China may be holding tight to its communist past, but the country is becoming the place for investors to flock. Even Wellesley, Mass.-based Battery Ventures, which currently has no investments in China, is eyeing the possibility of sending money beyond the Great Wall.
Just how big has China become for investments? In fact, China is widening its lead over the United States as the most preferred nation for Foreign Direct Investment (FDI) this year, according to A.T. Kearney’s sixth annual Foreign Direct Investment Confidence Index, an annual survey of 1,000 CEOs worldwide, released last week.
The report’s author, Jonathan White, has for the last two years successfully predicted the decline of FDI into the United States along with other industrialized nations and the rise of FDI in China and other emerging markets.
FDI into the United States has fallen consistently since reaching a historic high of $300 billion in the year 2000 to $124 billion in 2001, according to the U.S. Commerce Department’s Bureau of Economic Analysis and the United Nations Conference on Trade and Development. Last year, FDI into the U.S. was down to $30 Billion.
Meanwhile, FDI into China surged over the same period – $40 Billion in 2000, $46 Billion in 2001 and $52 billion in 2002. The A.T. Kearney report predicts 2003 will see an even more dramatic increase of FDI in China when all is said and done.
Oliver Curme, a general partner at Battery Ventures, says that that the Kearney report forecasts one of the biggest economic trends that will happen over the next 20 years.
“U.S. fund managers are completely losing out,” says Curme, who points out that his firm currently has no investments in China, and only 15% of its current $1 billion Battery VI fund is allocated for investments overseas. But Curme says that Battery VII, which the firm plans to begin raising next year, has plans to make investments in China. He adds, however, that the final decision on going into China would still depend on discussions with the firm’s LPs.
Meanwhile, at Adams Street Partners in Chicago, Partner Raymond Chan is one of a team that is following investment opportunities in China for the firm. Chan says that Adams Street is still waiting, taking a cautious approach, but following private equity events in China closely.
Like Curme, Chan thinks that China is set for another 20 years of economic growth. But part of the caution of longstanding firms like Adams Street is the host of issues facing private equity investors who want to put their U.S. dollars to work in China. Issues such as the problems with the protection of intellectual property, minority shareholder rights, and the lack of any easy monetary exit path from investments in China.
Some venture groups are taking a more aggressive approach. Barry Taylor, a managing director in Warburg Pincus’ technology group based in Menlo Park, Calif. oversees more than $300 million that his firm will invest in China. Warburg has a staff of eight in Hong Kong and one representative in Beijing. The firm is focusing on IC design, semiconductors and wireless investments in Chinese companies. Taylor was unavailable for comment. He was in China.
Fan Zhang, a senior vice president at Draper Fisher Jurvetson (DFJ) in Redwood City, Calif., reports that his firm is similarly bullish on venture capital in China because the country’s economic growth has been consistent, as of late, and its government more stable. In addition, Zhang says that China’s consuming middle class stands at over 240 million people and is larger than that of the United States.
Zhang says his firm is interested in technology, wireless and IT design investments, as well, because while Chinese manufacturers currently buy products from Texas Instruments and Motorola, they’re not happy about it.
They want their own designs and lower costs, Zhang says. DFJ, by implication, clearly intends to participate and benefit from China’s building out its manufacturing base.
Email Jerry Borrell