In 2012, the construction industry was stunned worldwide when Chinese heavy machine maker Sany announced the purchase of a German competitor, Putzmeister, for 500 million euros ($594 million). Headquartered in Changsha, Hunan province, Sany is the sixth largest heavy equipment manufacturer in the world, and the first in the industry in China to enter the FT Global 500 and the Forbes Global 2000 rankings. Back in the 1990s, Sany chose to focus on a home-grown concrete pump for transferring liquid concrete. Until around 2005, the world market was dominated by two German companies: Putzmeister and Schwing. Together, they controlled over 90 percent of the whole business. But in a dramatic industry shift during the recession in 2008, Putzmeister’s sales fell from a record 1 billion euros ($1.15 billion) to a loss of 170 million euros ($196 million) in 2009 and the company failed to stay independent.

The acquisition was not without controversy. Putzmeister employees were seen picketing outside the German factory for fear of job losses and cut wages. That didn’t happen. Since then, Sany has continued to sell its own pumps in China and Putzmeister’s in Europe, using the latter as a global distribution hub. “I think if it were an American company, it would be a lot worse for the workforce,” said Joerg Loeffler, head of the works council. Putzmeister’s employment in Germany has held steady. The company stayed intact and workers kept their jobs.

Policy makers are well aware of the benefits of attracting foreign direct investment to spur economic growth or to spare economic woes. Direct investment by foreign companies not only brings capital and employment, but such capital tends to be long-term focused, as opposed to portfolio investments in which “hot money” only drives up property prices and the local stock market in the short-run. Singapore, Israel, and South Korea have all pursued policies that explicitly attract long-term, foreign direct investment. That’s how these former backwaters developed themselves into economic powerhouses and, in the process, provided their citizens with high standards of living.

It is therefore not surprising that, in the midst of the never-ending negotiations surrounding Brexit and in the desperate attempt to keep Britain within the European Economic Area, UK Prime Minister Theresa May declared that her visit to Beijing early this year was to “intensify the 'Golden Era' in U.K.-China relations’’. In her bid to downplay the country’s uncertainties, May positioned the UK as “seizing the opportunity to become an ever-more outward-looking Global Britain, deepening our trade relations with nations around the world--including China.”

Describing Britain as more outward-looking may seem strange when it is preparing to leave the European Union altogether, but it is perfectly sound to court Beijing to ensure that the constant flow of China’s direct investment into the UK, which topped $20.8 billion in 2017, will never cease.

Except for one problem: the Chinese see things differently.

There existed a time when Chinese overseas investment mostly aimed at raw material extraction, undertaking mining activities in countries such as Australia, Canada, and Nigeria. But an increasing driver of overseas investments are now for the acquisition of foreign technologies, brands, and distribution channels so that Chinese domestic firms can leap onto the world stage. In Europe, the automotive sector alone took up 60 percent of Chinese investment in the region.

After China’s first non-state-owned carmaker Zhejiang Geely bought struggling Volvo in 2010, the Swedish operation has since built an engine plant and two vehicle assembly factories in China, while expanding research and development centers in Gothenburg, Sweden. To Geely, the purchase was a no-brainer because the company “didn’t have a competitive advantage in technology, R&D, design, or operations’’, according to a former Geely board member. But Volvo CEO Hakan Samuelsson saw something more in his boss’s mind. “If and when they [Geely] decide to go global, to Europe, possibly the US, we can of course make that entry more credible.” The ‘‘Made in Europe” label is what Chinese investors want.

So here lies the biggest problem with Brexit.

For decades, the UK has billed itself as the gateway for Chinese companies into the EU, with English as the lingua franca for businesses. London was also among the few offshore trading hubs for the renminbi (RMB). Although Frankfurt and Luxembourg also carry out RMB trading and are eager to supersede London, they won’t be able to do so any time soon barring an exodus of international financial institutes across the English Channel.

What’s most troubling is the indirect effect of potential tariffs between the UK and the EU. Chinese investors may find that UK-based companies can no longer offer efficient distribution across continental Europe. An isolated UK means British-based companies would be disadvantaged by a lack of access to neighboring supply chains and top-end innovation clusters. All these are enough to nudge the Chinese to look directly inside the EU. That’s hard work, not least because investors might end up needing to learn German, French, and Italian. But with Brexit, the UK has become less attractive to China.

Howard Yu is LEGO professor of management and innovation at the IMD Business School in Switzerland. He is the author of LEAP: How to Thrive in a World Where Everything Can Be Copied (Public Affairs; June 2018).

The author contributed this article to China watch exclusively. The views expressed do not necessarily reflect those of China Watch.

All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.