A Chinese firm’s multi-billion-dollar takeover of the biggest name in US pork is the latest example of the country’s global business ambitions, analysts say – and the need to satisfy domestic demand for quality.
In what will be the biggest Chinese corporate purchase ever in the United States if approved, meat processor Shuanghui International said last week it was buying Smithfield Foods in a deal that valued the US company at US$7.1 billion.
That announcement came just two days after Chinese conglomerate Fosun – the single largest shareholder in Club Mediterranee – said it was making a joint bid for the French holiday group.
Chinese companies are increasingly moving into foreign waters. Direct investment overseas in non-financial sectors surged 28.6 per cent in 2012 to US$77.22 billion, spread across 141 countries and regions.
Once focused on securing resources such as oil, gas and commodities essential to fuel China’s rise to become the world’s second-biggest economy, the trend now is more complex.
“Chinese companies’ overseas acquisitions indicate that China is redefining its position in the global economy,” shifting up the value chain from being the workshop of the world, Li Guoxue, a researcher at the Chinese Academy of Social Sciences, said in an email.
“China’s rising global influence has also facilitated overseas investment of Chinese companies,” he added.
It is also the natural result of firms getting bigger, said Bala Ramasamy, professor of economics at the China Europe International Business School (CEIBS) in Shanghai.
“You have companies that are becoming larger and they are looking for opportunities,” he said. “So the opportunities no longer are domestic in nature but they become more global.”
But Chinese acquisitions can face political opposition overseas.
China’s biggest overseas takeover came last year with the US$15.1 billion purchase of Canadian oil and gas giant Nexen by Chinese state-owned energy behemoth CNOOC.
After initial resistance Ottawa approved the landmark deal in the end.
CNOOC had been forced to withdraw a bid for US oil and gas producer Unocal in 2005 due to national security concerns in Washington.
Despite decades of capitalist reforms, numerous Chinese companies remain either majority state-owned or maintain close government and Communist Party links. Their opacity and doubts over corporate governance have contributed to suspicions.
US authorities have also expressed fears over Chinese technology companies Huawei and ZTE, and the state-run China Daily newspaper voiced concern that the Smithfield deal could face a rocky road.
“Even the conspicuous absence of national security factors in this friendly takeover can hardly guarantee that US protectionists will not poke their nose into it,” the paper said in an editorial on Friday.
But Jarod Ji, an analyst at Beijing-based Zero2IPO Research Centre, said that while such “political risk” was a concern for China’s companies looking abroad, the trend would continue.
“Overseas acquisitions will more active and we will likely see more such cases,” he said.
Shaun Rein, managing director of China Market Research Group, identified two key drivers behind the phenomenon: Chinese companies’ increasing appetite to be world players, combined with the pressures of a less robust domestic economy.
“A lot of Chinese companies have the ambition to become global brands,” he said, giving Fosun as an example. “They’re very aggressive, very ambitious and they want to grow fast.
“They’re looking at getting access to the American and European markets in order to shield themselves from what is definitely a slowing Chinese economy,” he added.
China turned in its weakest economic performance in 13 years in 2012, with growth sliding to 7.8 per cent for the year.
Acquisitions of foreign brands and technology can also pay important dividends domestically with Chinese consumers fed up by food, quality and safety scandals.
Earlier this year, China was shocked by the spectacle of more than 16,000 dead pigs recovered from parts of Shanghai’s main river, one of a long line of food controversies.
“It’s about bringing American pork, trusted American pork, to the Chinese consumer,” Rein said of the Smithfield acquisition. “Chinese are petrified of domestic-raised pork, pigs and cattle because of quality control concerns.”
“I don’t think the trend is going to stop,” added Ramasamy of CEIBS. “If there is a good business opportunity, I think Chinese companies are going to go out there and get this.”