If we build it, they will come: ‘Made in China’ drawing foreign investors

Data Insight 17 October

If we build it, they will come: ‘Made in China’ drawing foreign investors

Inbound M&A in advanced manufacturing has surged in China since the start of the year, according to Mergermarket data, following the launch of a charm offensive by policymakers to attract foreign investment.

A raft of favorable policies and measures is helping the country consolidate its role as the world’s factory, reducing the impact of US efforts aimed at shifting supply chains away from its geopolitical rival.

In 2022, the Chinese government expanded the list of sectors open to overseas investors to encourage foreign capital to flow into manufacturing-related industries.

Overseas players have finalized six deals worth USD 9.4bn in 2023 year to date (YTD), the highest-ever volume, and up 6.1x compared with the previous record set last year.

The data is even more surprising given that Washington doubled down on efforts focused on re-shoring and ‘friend-shoring’ production amid rising tensions with Beijing.

Foreign buyers accounted for a little under 10% of the number of transactions in advanced manufacturing in China, but more than 73.7% of deal volume.

Domestic and inbound deals in the sector have totaled USD 12.8bn in 2023 YTD – the third-largest volume on Mergermarket record, down 13% compared with the same period in 2022.

The sector outperformed the general M&A market in China, which saw its value tumble 23.8% over the same period to USD 213.8bn. Geopolitics and regulation have played an outsized role in shaping this trend.

In addition, buyouts and consolidation in advanced manufacturing are becoming increasingly attractive thanks to a stable customer base and healthy cash flow at a time of growing uncertainties.

Power play

While overseas players have ploughed money into a vast range of subsectors – from semiconductors to biomedicine – via greenfield investments, foreign investment through M&A has been focused mainly on new energy vehicles.

The largest announced deal is a proposed acquisition of Lotus Technology by Singapore-based blank-check company L Catterton Asia Acquisition Corp at end-January for USD 5.5bn.

In March, Bestpath, a specialist technology firm involved in the application of hydrogen fuel cell-powered vehicles, agreed to merge with Nasdaq-listed SPAC Aquaron Acquisition Corp for USD 1.35bn

Meanwhile, foreign players – particularly from Germany – are eyeing consolidation via tie-ups with local carmakers, although the announcement of a European Union probe into China’s subsidies for its electric vehicle (EV) industry exposes German carmakers to retaliatory measures from Beijing.

Between July and August, German carmaker Volkswagen struck deals or entered talks for tie-ups with three Chinese counterparts: Xpeng, Leapmotor and SAIC Motor. Domestic EV maker Nio is reportedly in talks with Mercedes-Benz, while German private equity investor Mutares, among others, is also betting on China’s auto sector.

Eastern promise

Middle Eastern players have also shown an increasing appetite for investment in Chinese new energy vehicles thanks to their technological development and comprehensive supply chains.

CYVN Holdings, an investment vehicle majority owned by the Abu Dhabi government focused on smart mobility, bought minority stakes in Chinese EV maker Nio for more than USD 1bn.

Saudi Arabia’s oil giant, Saudi Aramco, is investing in a venture with France’s Renault and China’s Geely that also involves the development of hybrid technologies for the automotive sector.

Meanwhile, Chinese players are redoubling efforts to increase their footprint in Southeast Asia. Most recently, DRB Hicom signed an agreement with Geely for the development of an automotive hub in Malaysia.

State expectations

State-led funds are expected to increase their role in directing investment toward advanced manufacturing. Chinese president Xi Jinping and Premier Li Qiang have stressed on several occasions the strategic nature of this sector for the future of the country.

China Reform Holdings, a state asset manager, is planning a development fund worth at least CNY 100bn (USD 13.7bn) to invest in strategic emerging industries and could start operating within the year. Moreover, a plethora of authorities and regulators have vowed to support advanced manufacturing.

The People’s Bank of China (PBOC) is urging the financial sector to help fund tech research, startups and tech-related M&A deals, while state lenders such as Bank of China have pledged to increase credit support for key industries such as integrated circuits, new energy, automobiles and power lithium batteries.

The National Administration of Financial Regulation (NAFR) group says it will continue to increase financial supply in key areas such as advanced manufacturing, strategic emerging industries, as well as the transformation and upgrading of traditional industries.

The Ministry of Industry and Information Technology (MIIT) has vowed to improve the service guarantee mechanism for key foreign-invested projects in the manufacturing industry, as well as guide foreign capital to invest in advanced manufacturing, energy conservation and environmental protection.

The Shanghai government released an action plan to drive the high-quality development of the manufacturing sector through to 2025, as well as facilitate IPOs for over 100 enterprises in the STAR Market of the Shanghai Stock Exchange. Other local governments, including those of Shenzhen and Zhengzhou, have unveiled similar plans.

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