ROYAL DUTCH SHELL GROUP .COM THE INDEPENDENT ON SUNDAY

Royal Dutch Shell Group .com

THE INDEPENDENT ON SUNDAY: The corporate dragons chasing success in the West: “Analysts say CNOOC could now make a bid for Royal Dutch Shell's 34 per cent stake in the Australian company Woodside, but it is likely CNOOC would face similar obstacles from the Australian government to what they came up against in the US over the Unocal deal.”: Sunday 7 August 2005

Unocal might have been 'saved' for the American nation and the Chinese predators beaten off, but there are many more companies flexing their financial muscles in order to stake a claim in the global marketplace

By Tim Webb, Ben Schneiders and Clayton Hirst

Published: 07 August 2005

Until recently, takeovers involving Western and Chinese companies were exclusively one-way traffic: Chinese takeaways by their bigger and richer Western rivals were the order of the day. But the tables are turning. Now, increasingly, Chinese companies, mostly owned - and funded - by the Chinese government, are becoming the predators.

So far, however, their success rate is not high: the $1.75bn (£983m) acquisition of IBM by Lenovo in December remains the biggest coup. Last week, the China National Offshore Oil Company was rebuffed in its attempts to buy the US oil company Unocal. Investment bankers have started to talk about the "Chinese discount": the thinking here is that Chinese companies are worth less because of their inability to clinch the deals they want. Below, we look at those Chinese companies that harbour ambitions of becoming global players, and we assess their chances of realising them.

Nanjing

Nanjing is a most unlikely new owner of MG Rover. Last year, in its joint venture with Fiat, the Italian car maker, it made just over 24,000 cars, a fraction of the 600,000 cars produced by its far larger rival, Shanghai Automotive Industry Corporation (SAIC).

Nanjing is desperate to become a global player, and two years ago set a target of selling 300,000 vehicles per year by 2006. Like SAIC, it has been courting potential partnerships in the West and Japan, but with little success. In the 1990s, it wasted five years negotiating with Nissan and Ford, but failed to form a partnership. Analysts say Nanjing's management was too demanding during the negotiations.

The one partnership it has established, with Fiat, has not had the impact Nanjing had hoped for. The Fiat-Nanjing car-making joint venture made a third fewer cars last year than it did in the previous year.

Nanjing also has a joint venture with the Fiat company Iveco to make vans, which produced 60,000 trucks last year under its own brand name, Yuejin. A leaked internal memo at that time revealed that the joint venture was in deep trouble, probably prompting Nanjing to look once again to MG Rover as a potential new partner.

The deal with MG Rover could be Nanjing's last chance to become a serious player. It has not come a moment too soon. Last year, Nanjing made losses of 400m yuan (£28m) and it was reported that to raise the £50m to buy the British car maker, it had to sell land next to one of its plants.

Nanjing was formed in 1947 in the eastern province of Jiangsu. It is owned by the provincial government which, fortunately for the company, is one of the richest in the country. The Chinese central government has been keen to give Nanjing, one of the least successful of China's car makers, a helping hand in the fiercely competitive auto sector. It employs just under 15,000 people with assets of about $1bn.

SAIC

There is no love lost between Nanjing and SAIC. While Nanjing has dithered in its search for joint ventures, SAIC has established 70 of them. In 2003, it made a profit of nearly $700m, propelling it into the Fortune global list of 500 biggest-earning companies.

It started out as a tractor manufacturer in the 1960s, but had its big break when it struck a deal with Volkswagen, the first joint venture between a Chinese and foreign car maker. SAIC has another 50-50 joint venture with General Motors, and in 2003 the two ventures accounted for just under a third of all the cars sold in China, generating $22.5bn of sales. Globally, SAIC is the 17th-largest vehicle manufacturer.

The problem is that the vast majority of the cars sold are models designed by SAIC's foreign partners. SAIC's only brand is the Wuling, a small van.

To achieve its aim of breaking into the top six vehicle manufacturers by 2020, SAIC knows, like Nanjing, that it must acquire its own designs to sell as its own. The company accepts that it would take too long - and be too expensive - to try to develop the models themselves, particularly when there is already so much competition in the global car market.

It lost out on MG Rover, although there is a slim possibility that it could be involved in some car production at Longbridge. But it still has a 49 per cent stake in Korea's SsangYong and a 10 per cent stake in Daewoo, giving it access to crucial Western technology. Last month, SAIC announced that it would build a 3.7bn yuan plant in China using technology from SsangYong and the intellectual property it has bought from MG Rover, to sell cars at home and overseas under its own brand.

CNOOC

Incorporated in 1982, the Beijing-based state-owned China National Offshore Oil Company (CNOOC) has three main listed subsidiaries on the Shanghai exchange, with a total value of 200bn yuan. In 2003, it pumped 36 million tons of oil and gas, up 9 per cent on the previous year.

It also provides oil services, power generation and financial services, and manufactures chemicals. One of China's most outward-looking companies - it was set up with the specific aim of establishing joint ventures with foreign partners to exploit China's energy resources - it claims on its website that all its operations are "undergoing smooth and synergetic growth". By 2008, it wants to become an internationally competitive and modern energy group.

Last month, it finally lost its long-running bid battle with Chevron Texaco to buy the US company Unocal. CNOOC had made the higher bid - $18.5bn to Chevron's $17bn - but was thwarted by US politicians who warned that selling Unocal to the Chinese would harm US energy security. Ironically, most of Unocal's assets are in Asia, not in the US, which CNOOC would have probably sold anyway.

Analysts say CNOOC could now make a bid for Royal Dutch Shell's 34 per cent stake in the Australian company Woodside, but it is likely CNOOC would face similar obstacles from the Australian government to what they came up against in the US over the Unocal deal. Another name being mentioned is the UK's gas group BG.

Huawei

Established 17 years ago by a former officer in the People's Liberation Army, Huawei is today giving some of the West's most established telecoms companies sleepless nights. Huawei, which is still controlled by its founder, Ren Zhengfei, makes equipment for telecoms operators. Initially, it cornered the market in a booming China, but recently it has expanded aggressively into the West with great success. In December 2004, it won a contract to build a third-generation network for Telfort, the Dutch operator. This opened the floodgates, with a string of similar deals with the likes of BT, Colt and Australia's Optus.

While Huawei is not yet regarded as a technical innovator, the company's growing reputation is built on reliability and price. It is the latter that is particularly worrying for the likes of Ericsson, Alcatel, Lucent, Cisco and Nortel. Huawei pays its experienced engineers a quarter of the salary a worker gets in Europe or the US, while junior engineers work on an eighth of the typical salary.

Huawei has already built up a significant presence in the UK through a joint venture with the struggling telecoms group, Marconi. Ironically, most of Marconi's recent troubles are down to failing to win any business from BT's so-called 21st Century Network project to upgrade its entire system. Huawei was one of the companies that walked away with a decent contract from BT. Last week, Marconi unveiled growing losses and there is now speculation that Huawei could eventually launch a bid for its troubled UK partner.

The exact ownership of this private company is unclear, as Huawei's annual report is little more than a marketing brochure. However, it is thought that the Chinese government has an interest, since Huawei was set up with favourable loans from a number of state-owned banks.

Nevertheless, Huawei is financially successful. Last month, it revealed revenues for the first half of the year of 33bn yuan, up 85 per cent on the same period last year. Critically, some 67 per cent of its revenues came from sales outside its native China.

Lenovo

If ever there were a symbol of the growing strength of Chinese companies in the West, it would be Lenovo. On Tuesday 7 December 2004, IBM announced the $1.75bn sale of its iconic personal computing business to Lenovo, a company that until the announcement was virtually unheard outside of China.

The deal stunned both America and China. Overnight Lenovo, which has secured rights to use the IBM branding for five years, became the world's number three PC maker, behind Dell and Hewlett-Packard, in what is still regarded as a prestige market. To further stamp its mark, Lenovo moved its corporate head office from Beijing to New York and appointed a former IBM executive, Steve Ward, to head up the enlarged company.

In China, the deal surprised some because Lenovo's recent past had been far from sparkling. Liu Chuanzhi, an engineer at the state-owned Chinese Academy of Sciences, established the business - originally called Legend Group - in 1984. Six years later, the company started making its own brand of PCs that were sold domestically.

In 1994, Lenovo was floated on the Hong Kong Stock Exchange. But since the turn of the century, the company has been accused of dithering over its strategy, first focusing on the domestic Chinese PC market and then, after losing market share, seeking international expansion.

For the year ending 31 March 2005, the company saw its turnover drop 2.7 per cent to HK$22.6bn (£1.6bn), but earnings increased before tax and exceptionals by 4.3 per cent to HK$1.2bn. The Chinese Academy of Sciences is still Lenovo's largest shareholder with 28.1 per cent, with employees controlling 15.1 per cent, IBM 13.4 per cent, Texas Pacific Group 10.2 per cent and the rest as free float. But despite the transparency of its accounts, there is still a suspicion among many of Lenovo's Western rivals that it receives favourable tax breaks from the Chinese government.

Haier

The washing machine manufacturer Haier Group Corporation is another Chinese company that is looking to expand in the West.

Through its wholly owned subsidiary Haier America, it recently launched - then abandoned - a $1.28bn takeover offer for Maytag, the US owner of Hoover. The offer from Haier and its partners, Bain Capital and Blackstone Group, was trumped by a higher bid from Whirlpool.

It is unclear why the low-profile Haier pulled out of the bid, as it did not disclose the reasons for its decision. "We're not commenting on that," said a US-based spokeswoman.

However, the Haier decision probably had more to do with the escalating price for Maytag, rather than US political pressure, says one Hong Kong-based observer of the company.

What is obvious is that Haier, based in the eastern-Chinese city of Qingdao, is keen to expand beyond China. Haier, whose total sales were 101.6bn yuan in 2004, has a goal to become a "global recognisable brand".

First established in 1984 it is the biggest seller of washing machines, refrigerators, air conditioners and electric water heaters in China. "It's an aggressive player in white goods," says the Hong Kong-based observer.

While the deal for Maytag would have helped Haier acquire the famous Hoover brand, this is less of an issue for Haier than other Chinese firms, which lack the same kind of brand recognition. "In the US, people know the Haier brand. Few Chinese companies have had the same luck," the observer says.

In the US, Haier is the biggest seller of compact refrigerators and wine coolers. In addition, as it has had success in America, Haier also appears to be moving away from Chinese-state ownership. Its state-owned parent company has started to shift assets into its loss-making Hong Kong subsidiary Haier Electronics, which is listed on the local exchange.

CITIC

The state-owned China International Trust and Investment Corporation (CITIC), which was set up in 1979, paved the way for Chinese companies' expansion overseas.

Its founder Rong Yiren, who was known as the "Red Capitalist", set up CITIC with the support of the then Chinese leader Deng Xiaoping, and its creation was a critical part of China's decision to reform its economy and open up to the outside world.

However, while most of its assets are in the Asia Pacific and China, it also has extensive assets in the developed world. Last month, CITIC's petroleum arm set up a joint venture with the Vancouver-based Energem Resources, while CITIC also has extensive interests in Australia.

In recent months, it has also confirmed that it is bidding for projects in Indonesia, in electricity, toll road and rail ventures, and has previously invested in Cuba.

At the end of 2004, the total assets of CITIC were worth 701.4bn yuan and profit was 1.78bn yuan after tax.

While other Chinese companies are looking at expanding rapidly, CITIC has a different style. "It's pretty passive," says the Hong Kong-based observer. "It's an investment company."

But while it has strong links to the Chinese government, its focus has changed over the years. "It also expects a return on capital," he says. In recent years, its performance has suffered due to poorer returns from investments in the financial sector, which account for 81 per cent of its overall assets. One of its high-profile operations is CITIC Prudential Life, a joint venture with Prudential, the UK insurer, which is authorised to do business in 10 Chinese cities.

Like most Chinese companies, it is looking to reduce state ownership in parts of its business, with the CITIC Industrial Bank considering a stock market flotation.