Declining GDP growth, trade war, and negative media coverage – any outside observer of China’s economic relationship with the world and especially the state of multinational enterprises (MNCs) in the country might get the impression that all love is gone. But are foreign companies and investors really pulling out of China? Overall data from 1H 2020 as well as a snapshot of recent activities of major German firms provides a different indication.
A study released earlier this month by the Rhodium Group revealed that in 1H 2020 for the first time in a decade foreign M&A into China surpassed outbound M&A in value and volume, in an overall depressed market. Indeed, in China the average monthly transaction volume for inbound M&A this year stands at about USD 2 bn (vs. USD 3 bn in the record-breaking 2019) while outbound stands at only USD 1.3 bn (vs. USD 20 bn back in the record-breaking 2016). Needless to say that overall M&A deal volume in Q2 2020 is down 50% globally and 90% down in the US alone, according to data from Refinitiv. Coupled with a higher focus of Chinese investors on the domestic market, this regional trend is also the result of a prolonged increase in inflows that started back in 2018. “Foreign appetite for assets in China will remain robust, despite the chorus of political decoupling and economic reshoring talk, as long as China represents a sizeable share of global growth. Over the past 18 months, we have recorded levels of foreign M&A into China that were not seen in the previous decade”, Rhodium Group states.
German companies have been at the forefront of business engagement with and investments in China ever since the Reform and Opening Up of the Chinese economy some 40 years ago. The Business Confidence Survey 2019/20 by the German Chamber of Commerce and KPMG – conducted before the COVID-19 outbreak – showed that 45% of German enterprises rated China´s commitment to further opening the local market for foreign investment as at least “rather serious” (vs. 25% stating "less" or "no commitment"). China is a top 3 market for the majority of survey participants, in terms of sales. However, almost 50% of the participants noted that they perceive it as “likely” or “very likely” that Chinese competitors can become innovation leaders in their respective industry within the next five years (up from 36% a year earlier). Not surprisingly then, almost 70% of the participants of that same survey also noted that they were planning further investments into China in the next two years, following already years of increased inflows.
As a result, one area German MNCs have been in particular focused on is further deepening their ties with China’s thriving technology, innovation and startup ecosystem – either via direct investments or cooperation agreements. One key takeaway from our analysis is that currently especially Artificial Intelligence and innovative mobility solutions are gaining traction. German companies seem to acknowledge China’s innovative potential in these areas. Besides, in addition to an increasing interest in Chinese startups, German corporates are continuing the trend of setting up localized R&D/innovation labs in China.
Below is a non-exhaustive overview of some major developments in the last six months that we have observed.
Future of Mobility: Electric Vehicles and Autonomous Driving
Volkswagen takes major steps to intensify its e-mobility operations in China
Volkswagen plans to increase its share in JAC Volkswagen, its joint venture for e-mobility. Around 1 billion EUR is to be invested. This amount includes the acquisition of 50 percent of JAG, the parent company of the Volkswagen partner JAC, and an increase in the stake in JAC Volkswagen from 50 to 75 percent. By gaining management control, Volkswagen is paving the way for more electric models and infrastructure. Founded in 2017, the JAC Volkswagen joint venture is an all-electric company, which develops, produces and sells NEVs. A portfolio expansion of up to 5 additional BEV models by 2025 is planned, as well as building a full-scale e-model factory and finishing the R&D center in Hefei.
Furthermore, Volkswagen will acquire a 26 percent stake in battery manufacturer Gotion High-Tech Co., Ltd. for around EUR 1 billion, becoming the company’s largest shareholder. Volkswagen is the first global automaker to invest direct in a Chinese battery supplier. Gotion maintains various current and future projects over the entire battery value chain from sourcing, development and production to recycling.
“Together with strong and reliable partners, Volkswagen is strengthening its electrification strategy in China. The electric cars segment is growing rapidly and offers a great deal of potential for JAC Volkswagen. We are actively driving forward the development of battery cells in China through our strategic investment in Gotion” said Dr. Herbert Diess, CEO of Volkswagen AG
Continental’s Vitesco Technologies to Open New EV R&D Center in China
Vitesco Technologies, the powertrain business of Continental, a major German automotive supplier, will build a research and development center in the Chinese port city of Tianjin. The company has signed a corresponding agreement with the Administration Committee of the Tianjin Economic-Technological Development Area. In the new R&D center, which is scheduled for completion in 2021, Vitesco Technologies will develop technologies for hybrid and electric powertrains.
The company is thus extending its R&D capacity for zero-emission propulsion technologies in the APAC region. Vitesco Technologies already operates a highly automated plant at the site in Tianjin, where a fully integrated electric axle drive system has been produced since 2019. “The new center in Tianjin further expands our development capacities right in the center of where we expect the biggest electrification growth over the next years”, said Thomas Stierle, Head of the Electrification Technology business unit of Vitesco Technologies.
Robert Bosch Venture Capital backs Automated Driving Startup UISEE
Robert Bosch Venture Capital GmbH (RBVC), the corporate VC arm of the Bosch Group, one of the world’s largest automotive suppliers, had set up an office in Shanghai in 2018 to further drive its engagements in China. Now, the firm has completed an investment in Beijing-based UISEE, a provider of turnkey solutions for automated driving, initially in restricted areas. Its automated tractors have started to get operational and transport freights of thousands of passengers daily at an international airport. UISEE developed unique advanced Level 4 automated driving platform based on mature tool chain for data processing and simulation.
Dr. Ingo Ramesohl, Managing Director at RBVC commented: “UISEE adds to a growing RBVC portfolio of proprietary technologies for automated driving and enables a variety of cooperation opportunities with Bosch in this area.”
Automotive Supplier ZF Partners with Unicorn TuSimple on Autonomous Truck Tech
Self-driving truck company and unicorn TuSimple is making plans for mass production of its autonomous systems. In March, the company said it has struck up a partnership with major German car parts maker ZF to develop and commercialize technology for its self-driving big rigs, which are already hauling cargo for customers such as UPS.
The partnership is twofold: ZF will support TuSimple's preproduction systems starting in a matter of weeks, and the companies will then work toward building automotive-grade cameras, lidar, radar, steering and computing systems. Both companies have separate partnerships with Nvidia to develop computing platforms, so it's not necessarily surprising they'd come together to use ZF's ProAI to further their automated-driving ambitions. The partnership covers global operations in North America, China and Europe.
Healthcare: Shift to Innovation Made in China?
Merck invests in Chinese AI startup SynSense
In May, German pharmaceutical, chemical and life sciences multinational Merck announced an investment into computing startup SynSense (formerly aiCTX) via its corporate investment unit Merck Ventures. SynSense, which is based in China and Switzerland, focuses on developing neuromorphic computing that is modeled after systems in the human brain and nervous system. The startup’s AI processors and sensors provide an unprecedented combination of ultra-low power consumption and low latency for a broad range of edge applications in smart home, smart security, autonomous driving, drones or robots.
Merck invested in SynSense through its China Seed Fund, which was established by Merck Ventures and the China Innovation Hub of Merck in October 2019. “Our plan to be an active player in the China innovation landscape is paying off with this exciting step, which nicely complements our activities in our Performance Materials business sector”, said Isabel de Paoli, Chief Strategy Officer at Merck.
Boehringer Ingelheim to Establish Digital Lab in Shanghai
German drugmaker Boehringer Ingelheim plans to open a digital laboratory, officially known as BI X, in July in Shanghai as part of its efforts to penetrate the Chinese market. With an initial investment of three million EUR, the laboratory aims to recruit 20 experts in the field of digital health care to help develop medical products and therapies for the Chinese market.
Pharmaceutical companies in China in general are scrambling to leverage digital technologies to boost their health care services. Last year, Merck and tech titan Tencent signed an agreement, under which Merck would use the Chinese company’s internet and AI technologies to build a digital platform to improve public disease awareness and provide health care services to patients based in China.
Consumer Tech: Small-scale Investments, but growing Interest
Bertelsmann Asia Investments Participates in Oasis VR Series A and Keep Series E
Bertelsmann Asia Investments (BAI) was established in Beijing in 2008 and has a highly localized and independent operation model. It has invested in >160 startups over the past years (several of them now listed) and currently has more than 85 holdings. It is consistently ranked as one of the best investors in China.
In February 2020, Bertelsmann Asia Investments and Morningside Ventures led a Series A round of over RMB 10 million (1.25 mio EUR), into Oasis VR. Oasis VR, set up in Shanghai in 2018, makes software that lets users build their own virtual reality identities that can be used in virtual communities or within the company’s own games. Their flagship virtual social platform, eponymously named Oasis VR, has been available on Steam since late last year.
Furthermore, BAI recently also participated in a Series E round for Chinese fitness app Keep, helping the company achieve a 1 billion USD valuation.
Rocket Internet’s GFC invests into AI startup Lingxi alongside Bytedance
TikTok’s and DouYin’s parent company ByteDance has added Lingxi, a Beijing-based startup that applies machine intelligence to financial services such as debt collection and insurance sales, to its portfolio of investments. Alongside ByteDance, the $6.2 million Series A round closed in April was co-led by Global Founders Capital, the venture capital arm of Rocket Internet, the German accelerator that has incubated e-commerce giants Lazada and Jumia.
Certainly, the sustainability of recent developments is yet to be seen, especially in light of the global pandemic and international trade tensions, which might force in particular European countries to pick a side. However, the significant M&A activity of foreign MNCs clearly point at i) the importance of the Chinese market for their global operations, ii) the increasingly favorable local business and investment environment, and iii) the need for foreign MNCs to double-down on local tech cooperation and investments in order to compete with ever-more agile and innovative local competitors.
We believe the recent development also point to a long-standing fact: when it comes to China, perception is often different from reality. In most cases, it is better to let the actual data speak for itself.
All opinions expressed in this article do reflect my personal views only.