More expensive raw material procurement thanks to Chinese FDI?
Asien Kurier: The Chinese state and Chinese companies increasingly invest outside of their own country. In recent months and years, direct investments were made especially on infrastructure and raw material markets. While in particular the U.S., Africa and select Asian countries are registering high levels of FDIs from China, that trend could also advance towards Germany. To what extent do Chinese FDIs have, today already, an effect on the procurement of raw materials for German companies?
Ludwig Goebl: Current project situations already present the following picture: German manufacturers have to accept price increases – especially in terms of rare earths. Thus German manufacturers of electric motors have to procure the required magnets and coils mostly in Asia, due to the already existing market monopoly, while they are facing major price increases year after year. Accordingly, this situation is expected to become even more critical due to further concentrations of the raw material situation through continuing investments from the Asian region. Direct investments (FDI) from inside China are made based on various strategies. In the present situation, Africa and Australia are, inter alia, key countries for investments in terms of mineral resources. In a first step, the strategy for countries like Africa is to establish closer relationships with China – through infrastructural support and cultural transfers (language, schools). In Australia, on the other hand, state and private investors alike have been trying, already since 2009, to bring shares, but also complete mines from renowned companies such as OZ Minerals or Rio Tinto under Chinese control. In parts, these transactions have already been concluded.
Ludwig Goebl: It is not unusual, for small and medium-sized companies especially, to develop and conclude strategic contracts directly through management – in coordination with the purchasing, distribution and production departments. Accordingly, even with special purchasing consultancies, it is increasingly the management level which orders market research to be done and alternate suppliers to be developed. The electronics industry and, in this connection, the automotive sector and the telecommunications industry are primary areas with critical problems and consequences due to investment-driven market changes in the commodities sector. In companies from those industries, purchasing is considered one of management's responsibilities – especially in the wake of the 2009 financial crisis and its impact on the supply situation in 2010.
Ludwig Goebl: There are a few examples in the commodities sectors where quasi-monopolistic situations have been prevalent in various regions for some time already. The “rare earth” neodymium is needed, for example, as a raw material in strong magnets for headphones, mobile applications, wind turbines, etc. In terms of questions and problems around the subject of prices and costs, China takes the “driver’s seat” with its unchallenged major volume in world production. In this respect, a strategic way of procurement is of course inevitable for the companies concerned. Thus, strategic tasks move to the fore – such as securing the supply and maximum utilization of own market power for pricing. A variety of sensible measures can be used here – for example, a purchasing cooperation involving other companies, specific training courses for employees, as well as establishing a local purchasing office on the Chinese market. This will be based on the inclusion of well-informed local market participants with an already established network of relations, and also with the experience of setting up purchasing offices and searching for suitable Chinese employees, as well as adequate language skills.
Ludwig Goebl: Those who believe to be able to generate optimum prices for materials in the commodities sector by using a three-tier dealer system operating out of Germany will be utterly disappointed. What is needed, however, is presence, negotiating skills and exhausting the potentials in the supply chain throughout the various markets. As a consultancy with over 10 years of experience in the Asian region, our functions and tasks comprise trust-building among the players involved, eliminating unnecessary dealer levels, exploring the entire Asian market as a sourcing area for alternatives, and possibly fixing and establishing long-term, strategic partnerships in direct talks.
Ludwig Goebl: Investments can be expected to grow progressively. In the long run, this might result in German companies getting directly closer to the Chinese culture and having closer ties with Asian companies. The cost situation for commodities or raw materials will become more critical for German companies. In addition to its excellent financial situation, the Chinese government tried in recent years to establish all prerequisites for fast and easy investments abroad. Examples for this are not only the Chinese government’s twelfth five-year plan, but also political measures and institutions specifically set up for that purpose. Important milestones have been: The MOC (Ministry of Commerce China) adopts the go-out-of-China policy. To this end, investments in the sectors of energy, high technology and raw materials are subsidized. The SAFE (State Administration of Foreign Exchange) provides investors with a guarantee of fast access to foreign currencies.
Ludwig Goebl: Even before a wave of Chinese investments, the U.S. and Russia had already known the advantage of raw materials or commodities. These countries continue to focus their influence and investments in regions with raw materials through their already existing global presence. A current example in this respect is the Russian government's efforts in Antarctica. These conditions and circumstances will continue to exist in the future.
Kerkhoff Consulting GmbH