Foreign-Funded,,,,,,,,,M&A,,,,,,,,,Poses,,,,,,,,,no,,,,,,,,,ThreAT,,,,,,,,,To,,,,,,,,,ChinA’s,,,,,,,,,eConoMiC,,,,,,,,,seCuriTy:苏M

　　“Editorial note”Foreign funded M&A (Mergers & Acquisitions) activity isbecoming increasingly common in China. In this article Wang Zhile assesses theeffects and risks associated with M&A, finding that foreign funded M&A activity isimmensely beneficial to China and poses no threat to economic security.Editorial note
　　
　　A number of people have recently expressedconcern regarding national economic security issueswhich stem from foreign-funded M&A activities, andsome have even called for foreign-funded M&A to berestricted. There are some viewpoints which, in myopinion, appear plausible. Therefore, I hereby presentsome of my thoughts as follows.
　　
　　I. China is now at the peak of soundeconomic security
　　
　　Based upon the findings of a survey, I believe thatChina is right now at a level of economic securityunprecedented in the last century and a half or more,and at least since 1840. This is a fact easy to understandcompared to the situation before liberation and priorto reform and opening up to the outside world. Thelevel of national economic security does not mean wewill not have security concerns or pitfalls. The sheernumber of discussions upon national economic securityreflects the philosophy of remaining vigilant at alltimes, which is understandable. However, it is essentialto make a correct judgment with regard to the overallsituation of our national economic security.
　　Whether a country’s economy is secure is mainlydecided by its economic competitiveness. It is verydifficult for a non-competitive country to guaranteesecurity in the face of external competition. Theeconomic competitiveness of a country is, in turn,dictated by its business competitiveness.
　　My opinion regarding China’s economic securityupgrade is primarily based upon the significant boostin China’s business competitiveness over the years.The latest Fortune 500 rankings (2005) included 19enterprises from the Chinese mainland - which was insixth place, following the U.S., Japan, the UK, Franceand Germany in terms of the number of enterpriseslisted in the rankings. Ten years ago (1996), however,there were only three Chinese enterprises that made itinto the rankings. China not only found an increasingnumber of her enterprises qualifying for the list,but also saw a rise in their quality. The Fortune 500enterprises this year had an average sales return of6.42%, while the 19 Chinese enterprises posted anaverage sales margin of 6.88%. In this measurementalone, China surpassed the U.S., Japan, the UK, Franceand Germany. Moreover, certain Chinese companieshave become global industry leaders. For example,China Mobile ranked at no.11 in terms of salesrevenue, but at no.2 and no.3 respectively in returns onsales and returns on assets. Furthermore, China Mobilehas recently become the largest telecom operator in theworld in terms of market capitalization.
　　H i s t o r i c a l l y, t h e r i s e o f a c o u n t r y i s o f t e n accompanied by the emergence of a large number ofits world-class enterprises on the international stage.Currently, a group of Chinese enterprises are risingwith ever stronger impetus. An increase in China’sbusiness competitiveness is critical to any boost in hereconomic security level. We should not analyze issuesby chopping history into segments; instead, we shouldproceed from the perspective of historical development.
　　
　　II. No industry to date has beenmonopolized by foreign-fundedenterprises
　　
　　A large market share is not equivalent to monopoly.The monopoly under public criticism is, in fact, anaction restricting competition. To date, no industry hasbeen monopolized by foreign-funded enterprises. Certainpeople claim an industry has been “monopolized” byforeign investors simply because the aggregate marketshare of foreign-funded enterprises in that industry hasreached a significantly high proportion.
　　Such a judgment is flawed for two reasons. Firstly,competition also exists between foreign-funded enterprisesin the same industry, and all these separate enterprises ina particular industry should not be regarded as a singlecombined market entity or competitor when renderinga judgment. Market share concentration is a conditionof, but not equal to, monopoly, because monopoly meansthat a market competitor is leveraging its advantageousmarket position to restrict competition. According to thefindings of our survey, certain foreign-funded enterprisesdo have a very high market share in a few industries, butthis has not evolved into a real monopoly as they do notutilize their advantages in market share concentration torestrict competition. Currently, it is difficult for a foreignfundedenterprise to form a monopoly over a specificindustry in China in the short run.
　　At present, monopolistic enterprises are mostlySOEs, and such monopolies result from the marketaccess barriers imposed by the government throughadministrative means. Along with the greater pace ofreform and opening up to the outside world, foreigninvestors and private enterprises shall be allowed toenter most industries. This is the most beneficial way ofbolstering China’s industrial security.
　　It is inadvisable to elevate the difficultiesencountered by an enterprise or industry in marketcompetition to the level of national economic security.By so doing, such enterprises often seek protection inthe name of national economic security.
　　
　　III. Foreign-funded enterprises are animportant force for Chinese enterprises
　　
　　National economic security is defined relativeto the external threat. If an issue does not involvean external threat and is only an internal economicoperating issue, it pertains not to a national economicsecurity issue but to an issue as to whether or not theeconomic operation is healthy. To draw an analogy, aperson has a health problem when ill, but a securityissue when involved in a traffic accident, work safety incident, war or natural disaster. We cannot uniformlyescalate any competition or M&A (includingmonopoly) issue between the enterprises of differenttypes of ownership to the national economic securitylevel, as such issues are basically related to domesticeconomic operations and depend upon the healthinessof the economic systems or operating mechanisms.
　　In terms of ownership, Chinese enterprises includestate-owned enterprises, private enterprises andforeign-funded enterprises. Foreign-funded enterprisesare a component of Chinese enterprises and it is wrongto equate “foreign-funded enterprises” with “foreignenterprises”.
　　Foreign-funded enterprises are the companiesincorporated into the territory of the P.R.C. in line withthe Company Law of the P.R.C. They not only enjoythe same legal status as Chinese enterprises, but aredeeply incorporated into China’s economic system aswell. These enterprises create approximately one thirdof China’s industrial value, contribute more than onefifth of China’s tax revenue, and employ over 20 millionpeople. The National Bureau of Statistics has alwaysincluded foreign-funded enterprises in China’s economicstatistics as an integral part of the Chinese economy.
　　More importantly, foreign-funded enterprises havebecome the most active business force for China whenparticipating in global competition. Foreign-fundedenterprises have contributed approximately 50% ofChina’s technology import, about 60% of China’s totalexport, and 88% of China’s new and high technologyproduct export. To date, China has successivelyestablished internationally competitive industry chainsled by a group of flagship multinational companies.It is evident that foreign-funded enterprises have, asthe most dynamic business force, greatly boosted theglobal competitiveness of Chinese enterprises. Withforeign-funded enterprises excluded from the Chinesedomain, however, Chinese enterprises will find theirinternational competitiveness significantly eroded. Inother words, China’s national economic security levelwill also decline dramatically.
　　With regard to the merger and acquisition ofXuzhou Construction Machinery, regardless of whetherit was taken over by Carlyle or by Caterpillar andeven when its majority equity stake is controlled by aforeign investor, it has still become a foreign-fundedenterprise in China. As a component of the Chineseenterprise group, it is subject to Chinese laws andChinese government administration with respect toits operations; therefore, it will not pose any threat tonational economic security. If a monopoly is formed bya foreign-funded enterprise through M&A, this signifiesthat there is a problem with the order of economiccompetition in China and that her market operationis unhealthy, but it is not a national economic securityissue per se. Moreover, we can resort to legal means tohold back the monopolistic trend of foreign-funded enterprises. The regulations recently enacted by sixministries, including the Ministry of Commerce, uponthe mergers and acquisitions of enterprises by foreigninvestors in Chinese territory are a set of rules andstipulations aimed at standardizing the M&A activitiesof foreign investors. These regulations provide detailedrestrictions upon market monopoly that is likelyto arise from foreign-funded M&A activities. Weshould be confident in our government’s ability toadminister and restrain foreign-funded enterprises. Assubstantiated by fact, China has successfully guided andadministered foreign investments for many years, andis also in the process of addressing certain deficienciesthat are still in existence.
　　We should neither equate foreign-funded enterpriseswith foreign enterprises nor deem that state-ownedenterprises which have been taken over by foreignfundedenterprises are controlled by foreigners, as foreignfundedenterprises which take over SOEs and thoseformed post-M&A are all essentially Chinese enterprisesand, as such, are subject to the laws of the P.R.C.
　　Is it safe for private enterprises to take overSOEs? Some people originally believed it was notsafe because the SOEs would be privately controlled.Private enterprises were not considered “our own”enterprises to start with, but people have now changedtheir minds. Foreign-funded enterprises are part ofChina’s enterprises, and their takeover of home-grownenterprises is also the commercial behaviour betweenChinese enterprises. We should neither ideologizethis commercial behaviour nor portray it as a nationaleconomic security issue.
　　
　　IV. Assessing our own problems emergingfrom collaboration with foreign investors
　　
　　The entrance of foreign-funded enterprises and therise of private enterprises have, in recent years, promotedthe reform, progress and development of SOEs. Withoutthe exemplary role of foreign-funded enterprises and thecompetitive pressure from foreign-funded and privateenterprises, the SOEs would have found it difficult toproceed with reform in such an in-depth and extensiveway. Moreover, the SOEs would not have been able toboost their competitiveness to such an extent.
　　According to the findings of our survey, a largenumber of SOEs have expanded and boosted theircompetitive edge solely through partnership withtransnational companies. Xi’an Electrical Grouppresents an excellent example. As a result of JVpartnership with Mitsubishi in the first phase and withABB in the second phase, Xi’an Electrical Group has,since reform and opening up to the outside world,introduced and digested technology from transnationalpartners and carried out re-innovation. Within ashort timeframe of ten years, it has emerged as theindustry-leading enterprise in China, and is capable ofcompeting head-on with transnational companies incertain product lines.
　　Some people have concluded that China’s “marketfor- technology exchange” strategy failed because werelinquished the market to foreign investors but failedto obtain corresponding technology in return. Suchcriticisms are mainly directed towards the car industry.
　　Our survey also found that China’s marketfor-technology strategy was successful in the carindustry. Firstly, by forging a JV partnership withworld-renowned multinational carmakers, China hassuccessfully realized substitution for import and haseven begun to export cars made in China. Secondly,China has formed modern automobile industry chainsand industrial clusters. Shanghai, for example, haspursued a JV partnership with Volkswagen and GM fortwo decades, and as a result, has formed an automobileindustry chain in the surrounding areas. The two carjoint ventures have also established their own spareparts supply systems. Shanghai Volkswagen has 340 firstclassvendors, while Shanghai GM boasts 178 first-classvendors. Meanwhile, the two car joint ventures have alsoestablished their marketing and post-sale service systemsacross China. Shanghai Volkswagen has over 800 salesoutlets nationwide (including 500 4F shops), while GMhas 699 dealers (including import car dealers) acrossChina. Shanghai Automobile Industry Corporationhas not only established two car joint ventures, but hasalso formed over 40 key car parts manufacturing jointventures with multinational companies. In collaborationwith these parts manufacturers, the two car joint venturesoften invite key vendors to participate in car developmentand model design so as to shorten the lead time for productdevelopment. By forming her own car industry chain, Chinahas not only brought in advanced technology, but has alsointroduced advanced marketing concepts. The formation ofChina’s car industry chain has become the basis for domesticenterprises in developing their own brands. Thirdly, Chinahas trained tens of thousands of car technicians and a largenumber of engineers and modern automobile operation andmanagement personnel by improving car manufacturingplants and industry chains through more than 20 years of JVpartnership with transnational companies. These personnelhave also become the human resources of domesticenterprises for developing their home-grown brand cars.
　　Obviously, without the exemplary role of foreignfundedenterprises and the market competition pressurethey bring, China’s domestic business competitivenesscould not have made such huge progress within theshort timeframe of ten years.
　　While focusing upon the difficulties encounteredin certain M&A cases, our media should also turn theireyes to the examples of Chinese enterprises whichexpand as a result of JV partnership with transnationalcompanies and summarize their successes.
　　T h e c a u s e s o f p r o b l e m s w h i c h o c c u r i ncollaboration with transnational companies oftenrelate to the lack of in-depth reform of our corporate management system, the absence of self-developmentdrivers, and the dearth of motivation to absorbimported technology and carry out re-innovation.Certain people are even “sleeping” on joint ventures.This point has been corroborated by the negative casesdisclosed in the media.
　　In the event of business failure or industrydevelopment setbacks, we should be well versed inassessing our own problems instead of attributingblame solely to the introduction of foreign investors orthe “conspiracy” of multinational companies. A greatnation should be good at carrying out introspectionand identifying its own problems rather than holdingexternal factors to blame for any problems whichoccur. A nation can succeed in global competitiononly if it is adept at discovering its own problems.
　　
　　V. Capital, equity and ownership are fluid
　　
　　China’s economy is currently at a peak of securitynot achieved for more than one and a half centuries, butthe level of security does not mean we have no securityconcerns or pitfalls. Our economic competitiveness hasindeed climbed, but we also face a serious challenge asto whether it can continue to rise in light of a multitudeof issues related to control over international resourcepricing power, energy security, environmental security,business innovation capability, etc.
　　Resolving these issues requires further changesto economic management systems and operationmechanisms. The best method is to strengthen reformand further enhance marketization. Taking proprietaryinnovation as an example, Chinese enterprises makescant investments in R&D. This is not because theyfail to understand the importance of technology. Therelatively long R&D cycle, however, is at odds withthe relatively short tenure of business leadership.Some business leaders pay greater attention to theperformance achievable within their own tenure thanto the long-term sustainable development mission oftheir successors. Such a management system is clearly indisaccord with corporate development rules. Therefore,it is imperative to change the management systems andoperation mechanisms which are lagging behind.
　　Another view holds that foreign-funded enterprisesstand at the high end of the industry chain while weare at the bottom end ? resulting in them earninglots of money while we earn far less. This is a reality,but we should think of it from another perspective.Firstly, we were outside the global industry chain inthe past, and now we are able to enter into the low andmedium end of it; this is massive historical progress.Other developing countries enviously liken Chinato a huge black hole which has absorbed the foreigninvestment that should have flowed to them. Muchas they may wish to, they cannot enter even the lowend of the global industry chain. We should not negatethe tremendous progress we have achieved. Secondly,Chinese enterprises should not stop moving forward upon entering the low end of the global industry chain.They can and should ascend further to the mediumand high ends of the industry chain. In fact, a group ofChinese enterprises has already begun to climb higher.
　　As for proprietary intellectual property rights andhome-grown brands, we should also consider themfrom a development angle. As Chinese enterprisesgrow and expand, they encounter an increasingnumber of opportunities to conduct M&A overseas.We have undertaken a survey of two typical cases: 1)The takeover of Germany-based Durkupp Adler (DA)by SMPIC Corporation (an industrial sewing machinemanufacturer in Shanghai) in 2005; 2) The acquisitionof Germany-based Waldrich Coburg (which specializesin manufacturing planer milling machines) by BeijingNo.1 Machine Tool Plant. The two German enterprisesare both invisible champions in their respectiveindustries, each possessing the world’s leadingtechnology, core technology and world-famous brands.Since being taken over, their brands, technical patents,factories and R&D centres all belong to the Chineseenterprises. By absorbing and consolidating theseinternational resources, Chinese enterprises aim torealize Euro-Asian interaction and global developmentin a collaborative way.
　　In the era of economic globalization,Chinese and foreign enterprises will find theirequity interests being cross-held to a greaterextent. Given the faster pace of going publicoverseas, a number of central governmentowned SOEs have absorbed an increasinglylarge amount of foreign capital in recentyears. For example, China’s flagship SOEsraised money overseas mostly from strategicinternational investors by offering shares of 10%in PetroChina, 20% in Sinopec, 25% in ChinaMobile, 33.59% in CNOOC, and 25.75% inChina Construction Bank on the internationalcapital markets. Therefore, SOEs are no longerpure state-owned enterprises in the traditionalsense. The “cross-holding” integration will befurther intensified in the future.
　　The revelation to us has been that equityis fluid, capital is fluid, and ownership is fluid in a marketeconomy under conditions of globalization. Today, youcan take over me, but tomorrow, I will take over you;domestically, you can take over me, but overseas, I willtake over you - so there is no need to panic at acquisitionstaking place at the current time. If we address issues fromthe macro-perspective of globalization and historicaldevelopment, we should be able to realize that foreignfunded M&A is part of the growth and “going global”process for Chinese enterprises.
　　We s h o u l d l e a r n t o p a r t i c i p a t e i n g l o b a lcompetition and cross-border M&A under conditionsof cross-business-ownership. We should not use thestereotypical thinking formed when China was closedto the outside world to analyze the new businesscompetitive landscape.
　　
　　VI. Cooperation and competition betweenstate-owned, private and foreign-funded enterprises is most beneficial to China’seconomic development
　　
　　At the initial stage of development, China’seconomy was driven primarily by quantity growth.Now, China is in the process of transforming hereconomic growth pattern, with more attention givento quality growth. In this situation, it is necessary toadjust foreign investment policies. While activelyabsorbing foreign investment, we should emphasizeforeign investment quality. If we absorbed foreigninvestment in the past to promote rapid economicgrowth in China, we should do so in the future toenable foreign investment to push forward China"seconomic growth pattern transformation, as well asincreasing our efforts in building a harmonious society,and enhancing our endeavours towards building anenvironmentally friendly and resource conservationeconomy.
　　We must guide foreign investment in linewith market-oriented principles, and refrain fromreverting back to the administrative interventionprevalent during the era of the planned economy.To encourage a specific item of new technology,we should exploit market-driven means, includingadopting available government purchasing measures.When encouraging innovation, we should not limitourselves to only a specific kind of enterprise, butrather offer encouragement to whomever is carryingout innovation.
　　What the government should do is create a fairenvironment to ensure equitable competition andcooperation among state-owned, private and foreignfundedenterprises. Cooperation and competitionare the factors most conducive to promoting China’seconomic growth and business progress. We should notsupport one type of enterprise by holding back another.
　　It is inadvisable to afford excessive protection tothe SOEs. From an overall perspective, enterprisesof high efficiency and rapid growth are preciselythe foreign-funded and private enterprises. Thecompetitive pressure from foreign-funded and privateenterprises often represents the dynamic underpinningthe success of SOEs.
　　Additionally, government information should bemore transparent, and it is advised to solicit opinionsfrom multiple parties before enacting any newpolicy. Private enterprises, state-owned enterprisesand foreign-funded enterprises each have their ownindividual interests, all of which are legitimate. In thisprocess, the government should serve as an umpireby finding the point of equilibrium for the interests ofeach type of enterprise.
　　
　　VII. China has a cultural tradition ofabsorbing foreign factors
　　
　　F o r e i g n d i r e c t i n v e s t m e n t ( F D I ) i s t h einvestment with “rich gold content” because thisform of investment (particularly that by renownedtransnational companies) brings with it somethingnew in management, technology and philosophy. Withtransnational company investment often comes a seriesof industry chains and clusters which are extended intothe investment destination country. 　　Foreign investment plays a different role in Chinathan in other market economies. By introducingforeign investment, other market economies canpromote competition and push forward economicdevelopment. China is currently at the stage oftransition from a planned economy to a marketeconomy. In introducing foreign investment, sheshould not only assess its effects in terms of promotingeconomic growth, but also evaluate its implicationsupon her economic reform. Foreign investment bringscapital, technology and management to China, as wellas providing a “push” for China’s transition towardsa market economy. Foreign investment also acts as acatalyst for the transformation of China’s economicsystem and the formation of her market operationmechanism. In the future, foreign investment can alsobecome a positive factor driving China’s economicgrowth mode transformation, as long as it is properlyguided. Thanks to these special functions, we shouldcontinue to attract foreign investment even if we haveabundant sources of capital for domestic investment.
　　Our neighbouring countries are still strengtheningtheir policies for attracting foreign investment. Forexample, Vietnam’s foreign investment policies aremore preferential than ours. South Koreans also cameto China to consult with us regarding how to attractforeign investment. Several years ago, a South Koreanresearch institute asked our research centre to provideinformation upon the policies adopted in China’s 48new and high technology development zones and53 economic & technological development zones toencourage foreign investment. South Korea is thuslearning from China’s successful experiences in openingup to and introducing foreign investment.
　　It makes sense for China to afford foreigninvestors certain preferential treatments due to thenecessity of participating in competition for internationalcapital and resources. We advocate making appropriateadjustments to our foreign investment policies; forexample, shifting the universal preferential treatmentfor all foreign investments to industry and area-specificpreferential treatment, encouraging foreign investment toflow to Western China, granting special favours to certainindustries such as new and high technology, and affordingequal treatment to qualified domestic enterprises.
　　I n t h e e r a o f g l o b a l i z a t i o n , t h e k e y t o a nenterprise"s competitiveness lies in its ability to attract,absorb and consolidate resources. The competitivenessof a country is also dependent upon its ability to attract,absorb and consolidate international resources such asenergy, capital, technology and markets. History showsthat the rise of a nation often requires the utilization ofinternational resources. This holds true for the rise ofthe UK and Germany in the 19th century and the riseof the U.S. and Japan in the 20th century. Historically,these nations frequently plundered other countries’ resources by means of violence or unfair trade asthey rose to prominence. Now the rules of marketcompetition have changed, and plundering throughforce has become history. The rise of China can besustained only through market competition to attract,absorb and consolidate international resources.
　　China has a unique advantage in her specialcompetitiveness ? her cultural ability to integrateand consolidate foreign factors. All of the nomadicminorities reigning in central China throughout historywere eventually merged into the Chinese culture.Faced with the challenges from economic globalization,we should participate in global competition with thesame confidence and ability with regard to integration.
　　In the more than 27 years since reform andopening up to the outside world, as multinationalcompanies have brought China into their globaloperating networks, we have actually consolidated theirresources into our economic system. Consolidationand reverse consolidation constitute a salient featureof economic competition in the era of globalization.Therefore, we should change from a “weak” mentalityof passively enduring attacks into a “strong” mentalityfeaturing self-confidence and strength. Furthermore, weshould undertake more proactive initiatives designed toattract, absorb and consolidate global resources.Source: Study Times

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