China and the World

Silk road to Rome

China’s investment spree in Italy grows, but some locals are nervous

pirelli tires

A lot is riding on this tyre investment

The Silk Road was not known as such until 1877 when the German geographer Ferdinand von Richthofen coined the term. It was, of course, given this name to denote the delicate fabric which was traded along the route and so enamoured the Roman elite at its Western terminus.

Roman purchases of silk were so prolific that at one point the Senate attempted to ban its import. The material was treated with mistrust: its translucency was said to encourage moral decadence, and its cost drained Roman gold.

Trade with China has once again come to split opinion in Rome, with some Italian companies rushing to embrace it and others watching on with foreboding.

Local minds were focused in March when one of the nation’s most iconic businesses joined China’s acquisition list. That month ChemChina paid $7.7 billion for a 35% stake in tyre maker Pirelli. It was the largest single overseas acquisition made in Italy by a Chinese firm (see WiC275).

According to a recent report from Shanghai Daily, ChemChina has since completed the acquisition of just under 87% of Pirelli’s Milan-listed shares, pushing tantalisingly close to the 90% ownership required to take the company private. Once the company is delisted, ChemChina plans to split its production into high-end and industrial tyres, merging the latter with its existing Aeolus tyre production unit in China.

The prospect of an annexed Pirelli aligns with Italian concerns that the recent revival of the Silk Road is more a one-way street, as China seeks to absorb Italian technologies and branding know-how.

China’s ambassador to Italy Li Ruiyu opposes this notion, telling Southern Weekend: “China’s economy is currently at a crucial transformation period, whilst at the terminus of the Silk Road, Italy’s economy is taking the first step towards recovery. Cooperation is a win-win situation, and a mutual need.”

The depth of Italy’s need is evident. Last year, China’s State Grid purchased a 35% stake in CDP Reti, which controls Italy’s electricity grid. A report in the Financial Times claims Italian officials admitted such a sell-off would have been “unthinkable” before the financial crisis of 2008.

The credit crisis has seen a change in the dynamics of Sino-Italian joint ventures. Intese Sanpaolo, for one, was the first Italian bank to establish itself in China. Its primary function was to help Italian companies purchase factories there when China was better known to foreign investors as ‘the world’s industrial workhouse’. Now Intese Sanpaolo’s focus is more on matchmaking Chinese companies with Italian ones that want support.

KPMG published figures earlier this year showing that over the past five years, Chinese acquisitions of Italian firms have totalled €10 billion ($11.3 billion). In 2014 China accounted for one third of all overseas purchases of Italian corporations. Southern Weekend has described Italy as an exceptional place for Chinese investment, since its faltering economy has reduced asset prices and created buying opportunities.

And what do Chinese companies get for their investment? Joel Backaler, author of China Goes West, argues that in order to command a higher market value Chinese products need to offer something unique. Italian engineering skills and its brand names can easily become that unique selling proposition.

The Economist magazine notes that Italian purchases made by private sector Chinese companies now account for 41% of the Italian firms sold overseas. Chinese firms have bought companies ranging from Ferretti, a yachtbuilder, to Salov Group, an olive oil producer.

Sergio Bertasi, the director of Intese Sanpaolo’s Beijing branch, elaborates on the driving force behind Sino-Italian joint-ventures: “The Chinese government, particularly the local governments, don’t want polluting Italian industries to establish in China. What they want are added-value companies and those with potential for continuous growth.” Bertasi soon realised these were the same requirements the Italians had of Chinese partners.

His message: Sino-Italian business relationships are no longer about cheap labour.

However, many smaller Italian firms have been unable to enjoy the the freshly-paved Silk Road. Irene Pivetti, founder of the exclusively-Italian department store Only Italia, asserts that only companies with 400 or more staff are able to properly satisfy the demands of the Chinese market, which is beyond the means of many artisan firms.

Pivetti is seeking to open a branch of Only Italia in Beijing. However she is struggling to convince Italian producers to sign up for retail units. Bertasi adds that many smaller Italian brands are intimidated by the size of China, and lack the logistics to successfully distribute within the country.

One example is Venissa, a Venice-based wine seller, which currently sells into China through a French proxy company because it lacks its own means to expand into the market.

Smaller Italian firms are not only intimidated by China’s scale, but also by its intentions. Southern Weekend writes that whilst the Italian government and multinational corporations welcome Chinese investment with open arms, owners of Italy’s smaller businesses are observing the M&A trend from the sidelines, arms folded. The founder of La Campofilone, a Tuscany-based pasta company, told the newspaper, “We are scared of China.”

The head of Bank of China’s Milan division Bian Jidong attributes this reserve to cultural differences, claiming “Italian society is still fairly conservative”.

Pride might be a better estimation for some of the emotion that’s engendering mistrust towards inbound Chinese investment. “You don’t realise, how much we cherish the old days,” Italy’s former prime minister Romano Prodi told Southern Weekend. Increasingly having to play the junior party to the Chinese jars with a nation known for its machismo.

But at the World Expo hosted in Milan this year, Chinese companies sought to present a positive vision of their overseas expansion, clubbing together to build a pavilion to showcase their services. The UK’s Daily Telegraph described the pavilion as a representation of the “dream of Chinese companies that want to go global and engage with partners internationally”.

The pavilion not only focused on business opportunities but also organised a range of cultural exchanges, such as an Italian wine tasting contest and a competition for artists to paint “their interpretation of Chinese companies”.

But perhaps the best symbol of Sino-Chinese cooperation has occurred in the world of football. Guangzhou Evergrande showed what can happen when you bring together Chinese money (a real estate developer) with Italian expertise (coach Marcello Lippi). The Chinese team went on to become the first from the country to win the AFC, the Asian equivalent of Europe’s Champions’ League (see WiC216). Chinese investors will be hoping Lippi – now retired from management – is sharing with his compatriots his positive experiences of working in China…

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