Octopus-like ChemChina seeks to take a slice of GM food market

Buying Syngenta gives ChemChina access to GM seed patents Keystone

ChemChina’s $43 billion (CHF43.1 billion) offer for Syngenta is most notable for being China’s largest proposed takeover of an overseas target to date – more than four times bigger than the chemical group’s swoop on Italian tyremaker Pirelli last year.

But even as ChemChina ventures boldly abroad, the state-owned group is doing so with its home market very much in mind.

ChemChina is an octopus of an organisation, with units ranging from chemicals to petroleum refining and tyres. The group’s agribusiness division is a major producer of fertilisers and pesticides – two environmentally unfriendly product categories that the Chinese government wants to rein in.

In December, China’s agriculture ministry announced that it wanted fertiliser and pesticide consumption to plateau by 2020. “Essentially market growth [for fertilisers and pesticides] will level off to zero,” says Loren Puette at ChinaAg, a Taiwan-based research company. “ChemChina is looking for ways to diversify its agribusiness portfolio.”

What ChemChina lacks is seeds, and in this respect Syngenta is the perfect fit. The Swiss company is one of four dominant producers of genetically modified crops, with almost 7,000 seed varieties.

“Ultimately ChemChina will get access to GM seed patents that they currently don’t have,” says Mr Puette.

A similar desire for diversification away from its core chemicals business was also a driving factor behind ChemChina’s Pirelli purchase, which added a glamorous brand to its otherwise lacklustre tyre division.

“They bought Pirelli to go downstream and get away from chemicals,” says an industry executive who has monitored ChemChina for many years.

Future food supply

There is just one problem. While the US has embraced GM crops, they are banned in China.

ChemChina, however, is betting the ban will be relaxed soon as the Chinese government struggles to feed more than 20 per cent of the world’s population with less than 10 per cent of the earth’s arable land. Chinese agricultural yields are more than 40 per cent lower than US equivalents – a gap that GM crops could help close.

“[ChemChina] is very interested in securing food supply for 1.5billion people and knows that only technology can get them there,” said Michel Demaré, Syngenta chairman, during a conference call with analysts. He added ChemChina had demonstrated a “commitment to continue to invest in acquisitions”.

The Chinese government knows this too. Beijing does allow selective imports of GM crops, including at least six Syngenta corn varieties and a similar number from Monsanto, the US agribusiness giant whose own bid for its Swiss rival failed last year.

Every year China’s state council devotes its first official policy document to agriculture. This year’s “Document No 1”, as it is known, was published on January 27.

Speaking at a briefing in Basel yesterday, ChemChina chairman Ren Jianxin noted that it called for a “cautious rollout of GM technology in China”. The Chinese government, he added, has a “positive position on this point”.

Merger worries

A Syngenta-Monsanto deal might have raised competition concerns from Chinese regulators, just as Chinese ownership of Syngenta’s US operations could arouse scrutiny from Washington. Mr Ren has previously complained that he has had trouble securing visas to visit the US.

Mr Demaré said there was no obligation to submit the deal for approval to the Committee on Foreign Investment in the US, which can veto transactions on national security grounds, but the two companies had done so anyway.

European Commission officials responsible for merger reviews said there were no mechanisms in EU law that allow Brussels to reject a takeover on food security grounds. Although EU competition law allows exemptions for national security, those have almost exclusively been used in defence deals.

When China does allow GM production, analysts expect it will start with corn given it is primarily used for animal feed as opposed to rice, which would be a harder sell to a wary public.

If completed, the ChemChina-Syngenta tie-up is not the first agricultural partnership involving Chinese groups and overseas peers. One of ChemChina’s state rivals, Sinochem, partnered with Monsanto in 2008 to buy herbicide assets in seven Asian countries.

“Chinese industry leaders in the agricultural sector are going out and making big acquisitions,” says Mr Puette. “ChemChina is just part of this trend.”

Merger king: Ren uses state loan to build chemicals powerhouse

Ren Jianxin has spent his entire career in China’s state-owned system. Born in the city of Lanzhou in 1958, he joined the ministry of chemicals industry after graduating from university. As state entities struggled to pay their way in the early years of China’s reform era, Mr Ren used an Rmb10,000 (CHF1,525) government loan to start an industrial cleaning company called Bluestar in 1984. Because of the source of his funding, he never technically left the employment of the state.

Mr Ren then embarked on a buying spree during which Bluestar acquired more than 100 state companies, most of them in the chemicals sector. The resulting group was christened ChemChina in 2004, with Bluestar one of its core units. Along the way, Mr Ren was dubbed China’s “merger king” by state media and he has since plied his acquisitive trade overseas, snapping up a number of specialty chemical companies in Australia, France, Israel and Norway.

ChemChina is now China’s largest chemicals group. “Every youngster has dreams and aspirations,” said Mr Ren last year. “I dreamt of building Bluestar into a big business.” He only really came to international attention with ChemChina’s €7.3billion (CHF8.1 billion) purchase of Pirelli, the Italian tyre company, in 2015.

Additional reporting by Peter Spiegel.

Copyright The Financial Times Limited 2016