The Capricorn Fusion China Fund invests in companies with transcontinental ambitions between Europe and China. We look at both directions as the underlying rationale (the complementarity between the two economic blocks) works both ways.
A couple of weeks ago, I elaborated on the added value that European companies can have in China. This article focuses on the other direction answering the question on how Chinese companies can make the European economy stronger.
The opportunity for Chinese companies coming to Europe often relates to the leading position of China in the race for technological innovations. We believe that this mega-trend will be an important driver in the global economy for the next decades and are convinced there is tremendous value in it. To paraphrase a statement of Jos Peeters, the chairman of Capricorn Partners’ Executive Committee:
“Who do you want to work with? We choose to partner up with the leaders in
the technology race!”
There are many ways to structure the underlying forces underneath the innovation mega-trend, but for Capricorn Fusion China Fund, the value creation lies within 4 underlying factors.
Increased R&D spending and patents granted
We all know that the USA has been the world leader in patents granted for the longest time. A glance at the below graph shows that the weight has shifted dramatically over the last decade and China now has more than double the annual figures of the United States (345,000 vs. 144,000, with Europe well under 100,000).
All of this is driven by the switch China is making since the early 2000s from a classic manufacturing model to an innovation driven economy. To fuel this transition, China’s domestic R&D spending has grown from merely $9 billion at the beginning of the century to $320 billion in 2019 (2.23% of China’s GDP). Currently China spends more on R&D than Japan, Germany & South-Korea combined. This has resulted in 6.2 million R&D-employees and 4.32 million patents at the end of 2019.
Other important facts in this regard:
- More than 75% of the total R&D domestic spending is spent within commercial companies. The acquired knowledge is therefore predominantly used to improve products and processes directly.
- Most funding goes to applications in computer and communication manufacturing, with important innovations in AI, supercomputers, 5G, facial recognition capabilities etc. Chinese technology therefore sees its uniqueness and reliability increase in these specialist fields.
Europe is Hungry for Imports from China
The European Union has a long history as the import-hungry heart of the Old Continent. On the other hand, China has become the largest global exporting economy in 2013 and it continues to strengthen this leadership position. Critically important for the longevity of this position: in the past decade China changed to a more innovative economy and its share of medium high-tech industries tripled to 32% of the global production. Recent commercial success stories of Chinese companies in the US and Europe have increased confidence and this will lead undoubtedly to other joyful episodes.
Other factors that will stimulate this trend:
- Rising trade tensions between the USA and China will make the Chinese look at Europe as fertile landing ground even more.
- Cross-border e-commerce developments and logistic infrastructure investments (Alibaba in Liège as the most prolific example) will accelerate this process and are a great illustration of China’s commitment to Europe.
- The competitiveness of the Chinese market sparks globalization efforts as well: BCG conducted a survey of 150 Chinese executives, where 85% mentioned that domestic competition was the main driver to expand abroad.
A Single Market – United in its Diversity
The third factor we see is not such much an economic trend, but rather a reason why European investors and their networks can be a big contributor to the European success of Chinese companies. While the 27 EU-states accounted for a total GDP of € 15.4 trillion at the end of 2019, it is also ‘blessed’ with 24 different official languages as well as a large diversity of political systems, cultural differences and labor laws. For Chinese companies to thrive in Europe they will need an on-the-ground partner who understands the different European dynamics.
Largest Asian VC market
Private equity in China has been a story of continuous growth with approximately $60 billion in additional capital deployed in 2019. Private equity as a share of GDP in China was just 0.5% in 2019, compared to the US where private equity is at 2.2% of GDP. ‘Room to grow’ is the term that comes to mind.
The source of value creation is shifting, however. 10–15 years ago, private equity funds could still sit back and ride the macro tide. Nowadays, private equity returns increasingly come from value creation after the closing of the transaction. This also means that international expansion, networks and smart capital become increasingly important for entrepreneurs. From capital to smart capital!
We have a firm belief there will be great European business opportunities Chinese companies and their innovations. The steepness of the red curve below shows Chinese underlying desire to lead innovation globally.