This article is part of a series in which DLA Piper professionals define what the Northern Powerhouse means to them, and how to deliver the regeneration of the Northern economy. The author was part of a forum that contributed to an article in Super North, a monthly supplement produced by The Times and sponsored by DLA Piper.
Chinese companies are growing in the UK at an unprecedented rate, adding a significant contribution to the UK economy through growth and employment.
Research by the China Daily into UK businesses with Chinese parent companies identified the 25 fastest-growing companies by turnover, based on the latest published accounts. These companies are making a heavyweight contribution to the UK economy – employing more than 4,000 people and generating revenues of over £25 billion.
The big Chinese investors are concentrated in the sectors relating to manufacturing and financial services sectors closely followed by tech, media and telecoms. Well-established Chinese companies in the UK include Sinochem Europe, Bank of China, China Telecom, China Unicom and Huawei Technologies. Newer companies include Bright Foods Europe which bought the Weetabix brand.
However the investment is heavily concentrated in London and the South. The number of large investments into the North has been small. Only Bluestar Fibres, Powerlink and Holroyd Precision come to mind as major Chinese investments in the North.
There is much to be learned from the patterns of the most recent Chinese investment into the UK and it is important the North makes the most of its many advantages and taps into the opportunities.
Smaller scale start ups
A recent trend has seen large China-based businesses establishing smaller-scale ‘reconnaissance’ operations to build their understanding of the UK and European markets. This has proved a successful formula for companies such as TP Link, which set up its consumer electronics brand from scratch in the UK, recognising the difficulties in generating brand recognition in the market without a physical presence. York, Manchester and Leeds have in the past supported 'business incubators' which provide office space, access to support and resources for new overseas start ups. These programmes are more important than ever in attracting start up teams from the large Chinese corporates to the region. Feedback has shown consistently that these start up teams like to be based in or near Universities and Research centres and the North has the advantage of an abundance of excellent University cities with large Chinese populations that will be a strong selling point for a start up location.
Scale: a more strategic approach
China has the opportunity to invest ￡105 billion in UK infrastructure by 2025 with energy, property and transport being the biggest recipients. The Chinese Government is also providing significant support for companies to expand and invest overseas through the State Asset Supervision Committee, responsible for all state-owned Chinese enterprises.
London and its surrounding regions has the advantage of size and scale for this kind of investment and is now also seen as Europe’s leading trading hub for the Chinese renminbi, following the Industrial and Commercial Bank of China’s decision to issue an offshore bond in the UK for the first time last year. In order to offer an alternative to London and the South for the largest investments, it is vital that the cities and regions in the North collaborate and work together to offer the wide scale and depth of opportunities that Chinese investors are seeking. Chinese investors are used to huge cities. Shanghai has an urban population of 16m, Chongqing (which is more like a province) has an estimated population of 30m. One can see how a proposition based solely on Leeds with its population of 750,000 may be difficult to get off the ground, but add in Manchester with its population of 2.5m and the other cities in the North, then Chinese investors may start to listen.
Springboard for global growth
There is an emergence of more mature, genuinely global privately-owned Chinese businesses that are increasingly upping their game and competing on the international stage. The North needs to adapt to the needs of this more sophisticated global investor who is not necessarily looking for grants and incentives as some of the smaller Chinese investors in previous years have done. Instead, they are looking for high growth opportunities that will give them an edge.
Huawei is one such example, having developed a significant footprint in the UK where its mobile phones compete successfully alongside established Western consumer brands. Similarly, TP-Link’s success in establishing its products with the UK’s major retailers has seen it capture a major slice of the domestic and home office wireless products market, fuelling rapid growth.
There has also been a greater focus on service-based businesses. Global social media marketing agency, We Are Social, is a new Chinese investor in the UK and perhaps indicative of growing Chinese interest in UK creative industry prowess. The North with its creative industry is well placed to tap into this.
Acquisition of established EU brands
The attraction of established brands has also had an enduring appeal for Chinese investors. Bright Foods acquisition of Weetabix has already been mentioned. The recent sale of Pizza Express to Beijing-based Hony Capital highlights another trend - the rise of Chinese private equity buyers looking to acquire assets across Europe. This is part of a new generation of home grown investment firms on the lookout for overseas companies they believe they can help expand in their domestic market – emulating the traditional approach of the state-owned companies.
As the power and resources of Chinese-based online brands such as Alibaba continues to grow, we may see more audacious acquisitions of Western media groups include those in the North.
Will the North remain attractive to Chinese business?
The UK boasts an attractive tax regime for overseas investors, with a corporation tax rate currently at 21% and dropping to 20% from April 2015. It is an increasingly popular holding company destination for Chinese companies wanting to set up and expand globally.
The UK Government has also taken steps to position the UK as a hub for innovation through R&D tax credits and its patent box regime. The UK is also seeing a revival in its M&A market. If the North can harness its own particular set of advantages together with those of the UK as a whole, there is no doubt that the North can positioned itself as well and truly ‘open for business’ to foreign direct investment and, as a result, has become a favoured destination for Chinese business.