Enter the Dragon and the ElephantChina is without doubt growing at a speed that is astonishing to many and one of the contributing factors has been its insulation from the recent financial crisis. After decades of spectacular growth, China finally passed Japan and became the world’s second-largest economy in the second quarter of the year.
The recent financial crisis has exposed the weaknesses in the western financial sector and with that it has also highlighted the domino effect which bad regulations and systemic failures have had on the western economies. We witnessed institutions crumble before our eyes, institutions which had built their reputations on sound business principles, wiped out by this financial tsunami. Goldman Sachs, AIA, Lehman Brothers, all have been severely affected and while some have come out injured but surviving, the others have not been so lucky.
With the financial crisis, a new era has arrived where many companies in the western economies have been hit, with some having their credit lines cancelled and recalled, while others have seen their asset values diminish drastically. Each great adversity also provides an equal opportunity, and the financial crisis has provided great opportunities for mergers and acquisitions with company valuations at realistic levels.
The post-financial crisis period will see the assertion of the Chinese and Indian economies as they take their place and flex their economic muscles on the world’s stage. According to The World Investment Report 2010, India is ranked as the ninth most attractive destination in the world for foreign direct investment up from 13th place last year. Foreign direct investment is now flowing into China, India, Brazil, Indonesia and Vietnam at the expense of mid-tier economies like Malaysia. China and India will remain as the top destinations for foreign direct investments over the next three years although GDP figures from China indicate that its economy is cooling down from a 10.3 percent in the second quarter and 11.3 percent in the first quarter to 9.2 percent in the third quarter.
The question that we must ask ourselves is “What is the true impact of China and India or Chindia on South East Asia? China and India have strong cultural and business ties with countries of South East Asia. Arising from this round of the financial crisis, Chinese companies have made headway in acquiring foreign companies not just in South East Asia but also around the world. One area is the mining and natural resources sector. China has been courting many of these resources companies from Indonesia, Vietnam to Australia and Brazil.
The intensity of the acquisition activities can be demonstrated in how the Chinese government has dealt with the failed Rio Tinto transaction. There have been several Australian and Brazilian mining companies that have had their stakes taken up by Chinese companies recently. South East Asian countries where resources are rich and abundant, can expect more acquisitions and joint ventures and this trend will continue in the next five years.
Apart from acquisitions in the natural resources sector, Chinese companies are also acquiring assets in strategic sectors. One high profile acquisition was Petrochina’s acquisition of the Singapore Petroleum Company Ltd (“SPC”) in 2008. This acquisition allowed Pertochina to have a footprint into South East Asia and for it to penetrate these markets through SPC.
Another case in point is China Huadian’s acquisition of Singapore’s Tuas Power. As Singapore moves towards energy liberalisation and the opening of its energy markets, foreign players have started to come in making inroads for themselves. Although a small market, the Tuas Power acquisition is a tactical move paving the way for similar acquisitions in South East Asia.
The largest energy market for the Chinese would still be in India and positioning themselves in South East Asia now would be a step closer towards establishing a presence in India. From a strategic viewpoint, it is easier for a Chinese company to partake in India’s energy projects through an intermediary and in this case, Tuas Power is a good vehicle for venturing into the Indian market. Direct entry by Chinese companies has not been very successful. Many reasons have been raised from a general distrust between the two large neighbours, to a prejudice for strategic industries to be opened to the Chinese, to a perception that Chinese companies are not sincere in long term business projects, to Indian bureaucracy, contributing to making it difficult for direct investments between China and India.
The recent Huawei matter shows how Indian bureaucracy can affect Chinese companies operating in India where policy changes have been implemented to curb economic development. However, India has relaxed an eight-month ban on imports of telecommunication equipment, approving orders from China's ZTE and Huawei as security fears fade before an urgent need to roll out third-generation wireless infrastructure. Here the Chinese have a head start over the other foreign regional telecommunications companies. This is one of the few sectors that Chinese companies have ventured into India in a big way. Previously most were project and infrastructure related and Chinese companies upon undertaking these projects would pack up and leave.
Apart from the above, Chinese companies have started their outward march before the financial crisis, with the well publicised acquisition of IBM’s personal computing business by Lenovo. Building on this, Lenovo is now a global brand alongside IBM. This strategy of acquisition of established foreign branding and entering into the international market looks set to be a trend that cash rich Chinese companies will take.
The recent acquisition of Volvo from Ford Motor by Geely Auto is another example of a Chinese company moving out and acquiring a more well known company in its industry. All this thanks to a strong domestic demand and the financial crisis. Geely Auto expects to increase the current Volvo production from 280,000 passenger cars to 600,000 cars in the next five years with production in China. It will not be surprising that other smaller car brands will fall into Chinese hands in the near future as China remains the largest and fastest growing car market in the world.
It is not only in the business field that the Chinese are making inroads, the recent announcement by a Chinese tycoon for Liverpool also signals the arrival of the Chinese. Although the deal did not go through, it signals that Chinese money is now making its way into sporting assets. This is not surprising especially when many of the English top Premiere League Clubs are foreign owned. The Chinese have arrived. Do not be surprised to see Chinese companies featuring more prominently in F1, the NBA and other prominent sport assets and international sporting events.
The impact of all this would also mean increased competition for good companies for the rest of the world. India for example will have to work harder to compete for natural resources and companies that own concessions or supply these resources. There will be a competition for these assets by Chinese and Indian companies. Countries like Indonesia, Vietnam, Cambodia and to a lesser extent Malaysia and Thailand all have natural resources that are all potential targets for Chinese and Indian companies.
Chinese products are also flooding the markets in India and South East Asia. From consumer electronics to motor vehicles to food products, cheaper Chinese consumer products are now in many South East Asian markets, moving the path of the Japanese and Korean consumer electronic companies. Many Chinese companies which had started out as OEM manufacturers for such Japanese and Korean companies have now started to produce products under their own brands. Consumer electronics brands like “Haier”, “TCL” are now common in the South East Asian consumer electronics market and will soon become more widely accepted as the Chinese “Sony” or “Samsung”.
First, we had Japanese cars flooding the South East Asian markets, then we had the Korean cars moving into the budget car space as Japanese cars moved up the ladder from being budget cars to value and even luxury cars like “Lexus” and “Acura”. The Chinese cars are now moving into the budget car space as Korean cars move up the ladder to occupy the middle market car space.
India on the other hand has been slower to invest in South East Asia and investments from South East Asia to India have not taken place at the pace of the investments to China. Indian companies already in China have however expanded their operations and reinvestments by these companies are also on the rise. All this is in line with producing products and services for the large domestic China markets. Indian companies are well regarded in the information technology field. Wipro and Infosys have been growing their China operations.
Indian products have also not reached the South East Asian markets as quickly as the Chinese products. Even with an equally vibrant automobile industry and a growing one at that, Indian manufactured cars are still not on the roads of South East Asia. Tata Auto, produces the most cars in India and has also taken over Jaguar from Ford Motor. However, they have not exported their cars to South East Asia but rather concentrating on domestic demand instead by creating the Nano, the smallest and cheapest car in the world.
Between India’s and China’s automobile industry, there is much space for cooperation. Recently, Shanghai Volkswagen Company announced a venture in India. It remains for all to see how that collaboration will work out.
India and China will dominate the economic landscape in the next decade. The impact to South East Asia will be great. Each country in South East Asia will have to carve a niche for itself in its relations in politics and more importantly economics with both India and China. Some of these countries will compete with India and China, some will complement them and others will just have to adjust to this new economic world order of the Dragon and the Elephant. When giants come out to play, the grass will be trampled.
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September 29, 2010
Enter the Dragon and the Elephant
China is without doubt growing at a speed that is astonishing to many and one of the contributing factors has been its insulation from the recent financial crisis. More
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