China's Belt & Road Initiative - Where do the opportunities lie?

The Chinese Belt and Road Initiative is heralded as the “New Silk Road”, the latest version of China’s traditional trade routes to Asia, Africa and on to Europe. At the present time, it is not clear what the Belt and Road Initiative encompasses and what will be its full implications. Initial impressions are that most, if not all, of China’s current outbound investment activity in Asia and beyond is being conducted under the umbrella of this initiative. Sometimes it is difficult to discern linkages between various investments other than that they are made by Chinese companies.

Nevertheless, whatever form it takes, the initiative is real and it has a great deal of potential. At present it seems that foreign banks are very interested but I suspect that they will only play a subordinate role to the Chinese commercial banks and the regional development banks. Where I think that there is potential, is working with Chinese companies that wish to expand into local markets as part of the Belt and Road Initiative by setting their own operations. In my experience, any company that is serious about internationalising its operations must, sooner or later, establish local operations to better service markets and this is no less true for Chinese companies. Chinese companies cannot conduct major business of this type at arm’s length.

The form that this might take can be anything from a small sales and service operation to a large manufacturing plant or an office managing engineering, procurement and construction a major infrastructure project. It is in these areas that we believe that Chinese companies will be looking for assistance. For all their success as exporters of goods, Chinese companies can be very unsure of themselves when it comes to establishing overseas operations; very large Chinese companies have had some major investment failures. There is also the fact that a foreign venture has the potential for a major loss of “face” should it go wrong. The importance of “face” for Chinese individuals and companies should not be underestimated. This is especially so in areas where Chinese companies feel that they lack basic knowledge. Their preferred approach is to work with a partner who already possesses the knowledge and experience that they lack. The use of partners in a joint venture with a Chinese company in China has been the backbone of Chinese industrial development over the past thirty years. It is therefore no great leap for Chinese companies to prefer to work with a partner when they venture overseas. 

Chinese companies that wish to expand their presence overseas have three basic options in countries where they are pursuing Belt and Road initiatives:

·    Set up a wholly-owned company;

·     Establish a joint venture with a local company and/or a third party foreign company;

·     Make a local acquisition;

Setting up a wholly-owned local company should be the most straightforward option although It is possible that local regulations will preclude one or more of the above options and each opportunity would have to be judged on its merits. For example, governments in the Gulf often insist on a local partner. It may also be advantageous to work with a local partner that knows the market and already has qualified staff.

If the local company is intended only to offer sales and service, this would seem to fit the bill. However, if they need to build something more elaborate such as a manufacturing plant, Chinese companies would be wise to enter the market as a partner with a local company in some form of joint venture.

In China a joint venture is a specific legal entity and there is a Joint Venture Law that governs its formation and operation. In most other legal jurisdictions, joint ventures are not specific legal entities but are usually defined by the partners’ holdings in a joint stock company. However, in this case it does make sense to call such an arrangement a “joint venture” as this is a term and concept with which Chinese companies are very familiar. The Chinese Ministry of Commerce publishes a model joint venture agreement as a basis for negotiations between Chinese and foreign companies to form a joint venture. Even for a joint venture incorporated in China, this text needs serious modification before it will meet the requirements of the foreign partner but its use as a template would have advantages for a Chinese company doing a deal under the Belt and Road Initiative as they are familiar with it and it can be altered to meet the specific requirements of a foreign partner, subject to negotiation, of course!

The acquisition of an existing local company will also be something that will be on the agenda of many Chinese companies as they look to expand into the territories covered by the Belt and Road Initiative. Based on past performance, Chinese companies are reluctant to acquire a foreign company outright, preferring to acquire 60-70% of the equity, leaving the balance in the hands of the current owners and, at the same time, retaining the existing management. Such an approach gives comfort to both sides and provides the original owners of the company with a method of participating in any upside that the acquisition may bring.

From the above, it will be clear that even the acquisition of a local company by a Chinese company could be considered a joint venture using existing assets; a concept very familiar to Chinese business people. There is no restriction on a Chinese company partnering with a foreign company to make an acquisition in a third country.

Establishing a joint venture or making an acquisition in a country as part of the Belt and Road Initiative are for ongoing projects but there are other projects that have a finite life but which could lead to interesting and lucrative partnerships for some companies. A key part of the Belt and Road Initiative is the development of infrastructure along its length. Chinese construction companies will bid for all the large infrastructure projects and will expect to win most, if not all, of them. But these companies may be inexperienced in the particular market in which they are bidding and operating and this will provide an opportunity for a non-Chinese company to provide them with the essential commercial and technical assistance that they may be lacking either as a joint venture partner or as a consultancy company.

There is a similar situation in the development of property, both commercial and industrial, in the countries along the road. Due to the high investment required and the risks of property development, joint ventures are a natural structure for partnerships with property developers, either as a contractual joint venture or the establishment of a joint Special Purpose Vehicle formed for a particular development. When the development is completed, the contract or the Special Purpose Vehicle is dissolved and the proceeds of any sale are distributed between the partners. It is to be expected that Chinese property developers will be seeking out both local and international partners for their projects.

These are some of the options for Chinese companies who will be active in the Belt and Road Initiative. The thread running through all of them, as described above, is the creation of some form of joint venture or partnership. Business Development International has been negotiating joint ventures with Chinese companies for twenty-five years and we know how Chinese companies approach joint venture negotiations, we understand the bureaucratic and government parameters (never far away when you are dealing with Chinese corporates) within which they have to work and we know how to negotiate strong and commercially attractive agreements for our clients.

We think that joint ventures will be a factor in many, if not most, of the deals concluded under the umbrella of the Belt and Road Initiative and we have unrivalled experience in this area. Business Development International would like to have a discussion with companies that are interested in finding out more about the Belt and Road Initiative to explore opportunities. 

If you are interested, please call Robin Nunley on 01948 780515 or send an email to [email protected]