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Zhejiang Supor Cookware chairman Su Xianze failed to realize that his company's takeover by French home appliance maker SEB would stir up the ire of the Chinese cookware sector.

 

On August 29, half a month after Zhejiang Supor Cookware Co., China's leading producer of kitchen appliances, and SEB signed the deal, Supor's competitors, ASD Group and five other cookware makers, published a joint statement asking the government to veto the takeover, which they say will create an industry monopoly with a serious negative impact on consumers.

 

Under the agreement, SEB, owner of the international brands of Tefal, Moulinex and Rowenta, will obtain a 61-percent stake in Supor and the latter's parent company, Supor Group, will hold no more than 17 percent.

 

The purchase will allow SEB to reinforce its position in the promising Chinese market and improve its profit margin with lower costs, say some analysts. Supor will enjoy the benefits of SEB's technologies and management experience.

 

"The planned takeover by SEB will not result in a foreign monopoly as the market is fully competitive," said Su Xianze. "It does not matter who becomes the controlling shareholder. We want to make our company stronger and produce more valuable products for consumers."

 

The Supor story mirrors other controversial foreign takeovers in China. Most of the deals are in the machine-manufacturing sector, which accounts for 60 to 70 percent of China's actual use of foreign funds.

 

In the steel industry, India-based Mittal Steel completed the acquisition of a 36.67-percent stake in the steel tube and wire division of Hunan-based Valin Group and EU-based Arcelor purchased 38.4 percent of Laiwu Steel.

 

In heavy equipment manufacturing, US-based Caterpillar holds 40 percent of Shandong SEM Machinery, one of China's leading wheel loader manufacturers. Global private equity firm Carlyle Group has concluded an agreement to purchase an 85-percent shareholding in Xugong Group Construction Machinery, the country's largest construction machinery manufacturer and distributor, while Germany's Bosch Group holds a majority stake in Wuxi Weifu Group.

 

In the cement industry, MS Asia Investment, an entity controlled by Morgan Stanley Private Equity Asia, acquired 14.3 percent of China's largest cement maker, Anhui Conch Cement Co. Ltd. In March, Huaxin Cement announced a plan to issue shares to Holchin BV, a unit of Switzerland's Holcim, making Holchin its largest shareholder. Holchin already owned 26.1 percent of Huaxin before the transaction.

 

Along with the rise in foreign mergers and acquisitions are growing concerns over the loss of state-owned assets and the low prices paid by foreigners in their takeovers.

 

"Foreign acquisitions of leading companies are a new problem China has to face, while advancing economic reform and opening up, " said Song Heping, deputy director of the Industrial Damage Investigation Department of Ministry of Commerce. "The ministry is trying to balance protection of indigenous industries with the investment enthusiasm of foreign companies."

 

As foreign companies encounter difficulties acquiring Chinese companies, there's been speculation that China is considering tightening foreign investment controls.

 

"China will resolutely pursue its opening-up strategy and look to enhance trade and economic cooperation with other nations in a mutually beneficial manner," said Chinese Vice-Premier Wu Yi.

 

"Even if China has accumulated abundant capital and foreign exchange reserves in recent years, international investment will continue to play an important role in supplying technology, talent and employment and in promoting structural adjustments to the economy and changing the growth mode," Wu told the 2006 International Investment Forum in Xiamen, east China's Fujian Province.

 

China's current policies to attract foreign investment were drawn up 27 years ago when the country was desperate for money and foreign currency. Over the past 15 years, China has been the largest recipient of foreign investment among developing nations. Its phenomenal FDI growth in the 1990s was a key factor behind the rapid increase in the nation's competitiveness.

 

In 2004, foreign investment reached a record US$60 billion. However, growth began to slow in 2005, due to international competition in attracting foreign capital. Actual foreign investment in 2005 and the first six months of 2006 has declined 0.5 percent year on year.

 

For a long time, around 95 percent of foreign investment went into the construction of new production facilities. Yet in the last two years, mergers and acquisitions have become a vibrant form of foreign investment.

 

According to statistics from the UN Conference on Trade and Development, foreign investment through mergers and acquisitions showed rocketing growth in 2005, accounting for nearly 20 percent of the total foreign investment, up nearly 9 percentage points from the previous year.

 

"Besides the enlarged scale, this round of foreign mergers and acquisitions has shown other new traits," said Lin Yanjun, an associate research fellow of the Chinese Academy of International Trade and Economic Cooperation.

 

In the manufacturing sector, foreign capital has switched from consumer products such as beer, cosmetics and camera film to strategic and basic sectors of equipment production and raw materials. New overseas investors are more inclined to invest by purchasing existing companies, particularly leading players in their fields.

 

"The background of the acceleration of mergers and acquisitions in China is the global wave of international mergers and acquisitions. Large multinational companies regard their moves in China as part of a strategic industrial restructuring. The services and heavy chemical industries are the two major battlefields for international mergers and acquisitions," said Lin Yanjun.

 

A record 21 mergers and acquisitions occurred in the first half of the year. Only three involved domestic companies acquiring overseas firms. The average takeover price of the other 18 deals rose to a record US$160 million. In contrast, the number of foreign-funded companies set up in China over the same period fell by 6.89 percent to 19,750.

 

According to a report by the Development Research Center under the State Council, foreign investors control the top five businesses in each of the industrial sectors that are open to foreign investment. Of China's 28 leading industrial sectors, foreign investors control most of the assets in 21 sectors.

 

"It's time China started to get picky with foreign investment," said Justin Lin, director of the China Center for Economic Research of Peking University.

 

"Since China's foreign currency reserves surged to US$875.1 billion in March, the highest in the world, our priority has been not to attract as much foreign investment as possible, but to bring in new high-tech industries that we currently don't have," Lin said.

 

Standardizing Foreign Mergers

 

To defend the country's industrial security and make better use of foreign investment, the government put into effect a revised regulation standardizing mergers and acquisitions of Chinese companies by foreign investors on September 8, 2006.

 

The 61-clause regulation, officially known as the revised Provisions for Foreign Investors to Merge with Domestic Enterprises, was jointly published by the Ministry of Commerce, the State-owned Assets Supervision and Administration Commission and four other government agencies.

 

The previous provisional regulation, published in 2003, set a good framework, but failed to touch on foreign mergers and acquisitions in sectors that could jeopardize China's industrial and economic integrity.

 

The new, detailed regulation has taken into consideration factors at home and international norms. On the surface, the new regulation is stricter in examining and controlling foreign mergers and acquisitions.

 

For instance, the issue of monopolistic practices is addressed in the regulation, which specifies mergers that require approval from government agencies.

 

The regulation requires companies to seek approval from the Ministry of Commerce and State Administration of Industry and Commerce for a proposed merger when one party has annual sales of 1.5 billion yuan or more and holds 20 percent of the Chinese market, and when a party accounts for more than 25 percent of the Chinese market or merges with 10 enterprises successively in a year, as a result of the mergers and acquisitions.

 

The regulation also requires that foreign investors must get Ministry of Commerce approval for bids to control companies that dominate Chinese industrial sectors, own famous brands or employ more than 2,000 people, or when the move could affect China's economic security.

 

"The stricter regulation has clarified many frequently quoted but ambiguous concepts such as 'malicious mergers'. As a result, it practically protects and promotes healthy development of rightful foreign mergers and acquisitions," said Shen Danyang, vice president of the International Trade and Economic Cooperation Research Institute of the Ministry of Commerce.

 

"As the policies on mergers and acquisitions have become more transparent and predictable, economic growth has maintained its rapid pace and long-term political stability has been insured, foreign investment in Chinese companies will have a great boost," said Lin Yanjun with the Chinese Academy of International Trade and Economic Cooperation.

 

"The new regulation has also opened a new channel for foreign mergers and acquisitions," said vice-director Guo Jingyi of the Law and Regulation Department of the Ministry of Commerce.

 

Under the regulation, for the first time, share swaps are allowed in lieu of cash payment when foreign companies merge with or acquire domestic enterprises. In the past, the most popular form of foreign investment in China was factory building.

 

Previously, the Chinese market gave priority to cash payment. The previous provisional rule did not expressly forbid such activity, but "it is the first official confirmation that share swapping is acceptable as cash payment", said Wang Zhile, director of the Research Centre on Transnational Corporations affiliated to China's Ministry of Commerce.

 

The regulation details procedures on share swaps, and spells out how foreign companies can pay in the form of stock, cash or a combination of both when merging with or buying out a local enterprise.

 

"The regulation, which is in line with internationally accepted practices, creates more room for the growth of domestic companies," said Wang. "It will also encourage merger and acquisitions by multinationals."

 

Redirecting Foreign Investment

 

There is still much to do to increase the quality and quantity in the use of FDI, industry officials said.

 

Statistics from the UN Conference on Trade and Development show the per capita foreign investment in China in 2004 was US$47, much lower than the US$534 of developed countries and the world average of US$107.

 

"While China still welcomes all forms of foreign investment, it will open up wider to investors who have advanced technologies to offer," said Vice-Premier Wu Yi.

 

"Foreign investment must serve the needs of China's industrial restructuring," said Wu. "Investment that helps upgrade agriculture, service industries and traditional manufacturing will also be encouraged."

 

She said China's Industry Guide for Foreign Investors will undergo its third revision since 1997 in the hope of channeling more investment into research and development centers, new high-technology industries, advanced manufacturing, and the energy conservation and environment sectors.

 

Amid growing domestic concern that the benefits of surging foreign trade are failing to reach people in central and western China, investment regulators are focusing on upgrading industries in poorer areas.

 

Assistant Minister of Commerce Yi Xiaozhun recently revealed a plan to encourage first-generation foreign investors, whose businesses mainly focused on low value-added processing, to move to the less developed interior. East coast business centers, the original frontier of China's new economy, would then refocus on more lucrative high-technology sectors.

 

The service trade now accounts for only 30 percent of the Chinese mainland's total foreign trade, while the proportion is as high as 60 to 70 percent in EU nations and 87 percent in the Hong Kong Special Administrative Region. Worldwide, the service sector takes two thirds of the global direct investment.

 

"This indicates great potential for China's service industry to attract FDI," said Hu Jingyan, director of the Ministry of Commerce's Service Trade Department.

 

(Xinhua News Agency September 11, 2006)