If anyone understands the potential for Canadian business to benefit from China’s evolution towards a more open market it’s Joe Bradford. Bradford is vice president, joint ventures and legal, at CNOOC Canada Inc. Prior to the state-owned China National Offshore Oil Co. International’s contentious $15-billion acquisition of Canadian oil and gas company Nexen Inc. earlier this year, his team was focused on managing CNOOC’s 35-per-cent interest in the Long Lake, Kinosis, Cottonwood, and Leismer oil sand projects. They also provided legal assistance on matters related to CNOOC’s interest in Northern Cross Yukon Ltd. and MEG Energy Corp.
Following CNOOC International’s acquisition of Nexen, they have been working to integrate CNOOC Canada’s joint venture (which includes marketing, facilities, production, and commercial functions), exploration, and financial teams into Nexen Energy ULC. “Our goal is to have one unified team under Nexen Energy ULC’s leadership,” says Bradford.
Bradford was formerly vice president, legal, with oil sands company OPTI Canada before it was acquired by CNOOC in November 2011. Since becoming part of CNOOC Canada, Bradford’s focus has been on North America but he’s visited CNOOC business units and sister companies in China, such as COSL, and had the chance to discuss their experience in international transactions and operations. Bradford spent all of last September in Beijing and met with delegations from Saskatchewan and Alberta. “I was impressed by the number of Canadian businesses who were in Beijing looking for opportunities to sell Canadian goods and services while at the same time encouraging Chinese companies to do business back in Canada,” says Bradford. “Based on my experience, Canadian companies have a lot to offer China in the oil and gas, mining, agriculture, and financial services sectors.”
He says both politically and commercially, Canada is sending all the right signals to China. “I’m seeing that Chinese companies, particularly service companies, are making significant investments in time, personnel, and resources in their Canadian operations. I see this as very beneficial to the Canadian oil and gas sector as these Chinese enterprises are bringing with them some much-needed competition in the service sector.”
Craig Hoskins, a lawyer with Norton Rose Fulbright Canada LLP, agrees. “We’re starting to get service companies coming in and setting up on a startup, greenfield basis where they send over one or two people from China with a view to start to provide services to the bigger companies who have made these huge investments and have these operations to start,” he says.
At an event held in Calgary this past summer, Chinese and Canadian trade delegations signed an agreement as a commitment to bolster investment between the two countries. The largely symbolic move comes at a time when experts say while the public might be concerned about seeing more large state owned enterprise deals, it is more likely to be smaller, privately financed deals that will dominate transactions between Canada and China in the coming years.
July’s Canada-China City Economic Cooperation Forum in Calgary involved Canadian companies and other stakeholders interacting with Chinese companies doing business in Canada. The Ontario chapter includes the CEO of the Bank of China in Canada and the CEO of the ICDC — China’s largest bank out of Toronto.
The conversation was largely about the climate for investment in Canada. Hoskins spoke on a panel at the conference and says too often people focus
on the CNOOC deal and perceived negativity such large foreign investments receive when it will be the smaller, private investment deals that will be more common.
“Quite often the CNOOC decision is seen as injecting a lot of ambiguity into what Canada’s real attitude is towards investment from China. There has been a lot of attention given to the ambivalence, at best, of public opinion towards Chinese investment that was reported on during the course of that whole debate last fall,” says Hoskins.
Joint ventures more popular
The ties between Canada and China continue to grow says David Lefebvre, a partner with Gowling Lafleur Henderson LLP in Calgary. “We’re such symbiotic economies. They now have lots of financial resources and expertise and lots of people and can use a lot of resources that we have and vice versa. I only see that
relationship continuing to grow."
Most of his work is acting for Chinese clients acquiring assets in other places around the world. Today his work is broad based and while he says the deals are not on the scale of U.S. investment into Canada, it’s no longer just about buying big companies like OPTI and Nexen. “A lot of the deals we do wouldn’t make the newspaper,” says Lefebvre. “That said, there is a wariness after the Nexen deal in terms of all the new rules of the government in terms of how they will be applied. We haven’t seen any deals like that since then.”
In recent years the type of deal structure has morphed to more of a joint venture, especially in the mining arena. In the beginning it was felt Chinese SOEs wanted to take 100 per cent of a company, store up the resources, and never be a seller. In 2009, one of the SOEs McCarthy Tétrault LLP acted for showed that to be wrong when Wuhan Iron and Steel (Group) Corp. acquired Canadian mining and exploration company Consolidated Thompson Iron Mines Ltd. for a $240-million investment.
WISCO acquired Consolidated Thompson as a minority shareholder at the public company level and also 25 per cent at the project level so the whole deal was done for $250 million for both chunks of investment. Two years later, Cliffs Natural Resources wanted to buy Consolidated Thompson and launched a takeover bid.
WISCO sold its 19.9-per-cent investment in Consolidated Thompson for almost $1 billion. “They made four-fold return and are still keeping the underlying joint venture interest of 25 per cent,” says Joyce Lee, a partner in the business law group with McCarthy Tétrault in Vancouver. “That demonstrates that the Chinese have now matured and they are more like market players from a pure investment perspective and they will sell at the right time.”
She says the reason Consolidated Thompson was seen as attractive to Cliffs was partly because WISCO was the major JV partner in the deal. “Cliffs, like others, wants to break open the Chinese market,” she says. So while some Canadian companies think Chinese investors aren’t interested in selling, WISCO demonstrates that myth to be wrong.
With CNOOC and Nexen there is also a theme that they are not interested only in the raw materials but also in the management team.“The Chinese are maturing from ‘we must control everything’ to knowing if they want to play meaningfully in the global platform maybe one of the ways to do it is to have people with Western management skills and experience,” says Lee.
From his office in Calgary, Hoskins says he sees more interest from Chinese investors in commercial and residential real estate development and in agricultural land in Alberta and Saskatchewan.
Policy changes in China with respect to personal investment rules will fuel the next wave of investment in Canada, says Hoskins. “China just went through a change of government this past year and the new premier is quite focused on implementing a lot of financial reforms, which effectively make it easier for private Chinese companies to finance themselves in a more competitive way within China and then to use that ability to get more financing.”
There are other reforms afoot with respect to foreign investment on the horizon that will make it easier for private Chinese companies to have the wherewithal to invest overseas. “We’re seeing some of that now,” he says. “Given what’s happening with Chinese domestic policy it is translating into five million new middle class Chinese citizens every year as a result of reforms and urbanization.”
Norton Rose Fulbright Canada is acting for some Chinese companies to establish their business here rather than acquiring a big existing business in Canada. One
of the firm’s partners in Toronto is working with investment bankers who are developing relationships in China with “high net worth individuals” to assist them in sourcing investment opportunities in Canada.
Although China’s economy is slowing somewhat and there are concerns the boom in some of the country’s cities has waned significantly, there is still considerable wealth creation taking place overall.
It is expected the liberalization of financial policies will continue to grow direct investment from private investors from China. “Everybody knows the Chinese economy is cooling but I’mpersonally very bullish on China,” says Edward Goldenberg, a partner and head of Bennett Jones LLP’s government affairs and public policy practice.
“Even if you assume the growth rate drops from 10 to seven per cent, an annual growth rate of seven per cent means the Chinese economy will double in size in 10 years. That has major implications for business around the world.”
Goldenberg emphasizes that Chinese investment is across the board and not just in the energy sector. “There is going to be enormous opportunities for Canadians in terms of Chinese investment here in Canada. In terms of where the government stands on state-owned enterprises they’ve set some rules. The bottom line is they approved the Nexen deal and there will probably be more joint ventures and less 100-per-cent takeovers.”
There is definitely greater diversity in the different kinds of opportunities Chinese business people are exploring in Canada, says Ian Michael of McCarthy Tétrault. “It’s not necessarily oil and gas and minerals — we’re seeing examples of auto parts manufacturers, lighting systems, and I think we will see food processing and food processing technology in the future,” he says.
Lee has acted for many SOEs and says the Chinese view the deals as not just another transaction but a training opportunity for their own people as well. “It’s not purely for the resources necessarily — they want the resources but more importantly it’s an evolution of these state-owned enterprises to the global stage in a meaningful way.” She adds they want to do it in a non-disruptive way and that’s why western management is so important to them. The other sectors that have been successful in coming to Canada include technology companies and banks. “They don’t necessarily come in via acquisition, they come in by just setting up shops here with branches,” she says.
BYD Co. Ltd. is one such company. The car and battery manufacturer also produces electric buses and advanced lighting systems. BYD has set up a greenfield Canadian office. Despite some delays, the Chinese-built electric eBus is set to be tested in Ottawa and Montreal until May of 2014.
Canada to China
Canadians have been much slower than the U.S. and the Europeans in terms of going into China, says Lee. McCarthys acted for Vancouver-based Ritchie Bros. Auctioneers this past year as it launched its business in China but it was a project many years in the making.
In late 2012, Ritchie Bros. became the first auction company to be granted wholly owned foreign enterprise status in China, paving the way for its first industrial equipment auction in Beijing. “They have been working on it for over 10 years,” says Lee. “They are in a special sector because auction law was not developed there so they had to go in to help the Chinese government develop industrial auction laws.”
Its first auction in China was held April 18, 2013. It featured a traditional Chinese lion dance thought to bring good luck — possibly the first lion dance ever performed at an equipment auction. More than 1,000 people came to the Beijing auction site. Many people in China are unfamiliar with auctions or they associate them only with the sale of fine art and wine.
Ritchie Bros. was founded in 1958 and now conducts hundreds of unreserved public equipment auctions around the world each year. In 2012, the company held auctions in 13 countries. Just like any of their other auctions, the Beijing site featured hydraulic excavators, wheel loaders, compactors, cranes, and more. Along with brands like Caterpillar, Komatsu, and John Deere, they also sold equipment made by XCMG, SEM, Jaingong, and others.
“You have to be a certain size in order to be able to do that type of thing,” says McCarthys’ Lee. “If you move down one or two tiers what we see most would be technology and biotech companies — they won’t be able to go to China by themselves. If they go to China, they have to find a reliable partner who won’t cheat them.”
Partnering is key
Lee says if smaller companies try to start their own business in China it will be expensive and challenging from a bureaucracy perspective. “Our advice to local Canadian companies is unless you’re Bombardier, who has been there for many years, you have to be at least $1 billion in turnover otherwise to go it alone into China is going to be costly and difficult,” says Lee.
Gowlings’ Lefebvre advises companies to do the research to understand the various levels of government in China and get to know key partners that can help facilitiate business.
Biotech and telco companies are also eyeing China with the hopes there could be greenfield business opportunities in the large developing urban areas, says Norton Rose Fulbright’s Barbara Li, a partner based in the firm’s Beijing office. “There are huge opportunities for greenbuilding technology and construction companies.
People who used to live in the countryside have now moved to the cities.”
Agriculture and food are some of the other areas the Chinese are interested in investigating in terms of what Canada can bring to their table. While China is a big farming country it’s done still in a relatively low-tech way and some of the big SOEs and POEs are coming to North America wanting to learn how farming is done in order to take the knowledge home to improve systems in their country. Lee cautions that if you don’t have a local partner you make enemies fast but joining forces makes you more respected. That can also go a long way to protecting intellectual property concerns, which many companies have when considering doing business in China. “I keep saying the law on IP is very advanced in China — probably more advanced on the legal system side than most countries in the world,” says Lee. “The laws are very new and very modern. It’s the enforcement that is the problem.”
IP laws are changing in China
But that too is changing. “It’s not so much that the court doesn’t enforce — you have to find proof and if the infringer is not a big enough company they just disappear. If you kill one, the other comes up next door,” she says.
Chinese companies also now have some intellectual property they want to protect. “You have to find a reputable partner as your joint venture partner. If they have something they are afraid of losing those are the people that will help take IP protection to the next level in China,” she adds.
For first-time dealmakers with Chinese counterparties, Canadian companies should make themselves familiar with the pace of the negotiations, timelines, and expectations. “You have to know your partner. You need to figure out who is the decision-maker,” says McCarthys’ Michael. “You need to go there a first and second time not thinking you will get a signed deal in your briefcase — you need to go and spend time and get to know the people.”
Bradford agrees, saying taking the time to learn about the business culture can go a long way. Picking a local partner to be part of the arrangement can be tricky, says David McIntyre of Norton Rose Fulbright. “I’ve seen it where the arrangement with the local partner can go sour and how difficult it can be to keep your business on track when that happens, whether it’s a local Chinese company coming to Canada or the other direction,” he says.
Drafting of the agreements is something not to be overlooked and there’s a different cultural approach to legal documentation that can arise. “A partnership or shareholder agreement is a living document that essentially governs your relationship. What I’ve seen is there’s a different approach in China than in Canada — less attention is paid to those kind of agreements in China in that they are more broad based and detail is meant to be dealt with through the evolution of the personal relationship,” he says.
Li and McIntyre also note the tax rules are complex in China and a challenge to deal with. “Getting profits out of the country is definitely something to focus on. There is a lot of bureaucracy associated with getting your money out,” he says. “When you talk to different people about doing business in China I would say the three things they are most concerned about are: involvement with local partners, how do I get my profits out of the country once I’m there, and how do I protect my intellectual property rights?”
He has a Canadian client interested in doing business in China and is grappling with how to do it. “They want to know: ‘How do I trust that my local partner will respect the intellectual property rights and how do I protect them from just being taken?’”