Latin America, Europe, Africa and
Asia-Pacific. Since its foundation in 1991, Mindray’s development has been driven by
innovation. Mindray has built up a global R&D network with research centers in Seattle,
New Jersey, Miami, Stockholm, Shenzhen, Beijing, Nanjing, Chengdu, Xi’an and
Shanghai. Today, Mindray’s products and services can be found in healthcare facilities
in over 190 countries and regions. Inspired by the needs of our customers, we adopt
advanced technologies and transform them into accessible innovation, bringing
healthcare within reach. In March 2008, Mindray acquired US firm Datascope’s
monitoring business, becoming the third largest brand in the global field of life
information monitoring.
Founded in 1999, ZONARE is based in Mountain View, California. Over the past
decade, ZONARE has become one of the leading ultrasound brands in high-end
radiology segment globally. Its world-class R&D team, comprising several leading
ultrasound
experts,
developed
the
company’s
revolutionary
ZONE-Sonography technology to deliver superior image quality. Moreover, ZONARE
has a direct sales team mainly covering developed markets including the US, Canada,
Scandinavia and Germany. The company reported sales of about $64 million in 2012.
20
At the end of 2012, more than 7,000 ZONE-Sonography machines were in operation
around the world. Customer satisfaction with the machines was high, with a repeat
purchase rate of more than 50%. Major users which have purchased more than RMB
100 million worth of equipment from ZONARE include the University of Michigan,
Vanderbilt University’s School of Medicine, Yale University’s School of Medicine, the
Second Affiliated Hospital of Charity Hospital, Sichuan University No. 2 Affiliated
Hospital, China Aviation Administration No. 361 Hospital.
II. Background of the Acquisition
With steady global population growth and population ageing, the world’s medic device
industry has been growing robustly. China’s medical device industry, despite its
humble origins, has grown exponentially in recent years. Sales of medical devices in
China soared from a mere RMB 17.9 billion in 2001 to over RMB 250 billion in 2014,
an 14-fold increase with inflation factored in, making China the world’s second largest
user of medical devices after the U.S.
China’s medical device industry has the following problems. First, the device to drug
ratio in China stood at merely 0.19:1 in 2014, compared with about 0.7:1 globally and
more than 1 in Europe, the U.S. and Japan. China is well below the average
international level and the shortfall in the medical device industry remains huge.
Second, China’s medical device industry is poor in innovation. Although conventional
medical equipment is common in the country, high-end equipment is far and few
between. With ample natural resources and labor, China has attracted many
international medical device makers, who have built factories in China. China has more
than 15,000 homegrown medical device makers, but most of them are small and stuck
on the low end of the industry with no capacity for international competition. In China,
the high-end medical device segment is controlled by foreign companies, resulting in
exorbitant prices for advanced medical devices. In 2013, China imported nearly RMB
15 billion worth of medical devices, most of which were high-end. In the same year,
China exported $19.3 billion worth of medical devices, the majority of which were
low-end.
In contrast, the U.S. boasts the world’s strongest technological prowess and innovation
capacity and is the world’s largest market for medical devices. It also produces nearly
40% of the world’s medical devices and is home to many global medial device giants.
III. Motivation for the Acquisition
Mindray purchased ZONARE mainly to gain patented technology, expand its product
line, and increase its global presence.
First, by acquiring ZONARE, Mindray would gain access to sophisticated patented
technology. ZONARE has a world-class R&D team, strong innovation capacity, and
21
superior patented ZONARE-Sonography technology. Mindray would retain ZONARE’s
R&D team, and the two companies would jointly develop next-generation ultrasound
equipment for the global market.
Second, the transaction would help Mindray expand its product line. With the deal,
Mindray would tap into the high-end ultrasound market. Since the rollout of its first
fully digital ultrasound diagnostic system in 2001, Mindray’s products have been
primarily aimed at the low end and middle range of the market. According to Mindray,
China’s color Doppler ultrasound market was worth RMB 4.8 billion in 2010, with
approximately 54% of it going to the high-end segment, but this high-end segment was
dominated by transnational corporations, with GE Medical, Phillips and Siemens
controlling about 65% of the market. China’s major ultrasound makers, including
Mindray, SonoScape, Landwind and Shanchao, all made low-end and mid-range
products, and most high-end ultrasound devices in China were foreign-made. ZONARE
holds the world’ top-class high-end ultrasound technology and ranks fifth in the U.S. in
ultrasound diagnostic system. The acquisition of ZONARE afforded Mindray quick
access to the high-end ultrasound segment.
Third, conventional endogenous growth had proved inadequate for Mindray’s
ambitions for overseas markets. In 2008, Mindray embarked on a series of overseas
M&As to expand its operations. In the ensuring two years, it purchased eight
companies, expanding its product line from monitors and medical imaging devices to
surgical and medical information fields. According to publicly available data, in the
fiscal year ending March 31, 2013, Mindray had sales of $242.1 million, up 10.5%
year-on-year, and profits of $57.4 million, up 57%. To raise its sales to RMB 10 billion
by 2016, Mindray may consider more M&As. It is committed to enhancing its
international competitiveness on the strength of its core technology.
IV. Risks of the Acquisition
Mindray’s aggressive M&A activity abroad has prompted some people to question its
expansion mode. Industry observers argue that despite its vigorous push into overseas
markets, Mindray, which prefers to expand its boundaries through M&As, has actually
failed to achieved its intended objectives through M&As. They suggest that Mindray
will run into various problems by copying its domestic experience and practices for
overseas markets. In the emerging markets which Mindray has aggressively pushed
into, Russia and Brazil are both considering legislation in support of the growth of
homegrown businesses, while India continues to compete with low production costs
and product prices. As such, Mindray’s profitability prospects remain uncertain in
these emerging markets. In spite of annual sales of $64 million in 2012, ZONARE
actually lost money and its profitability remained weak. The transaction might dilute
Mindray’s 2013 and 2014 earnings.
In response to concerns over the risks, Minghe Cheng, Mindray’s co-Chief Executive
22
Officer, said that ZONARE’s poor record of profitability was largely attributable to high
financial expenses, low gross margins, and management flaws, all of which could be
rectified. Mindray plans consolidate ZONARE over the next two years to improve its
profitability. “We are very excited about this transaction. We evaluated many different
acquisition targets and determined that ZONARE’s proven business model, along with
its technology and sales channel assets, fits very well with our selection criteria,” said
Mr. Cheng. “This transaction will create significant synergies by combining ZONARE’s
strong innovative R&D capability and direct sales and service network in the high-end
ultrasound market with Mindray’s efficient engineering and production platforms. We
expect customers to benefit from the combined company’s expanded portfolio and
improved ability to develop more innovative and customized products.”
23