Global Manufacturing and Secondary Innovation in China. Xiaobo Wu
of Foreign Exchange in 2003–2015.
Diagram 1-8 Cross-border M&As as an outbound foreign direct investment by Chinese companies
Data Source: Statistical Bulletin of China’s Outbound Foreign Direct Investment issued by the Ministry of Commerce, National Bureau of Statistics and State Administration of Foreign Exchange in 2003–2015, and China Mergers & Acquisitions Yearbook by Beijing Jiaotong University.
Similar to what has happened in other sectors, cross-border M&As have also been favored by manufacturing investors. In the early days of China’s accession to the WTO, Chinese manufacturing companies had relatively monotonous outbound investment types. They directly invested in new manufacturing factories to explore and expand the international market. It was a natural choice as most Chinese companies could hardly pay for the big premium goodwill required for M&As and integration process back then. At the same time, due to the lack of management experience, they had to face great risks in the overseas investment through M&As. With the continuous improvement of management, financial risk bearing capacity and corporate reputation, Chinese companies began to try direct investment through equity consolidation or M&As, etc. As an important way of outbound foreign direct investment by Chinese companies, the cross-border M&A deal has been growing steadily in both volume and scale in the recent years (as shown in Table 1-4).
Table 1-4 Cross-border M&As by China’s manufacturing industry, 2003–2015
Data Source: Data of 2003–2012 were from China Mergers & Acquisitions Yearbook, and data of 2013–2015 were from Statistical Bulletin of China’s Outbound Foreign Direct Investment issued by the Ministry of Commerce, National Bureau of Statistics and State Administration of Foreign Exchange in 2013–2015.
At the same time, a number of representative M&A cases have emerged, such as Geely’s acquisition of Volvo in 2010, and Wanxiang’s acquisition in 2013 of A123, the largest new energy battery manufacturer in the United States.
Through cross-border M&As, firms can obtain relatively advanced technologies, brands, production and sales network resources to achieve effective utilization and complementation of resources between companies and create a synergy effect of “1+1>2”. Meanwhile, the establishment of upstream/downstream overseas companies through M&As not only improves the corporate’s core industrial chain, but also indirectly alleviates the pressure brought by limitations of domestic resources. Therefore, in recent years, Chinese manufacturing companies have frequently gone abroad for overseas M&As, and the scale and number of the transactions have grown rapidly.
1.2.4 Investable industries increasingly diversify, and the technology-driven investment becomes the major trend
The outbound investment of China’s manufacturing industry has been developing and implementing the strategy of diversification. During the three years from 2003 to 2015, China’s manufacturing industry invested into an increasingly diverse range of industries. In 2003, the industrial sectors outside China invested by China’s manufacturing industry mainly included electronic equipment manufacturing, textile industry, ferrous metal smelting and rolling processing industry, etc. After more than ten years of globalization, in 2015 the scope was expanded to cover electronic equipment, transportation facilities, general-purpose equipment, special equipment, medicine, textile manufacturing, non-ferrous metal smelting, rolling processing, metal product and wood processing industry, etc.
At the same time, in the continuously deepening globalization, the motivation of China’s manufacturing industry for overseas investment gradually shifted from pursuing foreign trade opportunities and natural resources to acquiring strategic assets such as technology and brands, etc. Among such motivations, technology acquisition was the most common one. Through Greenfield investment, establishing overseas parks and incubators, Chinese manufacturing industry tried to foster advanced technologies. By acquiring overseas high-tech institutions, building R&D alliance with overseas institutions, etc, Chinese manufacturing industry tried to acquire overseas advanced technologies. Among them, self-constructed overseas R&D institutions (Greenfield) and M&As with overseas high-tech institutions were the most common pathways. For example, SANY Heavy Industry built its R&D and manufacturing base in the United States in 2008. It developed new products such as rough-terrain cranes and crawler cranes widely welcomed in the North American market. In 2014, Wanxiang acquired Fisker, a company with complete new energy vehicle production capacity, at a price of USD 150 million. Wanxiang obtained the manufacturing technology and intellectual property rights for new energy vehicles, including 18 design patents, invention patents and brands through the acquisition. This completed the strategic deployment of Wanxiang in new energy vehicle field, and assisted Wanxiang in rapidly integrating electric vehicle manufacturing technologies.
1.3 Innovation capability building of China’s manufacturing industry
When confronting international competition in the global market, innovation capabilities will be the key factor for China’s manufacturing industry to win the future global competition. Currently, the Chinese government unveils many incentive policies, i.e. policies promoting innovative infrastructure construction projects, policies promoting evaluation system for enterprise’s innovation performance, policies encouraging R&D subsidies and tariff concession for high-tech companies as well as other incentive policies. These incentive policies are purported to encourage employees’ enthusiasm for R&D in manufacturing industry and improve its international competitiveness. According to statistics, by the end of 2015, China had built 132 national engineering research centers, 158 national engineering laboratories and 1,187 nationally recognized enterprise technology centers. The Venture Capital Program for Emerging Industries had spun off 206 venture capital firms, with a raised capital of RMB 55.7 billion yuan altogether and 1,233 start-ups invested. It therefore boosted the system construction for industrial technology development and corporate technological innovation, improving the technological innovation capabilities of the industry and enterprises.
China has placed innovation at an important strategic position in economic development. Being the “engine” for economic growth, technological innovation in manufacturing industry is particularly important. For the manufacturing industry, production and R&D are two key aspects for industrial transformation and upgrading, and innovation capability improvement. Therefore, in this section, both static and dynamic competitiveness analysis of China’s manufacturing industry are conducted from the two perspectives of production efficiency and technological innovation capabilities. Benchmarking the development of China’s manufacturing industry against the world level would provide some inspirations as to what is the correct choice of technology strategy for China’s manufacturing industry.
1.3.1 Production efficiency
Benchmarking China’s manufacturing industry’s production efficiency against the international standard. There are many indicators reflecting the production efficiency of the manufacturing industry. Three indicators, namely the labor productivity, value-added rate and labor remuneration to the value added, are often adopted to examine the production efficiency of the manufacturing industry. As for the manufacturing industry, labor productivity is the value added divided by the average number of employees in the industry (mean value of the number at the beginning of year and that at the end of year). It reflects the work efficiency of the labor force. In general, the labor productivity of the manufacturing industry is directly related to the capital intensity. The higher the capital intensity, the higher the labor productivity will be. If the capital intensity is relatively low, then the labor productivity will be low as well. The value-added rate in the manufacturing industry is a production efficiency indicator reflecting the labor productivity. It represents the ratio of the value added to the