China and the Western Campaign

September 2015

One of the main objectives of the Italian government for reviving the country’s competitiveness, is to make Italy a welcoming environment for foreign investments to reverse a trend which brought Italy lose a 58% of foreign investments since 2007.

Foreign investment in Italy: -57% from 2007

+ 3.5% from 2014, but actually…

In 2014, the incoming FDI (Foreign Direct Investments) amounted to

€ 281.3 billion

with an increase of € 9.5 billion (+3.5%) compared with the previous year. This has been the best result among the Eurozone countries of, but the overall stock of FDI on Italian GDP is still very low. With a meager 17.4%, also in 2014, Italy is still at the bottom of the European ranking. Only Greece’s situation is worse than ours (8.5%).

Italy: 65th in the world ranking of attractiveness

“The excessive weight of taxes, the problems tied to old and confused bureaucracy, the well-known slowness of our civil justice, the dreadful

late payments in commercial transactions, the infrastructure deficit and the low level of security in some areas of the country always discourage foreign investor to come to Italy”

CGIA of Mestre.

Italy is the 65th country in the world ranking of the factors determining a country’s capacity of attracting capitals, because of procedures, time and costs required to start a new business, to get a building permission, to connect a business’s electricity consumption to or to solve a legal dispute over a contract.

Nevertheless, Chinese investments in Italy have followed a continuous growth trend. Starting from € 147 million in 2012 they amounted to almost € 3 million in 2014.

Italy is now the Chinese second most important market in Europe (after UK)

and the fifth worldwide.

In October 2014 in Rome, the Italian PM Renzi and the Chinese PM Li Kequiang signed 20 agreements, worth € 8 billion, for as many direct and indirect investments in Italian business activities.

Approaching Italy

A passion for Italy , but not at all costs

The single largest investment: since 2003, the Chinese giant Hutchinson Whampoa, led by the now legendary Li Ka-shing, has invested more than € 13 billion in the telecommunication company 3 Italia. HW also bought the company managing the container terminal of the Port of Taranto for € 100 million. Nevertheless, it recently pressed charges against the Port Authority for not making necessary investment to the development of the port and it is diverting the container traffic on the Port of Piraeus.

The single major acquisition: a compulsory takeover bid, currently underway, was launched by Marco Polo Industrial Holding on 76,58% of Pirelli Group. Marco Polo, controlled at 65% by the Chinese chemical group ChemChina, already holds, obviously, the remaining shares of the Pirelli Group.

The single largest investment in State companies: in November 2014, State Grid Corporation of China, the largest electricity distribution company in the world, bought the 35% of CDP Reti from Cassa Depositi e Prestiti. CDP Reti holds a 30% stake in Terna and Snam, the Italian distribution system operators for gas and electricity respectively.

... and the second: in May 2014, Shanghai Electric purchased from Fondo Strategico Italiano, a holding company of Cassa Depositi e Prestiti, the 40% of Ansaldo Energia for € 400 million. Ansaldo Energia is among the world’s largest producers of electrical and gas turbines.

No expense is spared

In September 2014, Corriere della Sera published information drawn from a leaked confidential report that the Intelligence Agencies had prepared for the government: it highlighted how Chinese investment in defense, advanced technology and major critical infrastructures should be very carefully assessed by the government.

Caveat!

Except for the luxury brand Krizia, bought in February 2014 by Shenzhen Marisfrolg Fashion, an 8% in Ferragamo, Ferretti yachts and olive oil Sagra&Berio, Beijing has preferred avoiding the niche Made in Italy brands, rather focusing on the strategic sectors of energy, telecommunications and industry. Eni, Enel, Mediobanca and Telecom Italia are some of the major Italian companies in which the Chinese central bank, the People’s Bank of China, has a market share of just over 2%, the minimum threshold for declaring the possession of securities.

Lots of substance and little style

Trying to score a goal

After several unsuccessful attempts to enter the shareholding of the Italian football teams Inter, Milan and, maybe, Roma, the Dalian Wanda Group - the Chinese tycoon Wang Jianlin’s holding company - is the main shareholder of the Swiss Infront since last February which deals, among others, with the marketing of Serie A broadcasting rights.

Why Italy?

If Beijing didn’t let itself be frightened by those difficulties that foreign investors normally meet in Italy, it is because its strategy’s ultimate aim seems not to be profit, but rather the acquisition of know-how and technology. Its goal is to refine its industrial production - currently largely focused on raw materials, standardised products and intermediate goods - by means of competences learned in Italy.

The economic crisis, which brought many Italian companies in serious difficulties, has done nothing but open the doors wide to Chinese investors, who are not worried at all by a generally unwelcoming environment for foreign investments, but rather, “After years of crisis, they are ready to seize upon the huge sign ‘Sale’ tacked on the Peninsula”, to quote an unnamed banking source.

The so-called “2% quota”is

a peculiarity of the Chinese presence in Italy.

The People’s Bank of China holds in its portfolio minimal holdings in most of the major companies in the world. However, it usually opts for a low profile, keeping its shares always below the threshold to disclose. On the contrary, its investments in Italy have very often, and very narrowly, exceeded the 2% quota.

2% quota

According to a recent study of the US think tank, Pew Research, a 70% of Italians look unfavorably on Beijing. A very high percentage, higher than the other Western countries. China’s choice to get noticed seems to be a message of friendship, but also of power, which - with a minimum investment - should make the Country more loved in Italy.

It is no coincidence that the first declared investments, those in Eni and Enel, were made immediately after an incident in a textile company in Prato, in which seven Chinese workers (illegal?) were killed.

The purpose? Get Noticed!

The major Chinese investments have so far had a positive impact on employment levels in Italy, and this is definitely good news.

Chinese capitals allowed:in many cases, to create new jobs, especially for the young and skilled workforceto preserve existing jobs, avoiding the closure of companies in serious difficulty.

Also, to absorb the target companies’ know-how, the Chinese consider the maintenance of production, technology and skills in their original environment a crucial element of their strategy. This has helped to ease the initial negative perception towards the Chinese strategy in Italy.

Which profit for Italy?

Even if in recent weeks China is facing rather serious economic difficulties, the investment capacity of Beijing is still huge.

How to protect ourselves from possible acquisitions of strategic

enterprises or critical infrastructure?

In 2012, Italy has issued an innovative legislation regarding State powers in the event of extraordinary transactions relating to companies active in strategic sectors.

State powers

With this new regulation:Italy set aside the “golden share” principle (attribution to the State of shares in specific strategic companies, with special powers allowing the government to influence the decisions of those companies);the State enjoys a general “golden power”, which it can use in the event of transactions involving such companies.

It allows, as appropriate, the right to object, veto or dictate conditions...

Golden power

On 22 September 2015, the Cabinet decided not to exercise the special power on a proposed Joint Venture between Hutchinson Whampoa and the Bermuda’s multinational company VimpelCom, for the merger of their respective subsidiaries 3 Italia and Wind.However, the government has recommended to the two companies:

to highlight the key elements of their strategic planning from an industrial, investment, technological and employment standpoint;not to move outside Italian borders the management and security functions, so not to impair national security and continuity of services.

But will it ever be exercised?