«Chinese FDI strategy in Italy: the ‘Marco Polo’ effect Carlo Pietrobelli* Inter-American Development Bank, 1300 New York Avenue NW, Washington DC ...»
Based on case studies on companies such as Lenovo, Huawei, Haier and TCL, Deng (2009) and Rui and Yip (2008) analyse the rationale for foreign acquisition activity, emphasising that it provides a tool to compensate for competitive disadvantage and is a low cost way of leveraging advantages in production capabilities (e.g., the case of Lenovo) and the institutional support received for these operations. Rui and Yip (2008) quite rightly stress the difficulties involved in these operations and the importance of the culture and management capabilities in their success. Referring to the well-known cases of Lenovo and Huawei, they emphasise that the capacity to integrate and combine Chinese culture with world-class Western management systems is key to the success of these acquisitions.
In the rest of the article, the motivations of Chinese companies to invest in Italy are researched in detail. On the basis of the existing findings discussed above, we can expect Chinese companies be attracted by Italy for a mix of market seeking and strategic asset
• with regard to market seeking: the size of the domestic market, being part of the EU market, the opportunity to learn about market requirements and to improve brand reputation are expected factors of attraction
• with regard to strategic asset seeking: brand names, design skills and technologies in mature industries are expected to be driving attractors.
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3 Chinese FDI in Italy
3.1 Methodology No comprehensive database of Chinese companies operating in Italy is so far available.
Therefore, our first task is to compile an original database based on multiple sources, to enable an in-depth study of Chinese OFDI in Italy. The data sources used are FDIMarkets.com, previously called Locomonitor, now produced by the Financial Times Group which is the leading source of intelligence on FDI and provides UNCTAD and the World Bank with data. This database includes information on mode and year of investment, employment, sector, activity and turnover. We also use the European Investment Monitor (EIM), or Euromonitor, produced by Ernst and Young on project investments across Europe, and data on M&A collected in the Zephir database compiled by Bureau van Dijk. In addition, from 2007 to 2010 we continuously monitored the specialist business press (including Il Sole 24 Ore, the main Italian financial newspaper and the Financial Times) to check for information on new projects. The list of companies in our database was cross checked with the assistance of MOFCOM representatives in Milan and with the President of the Association of Chinese Firms in Italy.
As a result, we have identified 78 Chinese investment projects in Italy, including five ceased investments and two cases of relocation. Our database includes information on company name and address, parent company name, sector of specialisation, main activity undertaken in Italy, number of employees, total sales, year of the investment, entry and ownership modes. Whenever possible, this information is complemented by additional sources such as company documentation available on the Internet (including main company websites in Chinese), research papers and press articles.
After building our database, we have conducted face-to-face interviews with ten senior managers of Chinese affiliates in Italy, based on a set of open-ended questions focusing on background information about the company, its strategies of internationalisation, motivations for investment in Italy and opinions on the Italian business environment. Besides, we have interviewed key informants such as MOFCOM representatives in Italy, senior managers of the Bank of China, managers of the main Italian law firm dealing with Chinese FDI.
3.2 Characteristics of Chinese OFDI in Italy The first Chinese ‘flagship’ investment in Italy occurred in 1986 when Air China opened a commercial office in Rome (AT Kearney, 2008). From the mid 1980s to the end of the 1990s investments were sporadic, and included an office in Turin of the Nanjing Motor Corporation, a commercial office of Cemate Machinery Technology and a branch of the Bank of China in Milan. The majority of Chinese FDI in Italy occurred after 2000, and reveals a recent but rapidly increasing interest. The available information shows that the majority of Chinese companies located in Italy also have investments in other European countries,2 confirming that the decision to invest in Italy is usually part of a broader European strategy.
In terms of investment size, data on employment is available only for 60 of the 78 companies. Table 1 shows that most companies are small or very small, which is in line with the results of the survey by Cross and Voss (2008) in the UK that the majority of Chinese FDI strategy in Italy 283 Chinese operations have less than 25 employees. Note that, with two exceptions, the few companies that employ more than 50 people were all established during the 2000s.3 Table 1 Employees in Chinese companies in Italy
in the heart of the city’s Chinatown in 2010. Besides, also the Industrial and Commercial Bank of China (ICBC), the largest bank in the world in terms of stock market capitalisation, has opened a branch in Milan in 2011. Consulting firms set up to assist Chinese companies wanting to invest in Italy are also present. Among them, since 2007, the China Milan Equity Exchange (CMEX) operates as sole partner of China Beijing Equity Exchange (CBEX) in Europe, providing comprehensive advice on legal, fiscal, financial and organisational issues.
The second Italian region attracting Chinese FDI is Piedmont. Due its traditional manufacturing specialisation in the automotive sector, most Chinese investments are in this industry. Investments in other regions occur in different sectors of specialisation, namely white goods in Veneto, machinery in Emilia Romagna and logistics in Campania and Liguria.
The disaggregation of investments by main activity offers some interesting insights (Table 3). In line with what has happened in other European countries (Hay et al., 2009), while in the past the prevailing activity was establishment of sales and marketing offices, investments in higher value added activities have recently increased, especially manufacturing and, to a lesser extent, R&D. Furthermore, key informants suggest that traditional trade-related investments are evolving towards more sophisticated services, such as the search for new markets and the acquisition of new brands.
Table 3 Chinese OFDI in Italy per activity
The entry mode of Chinese investments in Italy has gradually evolved. The first wave of investments in representative offices was characterised mainly by small-scale greenfield investments; this has developed to larger greenfield investments directed to activities such as R&D and marketing. Since 2000 there has been an increase in M&A including the acquisition of the motorcycle manufacturers Benelli by Quianjiang, of Meneghetti and Elba by Haier, and the takeover of Cifa, specialised in the production of machinery for the construction sector by Zoomlion, which so far is the largest acquisition in Italy and one of the largest in Europe (Table 4).
The evidence presented on Chinese FDI in Italy confirms some of the findings of the existing studies on the UK (Cross and Voss, 2008; Liu and Tian, 2008), France (Nicolas,
2010) and Germany (Schüler-Zhou and Schüller, 2009) in terms of investment size, activities undertaken and mode of entry. The next section, based on first hand information from the interviews, will put the Italian case in perspective, exploring the main motivations that push Chinese companies to invest in the country.
3.3 Why are Chinese companies investing in Italy?
Chinese investments in Europe reflect a sustained effort to enter competitive European markets and get access to superior technologies, know-how and competence (Filippov and Saebi, 2008; Hay et al., 2009; Nicolas, 2009). Our research on Italy confirms that the main motivations for Chinese investments in the country are the search for new markets and other trade-related activities (market-seeking), and the search for strategic assets. In addition, given the peculiarity of the Italian economic system, we find that Chinese FDI in Italy look for access to advanced skills and technological capabilities in the many design-intensive manufacturing activities in the country.
With regard to market-seeking investments, Italy represents an important market for foreign investors as it is the seventh largest economy in the world and it is part of the European Union. For instance, in a sector such as telecommunications, Italy boasts one of the highest rates of mobile penetration in Europe. Huawei has established three subsidiaries in Italy: in Rome, Milan and Turin. As confirmed by the managers interviewed, the size and potential of the market has been highlighted as the most important factor affecting Huawei’s decision to invest in Italy. Having started out as a distributor for global MNEs in the Chinese market, Huawei’s globalisation strategy started from neighbouring countries before entry into Russia and Africa. Its extension to more sophisticated markets is designed to raise its international profile (Simmons, 2008).
Since 2000, the company has set up several high value added activities including R&D, training and design, in several European countries such as Sweden, the Netherlands, France and Germany, and has established its regional headquarters in the UK. In Italy, Huawei has invested to seek a large market, raise its profile and strengthen its brand, but also to conduct research and product development activities in its recently established research centre in Turin.
Overall, the prevalence of market-seeking investments is confirmed by Table 3: 46 projects are in market related activities, such as trade supporting services or the establishment of marketing offices. Some of these investments have been established to better serve customers and to strengthen loyalty, in other words ‘following trade’. This is the case for the state owned trading company, Temax, which opened an import-export office in Milan in 1991. Some important investments in the logistic sectors also aim at 286 C. Pietrobelli et al.
supporting trade. With the rise in Chinese exports, the main logistics companies have begun to invest in Europe initially through joint ventures and strategic alliances with local enterprises, while establishing representative offices through greenfield investments. Having acquired new capabilities and market power, Chinese companies are keen to strengthen their positions by acquiring European companies and investing in new infrastructure projects (Hay et al., 2009). This pattern applies to Chinese investments in the Italian logistics sector: China Ocean Shipping Group (COSCO) and China Shipping Company, both of which are in the top ten world shipping companies, both invested heavily in Italy.
The ‘trade following’ category includes more recent investments such as the opening in 2008 of a sales office in Milan by Suntech Power Holdings, the world’s largest photovoltaic module manufacturer. As confirmed by one of our key informers, Suntech has invested in Italy to target the large growth potential offered by the Italian market, sustained by the economic incentives provided by government. Similarly, Hisense, a large company producing home appliances, invested in Italy to strengthen the company’s profile in Europe, improve product image and promote its brand. Several key informers have underlined that Chinese companies consider Italian consumers to be highly demanding and particularly sophisticated. Therefore, in sectors such as home appliances the Italian market is regarded as a test market for products adapted to European tastes and it is considered strategic to obtain feedback on its products.
According to our key informants, the direct contact with the market jointly with the ambition to acquire strategic assets in design, manufacturing and management are the main reasons that have attracted Haier, the Chinese giant specialised in the white goods sector, to Italy. Haier is the second world producer after Whirpool, which first entered the Western market as an original equipment manufacturer (OEM) exporter. In 2000 Haier Europe was established in Varese to coordinate sales and marketing across 13 European countries (Duysters et al., 2009). In 2003, Haier made its first acquisition in Italy buying Meneghetti, a refrigerator producer and in 2009 it acquired another Italian company, Elba, which produces cooking appliances. These acquisitions were motivated on the one hand by the need to overcome EU tariff barriers and on the other by the objective to improve the capacity to design, develop and manufacture products suitable for the European market, and for the high end of the Chinese import market (Liu and Li, 2002).
Moreover, the intention to acquire knowledge and managerial capacity was behind the decision to locate the headquarters in Varese, given the area’s strong tradition in white goods manufacture. In fact, Varese is well known for its white goods production and is home to important companies such as Philips and Whirpool, and many other firms specialised in components and intermediate products. The agglomeration of many specialised firms generates positive externalities, arising from the presence of a pool of specialised workers and suppliers and by specialised knowledge on markets and technologies. According to some of our key informers, these agglomeration advantages attracted Haier and influenced its decision to establish its European headquarters there, as confirmed by Bonaglia et al. (2007) in their study on the global white goods sector.
According to Bonaglia et al. one of the lessons emerging from leading white goods manufacturers is that success depends as much on firms’ internal resources as it does on the collective efficiency of the clusters in which they operate and are embedded. In fact the choice of an offshore location is driven both by demand and cost considerations, as well as by the presence of suppliers of specialised components. Nevertheless, it should be stressed that the location is not a sufficient condition for local embeddedness and more Chinese FDI strategy in Italy 287 empirical evidence is needed to assess what is the capacity of Haier to take advantage of the existing agglomeration economies.