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Jonathan Braude

Investment in Europe rising as Chinese companies seek easier access to markets

For years, mainland China has been a beneficiary of the global trend to outsource manufacturing work to the cheapest economies. European countries - even Eastern European countries with relatively low-paid workforces - fear Chinese competition. Not even Romania or Ukraine can hope to compete with Chinese labour on price.

Yet there are signs that some of the outsourcing is beginning to flow the other way.

The latest edition of accountants Ernst & Young's European Investment Monitor, which tracks the sources of foreign direct investment in Europe, has produced some remarkable statistics.

It says the mainland was one of the fastest-growing sources of investment in Europe in first half of the year. And taken together with the numbers for 2002 and last year,  the figures seem to provide evidence of a trend. China invested in more projects in Europe during the first six months  this year than in the whole of 2003.

'It's pretty dynamic,' said Mathieu Bassee, a manager in Ernst & Young's Paris office.

One reason for the trend  may be Beijing's  policy of encouraging outward investment to counter the inflow of dollars into the mainland economy. But there are also commercial reasons for companies to invest in marketing and production in Europe. Accessing markets is easier with locally made products, which are unrestricted by external tariffs, and a sales force attuned to local culture and requirements.

However, one can exaggerate the importance of this trend. Even after this year's growth, we are talking about no more than 25 Chinese investments in six months across the whole of Europe, from Portugal to Russia. It is more than the 18 projects last year and the 11 in 2002 but it is still just 1 per cent of all foreign investments in the study.

Nevertheless, even that low number makes the mainland an important economic player in Europe, ranking it 16th worldwide in terms of investment.

Unfortunately, the figures show only the number, not the value, of the projects. Ernst & Young did not measure the projects by size or economic importance. But it is a fair bet that American, Japanese or German investments would have been larger and created more jobs on average than those from China.

It is also true that overall foreign investment in Europe was higher in the first six months  than in 2003, despite the fall of the US dollar against European currencies, so that China's share did not appear much larger than the 0.9 per cent of the total it clocked up last year.

On the other hand, it is also worth pointing out that the Ernst & Young figures probably underestimate the real effect of Chinese investment in Europe, since they do not include joint ventures or the purchase of equity stakes in existing businesses.

The survey does not record the names of the projects nor the individual companies making the investments, although it indicates that they operate in a range of sectors from software, electronics and telecommunications to textiles, vehicle  parts and pharmaceuticals. However,  Ernst & Young's research does show that Chinese companies are making serious investments in both production and sales in Europe.

Mr Bassee pointed out that, although almost 50 per cent  of the projects were located in Britain (less than in previous years) and a further 20 per cent in France, there were single investments in Denmark, Italy, the Netherlands, Sweden and Hungary. There were even projects in Russia and Ukraine.

It is too early to say whether the accession of much of Eastern Europe to the European Union in May this year has made a difference to China's investment plans. It would make sense to put  production units in these relatively low-cost economies, which now enjoy unfettered access to  Western European markets. But the pattern in the first half  - of the new entrants only Hungary received a new investment - suggests other considerations have prevailed so far.

Most of the  British investments, for instance, have been by Chinese companies establishing a European headquarters. These are what Mr Bassee calls 'high-value investments', creating high-quality jobs.

Mr Bassee also pointed out that all the Chinese investments were 'greenfield' projects. In other words, they were neither extensions to existing plants nor 'co-locations' of, for instance, a new research and development facility with an existing production unit.

Perhaps that was not surprising, he said. For a country like China, which has not invested much in Europe so far, there are not too many existing plants to be extended.

If the growth in investment really does indicate a longer-term trend, there may be fewer 'greenfield' projects in future.



Money begins to flow outwards from mainland