In 2015 China’s outbound M&A volume increased for the sixth consecutive year to a record high of $111.9 billion in 2015, breaching the $100 billion mark for the first time ever
2016 is the Year of Monkey – unsurprising a year which is to be characterised by volatility. Despite overplayed concerns about the Chinese economy, Chinese outbound M&A in 2016 is likely to continue to focus on acquisitions of mature businesses in developed countries with advanced technology and management best practices.
A yellow brick road for Australia
In 2013, President Xi Jinping announced a vision for a 100 year economic development policy for China, and surrounding regions – the One Belt One Road (OBOR –????). In 2015 OBOR initiatives continued to gather pace culminating in the launch of the Asian Infrastructure Investment Bank on 16 January 2016 and is expected to lend $10 billion-$15 billion a year starting operations in the second quarter of 2016.
While Australia is not technically on the OBOR map, the acquisition of John Holland by China Communications Construction Company and the Port of Darwin by Landbridge shows Australia can benefit from this bold endeavour.
As Australian mining services and construction companies face declining energy and resources sectors and further weakness in commodity prices, these companies are likely to present a lucrative opportunity to Chinese bidders (see China's OBOR - a new opportunity for Australian expertise).
The Next Unicorn – making way for the innovation nation
China’s 13th Five Year Plan (to be finalised in March 2016) lists technology as a key area of focus including expansion of the online economy and the implementation of the Internet plus plan, increasing network speeds and lowering fees.
The Chinese Government proposed to increase support for cyberspace innovation in industries, and supply and logistics chains.
Chinese investors have previously focused on the acquisition of commercialised tech companies. Chinese investors keen to acquire technology are recognising the benefits of investment in start-ups including Alibaba’s US$220 million investment in Snapchat (a Stanford Uni Start Up). A Chinese-backed US$713 million capital venture fund Cocoon Networks established in January 2016 will seek out British and European start ups with potential to expand in China with a focus on fintech, medical devices and healthtech.
Australian start ups have previously had difficulties in attracting Chinese investment with the focus on commercialised companies predominantly located in the US. However, with a frothy US tech market Chinese investors are also beginning to see that Australia is a great source of ideas as the smaller market size forces Australian start-ups to build viable business models which are not predicated on blue sky projections and which are capable of growth and can be readily scaled up to the Chinese market. In 2015 Airtasker’s $6.5 million capital raising attracted Chinese based investors including Shanghai based Morning Crest Capital.
In a bid to find the next Atlassian – a new Chinese reality show – The Next Unicorn (a cross between the Shark Tank and the X Factor) – has chosen two Australian contestants to compete among 15 global entrepreneurs on the show.
This combined with the changes to Australia’s significant investor visa requirements in 2015 which require investment of at least $1 million in Australian start-ups, we expect to see more investment by Chinese venture capital funds in Australian start-ups.
Why there is nothing like Australia
Chinese investors have set their sights on the fast growing tourism industry as well, not only investing in developing countries, but substantial sums have also been invested in the tourism industry of developed economies including Sydney’s Hilton Hotel in George Street to Bright Ruby for $442 million and Sunshine Insurance picked up New York five-star luxury hotel the Baccarat Hotel for $US230 million as well as a Hunter Valley resort with plans to develop a $100 million 6 star resort and second championship golf course.
In 2015, the number of Chinese visitors to Australia surpassed 1 million for the first time and has more than doubled over the past five years. Australian tourism takes in more than $35 billion every year and more than a fifth of that comes from China, at $7.7 billion which is forecast to nearly double to $13 billion by 2020.
Growth in tourism (and occupancy rates) and a focus on cash flow is likely to continue to drive Chinese investment and acquisitions of hotels in Australia.