“Society speaks and all men listen, mountains speak and wise men listen.” - John Muir
The acquisition of Syngenta, a world leading seed and crop protection company, by China’s largest chemical company ChemChina has raised some interesting points about China’s overseas direct investment. Indeed, as noted by the Financial Times, many of the large acquisitions conducted by Chinese companies in recent years have been made through State Owned Enterprises, which have a substantial backing from the state (either at the local or regional level).
This backing is most visible in the access to financing: ChemChina’s will pay USD 43 billion for Syngenta, the largest outbound M&A transaction from China. However, ChemChina has a debt to EBITDA (Earnings Before Interest Taxes Depreciation and Amortization, an artificial measure of profitability) ratio of 9.5 times, which can be categorized as ‘excessively leveraged’. This is before having to disburse an additional USD 43 billion to acquire Syngenta.
Of course, Syngenta is expected to have an easier access to China’s large agricultural sector and may also be able to expand Genetically Modified products in the country, an industry in which foreign companies are forbidden to invest. This acquisition is also very much in line with the objective of the Chinese government to increase food security over the long term, by securing foreign technologies to accelerate the industrialization of its (relatively) backward agricultural sector.
It is understood that China’s overseas acquisitions have a more or less strong political component. From the point of view of the government, this is completely justified by the fact that the country needs to catch up with other large economies. After all its breakneck growth and finally being the world’s second largest economy, China still has a lot of improvements to offer to its citizens, including food safety, cleaner environment, rule of law…
We should remember that China (the ‘Middle Kingdom’) is very much focused on itself. Its acquisitions abroad are usually ways to import technologies, products, and know how to the country, not some dark plot to take control of the world. Indeed, the country already has enough domestic problems on its hands and is clearly unwilling to compound them by adding foreign problems as well. Its border disputes with neighbors are worrying but can be very well understood when one takes a hard geopolitical analysis of China’s immediate surroundings.
In other words, we should understand China’s desire to increase the speed of its internal development. However, the Western world should also be careful not to allow the sale of world leading asset, especially in strategic sectors, to a country with which the relationship sometimes verge on open confrontation. In the end, it is most important to evaluate whether all key stakeholders benefit from the transactions.
Another article about Chinese factories in the USA raises some questions about the ability of Chinese companies to manage foreign operations, but we should again remember that China is on a steep learning curve. After all, Japan also used to be perceived as a threat during its breakneck growth. We shall hope that China follows a similar development path.
Science, General Knowledge & Environment
Why Chinese Factories Fare Poorly in the U.S. – (Hat tip Chuan Yu) – “There have been multiple reports of Chinese employers in the U.S. complaining that American workers are too outspoken and independent and are unable to follow rules.“
History & Geopolitics
Satellite Images: An Iranian Military Complex – [Video] – “Stratfor Military Analyst Sim Tack analyzes satellite imagery of the Parchin military complex and explains how the images may show Iran’s efforts to hide its nuclear intentions.“
Why the Military Rules in Pakistan – [Video] – “Stratfor South Asia Analyst Faisel Pervaiz examines the historical and recent reasons for the prominence of Pakistan’s military in politics.“
Etats-Unis - France : la même schizophrénie de l’électorat – “En effet, dans les Etats-Unis de 2016, il existe des tendances fortes et contradictoires, que l’on pourrait résumer avec les termes suivants : colère et rejet d’un côté, appréhension et besoin d’être rassuré de l’autre. Il s’agit là d’une forme de schizophrénie démocratique d’autant plus intéressante à constater qu’elle évoque de manière troublante la situation qui est celle de la France, un peu plus d’un an avant ses propres élections présidentielles.“
Finance & Economics
M&A: China’s world of debt – (Hat tip Lao Hou) – “The outward embrace of China Inc raises a series of challenges for target companies and countries. Common problems arise from a mismatch of regulatory systems, a clash of corporate cultures and commercial miscalculations.“
Picture of the day: Winter White
About Carlito Riego
"Great perfection may appear imperfect, but its usefulness is inexhaustible. Great abundance may appear empty, but its usefulness cannot be exhausted. Great correctness may appear twisted, great skills appear crude, great eloquence appear awkward. Activity conquers cold; inactivity conquers heat. Clear serenity governs the world." - Lao Zi