France's trade deficit is often highlighted as the economy's weak point but it may not tell the full story of how well its companies are doing abroad. For an increasing number of French firms are looking to foreign direct investment rather than exports to grow their business, particularly in dynamic developing markets.
A high-profile case in point is household appliance maker SEB, which recently announced it wants to take a majority stake in a Chinese counterpart so that it can produce goods for sale in China and the rest of Asia more cheaply.
SEB has complained in the past of Asian rivals squeezing its margins in its domestic market, which makes up a quarter of its global sales, and analysts say it cannot compete with them on their home turf if it does not produce its goods locally.
SEB has yet to win Chinese regulatory approval for the deal. Carmaker PSA Peugeot Citroen is another firm looking to expand through FDI. "The company is looking to expand by growing into markets like China and the Mercosur countries and in order to grow strongly it is necessary to have factories in these places," Jean-Hugues Dubant, PSA Peugeot Citroen spokesman, told Reuters.
He said transporting new cars between continents could be difficult and costly.
"Also, in a lot of countries, like China, there are customs barriers which make a car more expensive if it is not made in that country.
"You add these factors up and if you want to be a player in China, you have to have production facilities on site. Ninety-nine percent of the cars we sell in China are made in China. There is no other way if you want to sell in big quantities."
Such sales do not show up on the export side in the trade balance if the goods do not pass through France but the strategy enables French firms to perform in a highly competitive international market.
"It is just not possible to make something like household appliances in France where the costs are much higher and hope to sell it in China since the price of the goods will be too high for the market," said Diane Bruno, equity analyst for the consumer goods sector at Natexis Bleichroeder in Paris.
"In all sectors, the big theme for the coming years will be emerging markets like Brazil, Russia, India, China where growth is much stronger than in the developed countries, and all firms will have to think about how best to tap into those markets."
SEB chief, Thierry de la Tour d'Artaise, estimates labour costs are 50-fold higher in France than in China. As a result, goods made abroad by French firms can sometimes even turn up on the import side of the trade balance. "In China it is very profitable to invest in order to produce goods for sales to the local market," Francois David, the president of French credit insurer Coface, told Reuters.
"But it is just as clear cut that it is cheaper to make things in China and to send them back to France when the labour cost is important."
Firms are also using this strategy closer to home, via mergers and acquisitions and with greenfield investment. "While FDI flows to China have definitely picked up, and a small number of high-profile investments have attracted much media coverage, the bulk of the outward French FDI flows over the last few years went to other European countries," said Hans Christiansen, economist in the OECD's Investment Division.
"French companies seem to be pursuing strategies of positioning themselves more broadly in Europe, including by means of large cross-border mergers and acquisitions. "New 'hunting grounds' include Central and Eastern Europe, where companies have moved for the dual reasons of low costs and untapped markets."
The Organisation for Economic Co-operation and Development has said France, which ran a seasonally adjusted trade deficit of 2.579 billion euros ($3.31 billion) in June, was the world's largest outward direct investor in 2005 with outflows estimated at close to $116 billion.
Such data suggests that while France may indeed have room to improve in exports, its firms do not seem to be doing that badly, analysts said. "It is a different strategy and another way of being present in the world markets rather than just exporting. I would argue that it is a clever strategy," said David Naude, senior economist at Deutsche Bank in Paris.
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