Chinese FDI in Poland: Still just wishful thinking

In December 2011, Polish president Bronisław Komorowski paid an official visit to China. During the meeting with the Secretary General of the Communist Party of China and President of the PRC Hu Jintao he signed a document on establishing a strategic partnership. It was a symbolic turning point in Poland’s policy towards China. Europe’s economic woes, which had influenced Poland, and a shortage of domestic capital were to be cured by Chinese investments and growing exports to the Middle Kingdom.

In 2016, during Xi Jinping’s visit to Poland, the comprehensive strategic partnership format was adopted. Both documents include stipulations on investment cooperation. Andrzej Duda, during his visit to China in 2015, also sought the support of CPC and state officials. Agreements aiming at a greater presence of Chinese investors in Poland were signed. The topic of Chinese investors flocking to Poland, bringing huge capital flows and creating jobs has been appearing constantly in Polish media, government agency statements and opinions by experts. The reality, however, has strongly diverged from the expectations, and the status of Chinese investments in Poland can be described as mediocre at best.

The actual amount of Chinese investments in Poland

Evaluating the extent of Chinese investors engagement in Poland requires an estimation of the amount of the Chinese FDI. Various sources provide different values for accumulated Chinese investments in Poland. Rhodium Group and MERICS put the number at around 1 bln euro for the end of 2017. Chinese official statistics put it at slightly over 320 mln usd for the end of 2016[1]. The Polish central bank Narodowy Bank Polski (NBP) reports only 130 mln usd.

The differences result partly from the methodology and partly from the limited capabilities of state agencies, business intelligence companies, think tanks and researchers to track the original source of the investments. Chinese companies, including state-owned, extensively use roundtripping and offshoring channels to create a multi-layered network of subsidiaries and associate companies including special investment vehicles to optimize the risk and profits but also to hide the full scope of their engagement abroad. The value of transactions, especially those made by non-listed companies or wealthy individuals, are often not revealed, thus significantly increasing the difficulty in calculating of investment values.

Rhodium and MERICS numbers are based on the transactional value of investments made by ultimately Chinese-owned companies; so Chinese investors are to some extent tracked, but it’s not clear if all disinvestments and reinvestments are included. Polish statistics report the net value of investments from known Chinese investors, which means that outflows are also included in calculations. However, investments made by Chinese companies through subsidiaries and associate companies are not recorded, thus roundtripping and offshoring issues are not resolved. According to NBP, investments from Hong Kong amount to 350 mln USD, but  the statistics do not show which part of this amount is ultimately made by Chinese investors only using Hong Kong as a channel and which belongs to genuine Hong Kong investors or is made by companies from other countries via Hong Kong.

Matching the values of investments provided in multiple media reports, company statements, local government press releases etc. with the lists of Chinese investments presented by various institutions: The Polish Investment and Trade Agency (PAIH), The Polish Institute of International Affairs (PISM) or the most recent and extended list included in the report of Asia Research Center (OBA) leads to the conclusion that the amount reported by Rhodium Group and MERICS roughly reflects the amount of gross inflows. Another issue is how to deal with the transactions concerning a company headquartered in another country that holds assets in Poland. In 2017, China’s CIC bought from Blackstone group 100% of shares of Logicor, the largest owner of European logistics and distribution properties. The transaction was completed in November. The value of transaction was logged in the UK in the  Rhodium/MERICS report. However, Logicor also has significant assets in Poland, including 28 logistics parks and 900 thousand sqm of logistics facilities. The Chinese sovereign fund has not directly bought a Polish company, but effectively controls it and owns its assets through another company that was the object of the acquisition. Other cases similar to Logicor are: Jin Jiang International acquisition of Louvre Hotels Group that operates a network of hotels in Poland, WH Group (at the time Shuanghui) acquisition of Smithfield that owns companies in Poland and in 2017 completed the purchase of the processing facilities belonging to Pini Group: Pini Polska, Hamburger Pini and investment project Royal Chicken after  UOKiK clearance and maybe the second  biggest (after Logicor) Chinese investment in assets in Poland so far – Three Gorges’ acquisition of a 49% stake in  EDP Renováveis S.A.

Later changes in the investments position due to disinvestments and reinvestments should also be considered. There have been almost no significant disinvestments in recent years, with the exception of the Petrochemia Blachownia S.A. takeover by Czech company Deza, that bought it from the Hungarian BorsodChem. Petrochemia Blachowania was finally acquired by BorsodChem in early 2006 after the Polish Office of Competition and Consumer Protection had granted the approval for transaction. In 2011 BorsodChem was acquired by Wanhua Industrial Group (Wanhua) and since then it has been a subsidiary of the Chinese holding, which means that Wanhua effectively owned Petrochemia Blachownia till last year.

On the other hand, there were several cases of reinvestments and incremental investments made by Chinese companies in their Polish subsidiaries that were not included in the original transaction value. LiuGong, the owner of Huta Stalowa Wola (HSW), has recently invested in a new manufacturing line, a regional spare parts distribution center and an R&D center in Stalowa Wola and moved their European headquarters to Warsaw. Earlier in 2013 Liugong also purchased a drive shafts manufacturer to increase HSW’s manufacturing capabilities. Tri Ring group has already invested around 80m PLN in Fabryka Łożysk Tocznych in Kraśnik.  It’s much less than the originally planned 130m PLN but still a considerable amount and Tri Ring plans to invest an additional 70m PLN by 2019, of which almost 20m PLN in an R&D center. There are more examples like the ones mentioned above, and they indicate that the total accumulated value of investments can be little higher than €1bn.

Factors of underperformance

As Logicor and similar cases indicate, the value of assets in Poland controlled by the Chinese companies can be higher than calculated according to rules governing FDI classification but it still does not change the overall picture. Investments in Poland are an insignificant fraction of Chinese investments in Europe. Polish hopes for a massive flow of Chinese investors establishing new factories and creating in huge numbers of workplaces have not yet materialized. Moreover, the value of the desired greenfield investments is many times smaller than acquisitions.

Officially, the Chinese authorities support companies to invest in Poland. Poland gets a high score as an investment destination for Chinese companies in various rankings comprising countries included in the Belt and Road framework. In the Knight and Frank Belt and Road Index, Poland holds a high 17th place, just a notch above Czech Republic. Both countries are ranked as “hot spots” well positioned to attract investments into industrial assets as well  as  other  sectors  like  agriculture,  energy  and  technology. Chinese analysts and scholars have been procuring reports indicating that Poland is among the top CEE countries and scores very well in the rankings as an attractive prospective investment destination. Chinese rating agency Dagong gave Poland a high rating, with A- for sovereign debt in foreign currency and A in Polish local currency. All those analysis show that Poland should have been a popular destination for Chinese investments, but they seem to be at odds with reality.

There are several plausible explanations for the strong underperformance of Chinese investments. One of them is that Poland so far could not meet the needs of the majority of Chinese investors. Many, especially state owned companies, need access to natural resources to fuel the growth of the Chinese economy. The other important driver is to buy companies with cutting-edge technologies to gain a competitive advantage on the Chinese and global markets. Many investors want to acquire globally recognized brands to facilitate internationalization and globalization processes as well as an easier entrance to foreign markets. Poland cannot offer much to meet those demands. As Poland tries to climb up the value chain, it is not a prospective partner country within the framework of an international capacity cooperation which, in many cases, means a transfer of polluting manufacturing facilities operating in overcapacity ridden industries and often equipped with outdated technology.

The Polish government also seems to underestimate the potential of Chinese private companies as investors. For years Warsaw has relied on strengthening relations with the Chinese government to attract investments. During the Belt and Road Forum in May last year, Prime Minister Beata Szydło held a meeting with prospective Chinese investors. The government delegation included mainly representatives of companies from KGHM Group. The only reported result was an MoU on cooperation between PeBeKa and a company belonging to China Minmetals Corporation, a long-term KGH trading partner. Representatives of wider business circles did not attend the official meetings. Foreign trade offices (ZBH) run by PAIH took over the duties of promoting Polish enterprises, products and searching for investors. In China there is only one fully active office in Shanghai, that replaced the Trade and Investment Promotion Section of the General Consulate in Shanghai. An office in Chengdu should soon be operational. In the meantime, however, the Trade and Investment Promotion Section of the Polish Embassy in Beijing has been closed. The sparse network of representatives on the ground limits ZBH’s capabilities to efficiently penetrate Chinese business circles and attract investors. ZBH are rather focused on promoting Polish exporters and providing support to Polish companies interested in investing in China.

For Beijing, more important than increasing Chinese FDI in Poland is winning public tenders in infrastructure projects. The Polish authorities express hope for Chinese investments in greenfield projects that would create new jobs and require technology transfer. But, on the other hand, Polish government agencies organize cooperation forums inviting Chinese construction companies, infrastructure developers and equipment suppliers interested in operating as contractors  rather than direct investors. Chinese companies were also officially invited by Polish leaders to cooperate in infrastructural projects. Some of them have already tested the waters in several tenders and this year have started winning them, as in the case of the Cracow north bypass worth 1.3bn PLN (350m USD). In another case, that of a section of the Warsaw subway, Chinese companies challenged the tender results. The only new significant greenfield project of Guotai-Huarong car batteries factory that has been undertaken this year is valued at merely  45m USD.

Manufacturing

The reasons why Poland is not attractive to the majority of Chinese investors are important, but maybe even more important is understanding the factors that have driven those few Chinese companies that have invested in Poland. The table below presents the conclusions from the review of 27 selected Chinese companies presented in the OBA report. The reviewed investments comprise not only narrowly defined FDI, but also indirect investments, where a Chinese company obtains the control or a share in assets of an enterprise operating in Poland through a subsidiary or associated company.

The full list of enterprises is presented in the attachment 1 to the report. Trading companies, restaurants and similar enterprises are excluded from the review. They are usually small-size family businesses with low or close to zero capex and employing no or few local staff. Investments such as the trading center built by GD Investments that maintain facilities for trading business are excluded. Banks are also excluded as they are present in Poland mainly as branches of the European divisions with small staff and low capex.  Fosun’s indirect investment in Millenium Bank through Millenium’s major shareholder Banco Comercial Português (BCP) is also excluded from the review by the rule, but it’s worth noticing as it is of a different nature and size than other Chinese banks’ operations in Poland. Acquisitions prevail in terms of the number of projects. The majority of cases are the result of a Chinese takeover of a group or mother company headquartered in another country. They are almost twice as many as the Chinese investments in genuine local Polish companies. Examples have been already mentioned. Other than Liu Gong and Tri Ring. cases of direct acquisition that targeted Polish companies are only few, including: Everbright International’s purchase of Novago, successive purchases of Bioton shares by several Chinese investors and the recent Zhonglu takeover of Appol. Investments in manufacturing dominate the greenfield/new projects. The most prominent include: Nuctech’s scanning equipment manufacturing facility, Hongbo Optoelectronics’ LED lightnings factory. The TPV investment is classified in the OBA report as acquisition because In 2005 TPV took over Philips OEM monitor and flat-screen tv products, and manufactures Philips-branded products in the facility in Poland. The factory however was newly established by TPV. In many cases Chinese companies have implemented their own technology. In some acquisitions they also modernized manufacturing equipment. Everbright, Nuctech, Zhonglu are companies fully or partially control by the Chinese state but Hongbo, Dalian Talent, Suzhou Chunxing and a few others are private.

Chinese companies are becoming more technologically capable and are willing to transfer technology to their Polish facilities, which is a positive trend. However, Chinese investors in Poland are only interested in better access to the Polish and EU market. None of them wants to establish production in Poland exclusively or at least mainly for export to Asia or China. A “Made in Poland” or even “Made in EU” label apparently does not matter that much from their point of view. They want to be closer to their customers to serve them better and get a bigger share of the Polish and European market. Some of them are developing local products, as they are aware that goods with Chinese brands do not appeal to many Western customers. It should also be noted that in the case of Dalian Talent the main driver for investment were anti-dumping duties. That can be an additional factor for investors’ decisions if trade frictions erupt in the future between China and the EU.

Poland can be an attractive investment destination for some Chinese companies already equipped with advanced technology that want to develop their own products in Poland or take over local Polish brands to develop and promote. From the cases reviewed it is clear that new investments can create additional market value instead of squeezing out existing local producers. however, avoiding the “processing trap” of manufacturing facilities importing all key components from China and only assembling ready products in Poland will be a challenge. The Polish economy is developing, the market is growing and the business environment (legal framework, infrastructure)has improved thanks to the efforts of the previous and current government.

EU membership and access to the EU market due to free flow of goods and services rule, supported by a qualified and still cost-competitive workforce accompanied by a developed business service sector, should also be encouraging factors. Some cases of investments in the service industry indicate the opportunities outside manufacturing. The real issue is finding the right investors and convincing them to come to Poland. That requires drifting away from the years-long reliance on state-to-state contacts and undertaking efforts to seek business-oriented investors focused on doing business and creating value, instead of those recommended by Beijing whose important task is to implement the CPC’s political and economic agenda abroad.

[1]        Unabridged version of “2016 年度中国对外直接投资统计公报” issued jointly by 中华人民共和国商务部, 中华人民共和国国家统计局, 国家外汇管理局. The shortened version, where Chinese ODI accumulated value in Poland is not provided, is widely available on official website e.g. Mofcom. The unabridged version can be purchased.