MENA and China Keys to Overseas Investment by Dr. Edward Tse Booz & Company The New Silk Road Raising Capital and Investing in the Middle East Beijing September 24, 2012 Shanghai September 26, 2012 Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. Latham & Watkins practices in Saudi Arabia in association with the Law Office of Salman M. Al-Sudairi. In Qatar, Latham & Watkins LLP is licensed by the Qatar Financial Centre Authority. Copyright 2012 Latham & Watkins. All Rights Reserved.
China and MENA has an increasingly tight economic relationship Bilateral Trade Volume Between China and MENA 1 Import from and Export to China, Billion USD, 2003-2011 36 19 2003 +37% 70 50 36 17 25 25 33 2004 2005 93 46 46 2006 125 57 68 2007 180 94 86 2008 +21% 145 69 77 2009 198 104 94 2010 263 150 113 2011E Proportion of MENA s Trading Contribution in China By Bilateral Trading Volume, 2011 Israel 4% 3% Kuwait 4% Sudan Other MENA Egypt Iraq 4% 5% Oman 6% Turkey 13% 7% 13% UAE 24% Saudi Arabia 17% Iran Import Export 07-11 CAGR 27% 14% Importance of the China-MENA Economic Relationships China s growing economy creates gaps between demands and domestic supply, particularly in oil/gas/natural resources that MENA can provide China s capabilities in producing consumer goods cheaply and efficiently fulfill MENA s growing needs for those products due to the large population China exports heavy equipment, machineries, and related services and products to fulfill MENA s huge needs in infrastructure development Importance of the relationship increases, as economy conditions in US and EU remain sluggish 1) Includes Iran, Iraq, Kuwait, Saudi Arabia, UAE, Qatar, Bahrain, Oman, Syria, Lebanon, Jordan, Yemen, Palestine, Turkey, Cyrus, Israel, Egypt, Sudan, Libya, Tunisia, Algeria, Morocco, Mauritania, Western Sahara Source: China Custom Database; literature search; Booz & Company analysis 2
China s FDI in MENA also increases rapidly, due to 3 key reasons Foreign Direct Investment from China to MENA Billion USD, 2007-2010 MENA is the 2 nd largest region for China s FDI, after Asia +38% 10 5 2 13 Key Rationale for Chinese Companies to Invest in MENA Natural Resources Gain control of strategic natural resources, e.g. energy and metals, to support domestic market % of Total China s FDI 2007 2008 2009 2010 19% 4% 17% 19% China s FDI Amount to MENA by Country 2010 Kuwait Sudan Other MENA Yemen Saudi Arabia Iraq 3% 2% Egypt 2% 4% 4% 2% 39% 3% Algeria 14% 27% UAE 1) Examples including Free Trade Zones in Syria and Egypt, with tax, lending, and utilities benefits Source: China Statistics Bureau; Literature search; Booz & Company analysis Iran Market Expansion Supportive Government Policies Gain access to broader market to have better economy of scale MENA as export destination/ re-export hub China government is supportive of investment in MENA (e.g. PBC s currency exchange arrangement with UAE to facilitate trade) Free trade zones and preferential treatments for Chinese companies 1 3
Chinese companies industry presence in MENA is becoming more diversified Presence of Chinese Companies in Algeria # and Scale of Chinese Companies Total Amount of Investment (2011) 60+ Chinese companies Employ over 25,000 employees in Algeria ~ 1 billion USD EXAMPLE Logistics and Transportation Number of Chinese Companies with Presence in UAE 2012 Telecom Machineries Energy Services 5% 17% 3% 3% 3% Others 6% 38% EXAMPLE Consumer and Trading Industry Focus Oil, gas, and natural resources Construction projects and materials 23% Construction Projects/Materials Energy, natural resources, and construction companies are the first to invest in MENA and have remained important, yet industry portfolio has become more diversified Source: Literature search; Booz & Company analysis 4
Characteristics of Chinese companies overseas expansion Characteristics of Chinese Companies' Overseas Expansion SOE Still the Majority More Ways of Overseas Expansion Moving Towards Mature Markets Diversifying Industries According to EIU s analysis on deals worth more than $50m b/w 2004 and 2009, 81% have been made by SOEs but growth of private enterprises is fast Role of sovereign wealth funds More ways of overseas expansion, from export to M&A and greenfield investment From majority stakes to minority Chinese outbound M&As are moving towards mature markets such as North America and Western Europe However, Africa, Asia, Latin America, and Middle East are also important Industry-wise, diversifying from resources and energy to industrial, manufacturing and consumer sectors Resources and energy still dominant Source: Literature research, Booz & Company analysis 5
Key trends of Chinese companies overseas expansion Key Trends of Chinese Companies Overseas Expansion Chinese companies are learning to be more mature and more sophisticated Chinese companies learned their lessons over time and became more sophisticated in deal making, though still not perfect More industry-impactful M&A by the Chinese Outbound M&A from Chinese companies are creating larger impact in the industry Chinese companies continue to pay high premium Chinese companies continue to pay high premium, while some managed to get better deal by taking advantage of lower asset prices 6
Chinese companies will grow overseas and become more mature Four Stages of Soft Power as Companies Grow Overseas Level of Soft Power Unknown Giant A company may be large at home It is an Unknown Giant when seen from overseas and lacks soft power New-Comer These first moves can go badly wrong or, if well-chosen, provide a strong positive platform for future expansion Critical stage that can shape the direction and pace of future soft power and success Global Corporate Citizen Most established multinationals fall into this category They understand how to operate effectively in many different countries with different stakeholders They do not, however, they neither shape their business environment nor project a distinctive influence on the world. Global Attractor Companies realize the full potential of soft power. They are the true global leaders. They set the agenda for future generations of services and propositions. Stage 1 Stage 2 Stage 3 Stage 4 Stage of Development 7
Contact EDWARD TSE PhD Chairman, Greater China Booz & Company Suite 2705, SK Tower No.6A Jianguomenwai Ave. Beijing, 100022, P.R. China Tel: +86 10 6563 8300 Fax: +86 10 6563 8333 edward.tse@booz.com www.booz.com/cn 8