New Energy OFDI Goes Strong
Since the turn of the new century, China’s outward foreign direct investment (OFDI) has fast accelerated. In particular, that by high tech companies has been playing a unique and positive role in facilitating domestic industrial technological advancement and optimizing China’s presence in the global economy, noted a commentary by Prof. Lu Feng of the NSD and his co-authors Li Shuangshuang and Wu Sirui. Lately firms in electric vehicle, lithium battery, and photovoltaic industries have posted explosive growth in domestic production and export volume and become active in OFDI. The authors argued that such moves, despite certain downside, are competition-driven in an open environment and needed for Chinese firms to acquire international market share in a long-running and stable fashion as well as for China to rise above the ‘Small Courtyard and High Fence’ tactics of some countries.
Starting at less than USD3 billion in 2002, China’s OFDI rose quickly in the following years and peaked at nearly USD200 billion in 2016. At around USD170 billion in recent years, fluctuations notwithstanding, it puts China in the first or second place in the world. Tech OFDI recorded its apex in 2016, at USD36.3 billion, before going downward in line with policy adjustment. In recent years, it has picked up steam again.
Overseas M&A and investments used to be favored by some Chinese private firms to push their international drive. Some high-profile examples include Huawei’s small-scaled acquisitions in the US at the start of the new millennium; Haier’s construction of an industrial park in South Carolina, USA, and acquisition of an Italian fridge manufacturer; and Lenovo’s (then Legend) USD1.25 billion acquisition of IBM’s global PC business. In the decade between the end of Financial Crisis and the outbreak of the Coronavirus pandemic, Chinese investments took advantage of falling asset prices to strike deals, such as Geely’s USD1.8 billion acquisition of Volvo. Since then, China’s tech OFDI have taken on two noteworthy changes: some mobile phone and semi-conductor companies have relocated their labor-intensive activities to other countries while still retaining core functions in China, and new energy firms have been making waves in overseas undertakings.
Electric car companies have vied to set up shop abroad. In May this year, Nezha Automobile broke ground for a factory in Bangkok with annual capacity of 20,000 cars. In June, AION, the new energy arm of Guangzhou Automobile Group, also entered the Thai market with a plan to set up its Southeast Asian headquarters there. In July, SAIC Motor unveiled a plan to build a factory in Europe by riding on the explosive sales growth on the continent, and BYD announced a RMB4.48 billion investment in Brazil to erect a sprawling production base. In August, Thai authorities revealed that Changan Auto will build a USD250 million factory to produce electric and hybrid cars. The authors pointed out that this current wave of OFDI follows that of battery firms dating to before the pandemic and continuing up to these days. Photovoltaic firms, on the other hand, started to invest in assembly lines abroad in the mid 2010s in order to go around the anti-dumping and anti-subsidy taxes imposed by the US government.
China’s tech OFDI has morphed from being driven by M&A to by green investments, and from acquiring technology to exporting technology, according to the authors. Besides, the current round of new energy OFDI sees industrial clusters and supply chain enterprises joining hands in their overseas endeavors. Despite so, tech OFDI merely amounts to a single-digit percentage of the firms’ domestic investments.
The authors pointed out that domestic and overseas investments seem to compete with each other in a static sense, but all-round analyses would bear out their complementary and mutually facilitating roles. Given that some Chinese companies have incurred big losses due to local investigations in the name of tax evasion or money laundering, the authors advised the authorities to offer risk warning and compliance guidance based on systematic research, and provide assistance and interventions when companies are subject to unfair treatment. What’s also important is to improve the statistics work on tech firms so as to enable dynamic assessment of situations and preempt potential risks. Lastly, the authors suggested staying mindful of the possible negative impact of tech OFDI on domestic investments. Efforts are needed to spur economic and income recovery, in order that increasing consumption gives enterprises confidence and allows them to run both domestic and overseas operations in a more rational and sustainable way.