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Polish hopes for a massive inflow of Chinese investors, establishing new factories and creating thousands of jobs, have not yet materialized.by Lukasz Sarek 3 September 2018
In December 2011, Polish President Bronislaw Komorowski paid an official visit to China. During his meeting with then-President Hu Jintao, who also served as the secretary general of the Communist Party of China (CPC), he signed a document on establishing a strategic partnership. It was a symbolic turning point in Poland’s policy toward 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. And President Andrzej Duda, during his visit to China in 2015, sought the support of CPC and state officials toward those goals.
In 2016, another big step was taken as during President Xi Jinping’s visit to Poland, a comprehensive strategic partnership format was adopted. Both this document and the earlier one include stipulations on investment cooperation. 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 the Polish media, government agency statements, and expert opinions.
The reality, however, has strongly diverged from the expectations, and the status of Chinese investments in Poland can be described as mediocre at best.
Real Numbers Are Hard to Find
Evaluating the extent of Chinese investor engagement in Poland requires an estimation of the amount of Chinese foreign direct investment. Various sources provide different values for accumulated Chinese investment in Poland. The Rhodium Group and MERICS put the number at around 1 billion euro for the end of 2017. Chinese official statistics put it at slightly over $320 million for the end of 2016. The Polish central bank, Narodowy Bank Polski (NBP), reports only $130 million.
The differences result partly from methodology and partly from the limited capabilities of state agencies, business intelligence companies, think tanks, and researchers to track the original source of various investments. Chinese companies, including those that are state-owned, extensively use round-tripping 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 values of transactions, especially those made by non-listed companies or wealthy individuals, are often not revealed, thus significantly increasing the difficulty in calculating 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 round-tripping and offshoring issues are not resolved. According to the NBP, investments from Hong Kong amount to $350 million, 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, and so on 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 the 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 the Blackstone Group 100 percent of the shares of Logicor, the largest owner of European logistics and distribution properties. The transaction was completed in November. The value of the transaction was logged in the UK in the Rhodium/MERICS report. However, Logicor also has significant assets in Poland, including 28 logistics parks and 900,000 square meters of logistics facilities. A Chinese sovereign fund has thus not directly bought a Polish company, but effectively controls it and owns its assets through another company that was the object of the acquisition.
On the other hand, there were also 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. The Tri Ring group has already invested around 80 million zloty ($22 million) in Fabryka Lozysk Tocznych in Krasnik. It’s much less than the originally planned 130 million but still a considerable amount, and Tri Ring plans to invest an additional 70 million by 2019, including almost 20 million in an R&D center. There are more examples like the ones mentioned above, and they indicate that the total accumulated value of investments could be a little above than €1 billion euros ($1.17 billion).
Factors of Underperformance
As Logicor and similar cases indicate, the value of assets in Poland controlled by Chinese companies might be higher than calculated according to the 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 inflow of Chinese investors establishing new factories and creating 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 do support companies wishing to invest in Poland. Poland gets a high score as an investment destination for Chinese companies in various rankings focused on countries included in the Belt and Road framework, Beijing’s ambitious trade and communications initiative. In the Knight and Frank Belt and Road Index, Poland holds a high 17th place, just a notch above the Czech Republic. Both countries are ranked as “hotspots” well-positioned to attract investments into industrial assets, in addition to other sectors such as agriculture, energy, and technology. Chinese analysts and scholars have been producing reports indicating that Poland is among the top Central and East European countries and scores very well in the rankings as an attractive, prospective investment destination. Chinese rating agency Dagong gave Poland a high rating, with an A- for sovereign debt in foreign currency and an A in Polish local currency. All those analyses 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 has not been able to 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 in 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 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 has also seemed 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 Szydlo held a meeting with prospective Chinese investors. The government delegation included mainly representatives of companies from the KGHM Group, a Polish multinational that is a leader in silver and copper production. The only reported result was an MoU on cooperation between PeBeKa, a big mining and infrastructure development company, and a firm 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. But in China there is only one fully active office in Shanghai, which replaced the Trade and Investment Promotion Section of the General Consulate in Shanghai (an office in Chengdu should soon be operational). A similar section in 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. While the Polish authorities have expressed hopes for Chinese investments in greenfield projects that would create new jobs and require technology transfer, Polish government agencies have organized 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 Krakow north bypass, which is worth 1.3 billion zloty. In another case, that of a section of the Warsaw subway, Chinese companies challenged the tender results. The only new significant greenfield project – of the Guotai-Huarong car batteries factory that has been undertaken this year – is valued at a mere $45 million.
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 markets. None of them want 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 markets. 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 candle maker 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 just 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, etc.) has improved thanks to the efforts of the previous and current governments.
EU membership and access to the EU market through the 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 investment 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 central task is implementing the CPC’s political and economic agenda abroad.
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