July 27, 2016 9:50 pm JST
Commentary

David Cockayne -- Why China is buying European soccer clubs

China wants to become a global leader in everything it does, and soccer is no different. China's burgeoning entrepreneurial ranks are eager to please President Xi Jinping, and Europe's elite clubs are in their sights.

Collectively, China is the ultimate pragmatist. Whether business is publicly driven, or facilitated privately, the Chinese are not bound by a formal code of market practice. Meanwhile an ever-expanding part of China's huge population is benefitting from higher disposable income. These market factors are starting to alter the way in which China interacts with foreign organizations, including international soccer.

A decade ago, China brought foreign companies and expertise into China; today there is a shift towards acquiring foreign businesses in their country of origin. This allows Chinese investors to learn from international organizations, and to assimilate their widening competences into the social and economic fabric of China. In the long term, the aim is to produce equivalent Chinese businesses.

There have been few better examples of this over the past 12 months than China's investments in European soccer. As a nation, China has only qualified for one World Cup tournament, has never hosted a major international soccer tournament, and no Chinese players are established in the first choice teams of any of the world's top clubs. How then can China expect to become a global soccer superpower?

Firstly, China has made considerable alterations to the governance of its domestic teams and leagues, which have relaxed media restrictions to help foster positive sentiment and discussion amongst soccer enthusiasts. Inspired by Xi, they have set a target of producing a staggering 100,000 home-grown professionalplayers through the provision of up to 50,000 specialist soccer schools -- an ambitious, yet meticulously planned domestic strategy.

Secondly, China is thinking globally about its soccer future as Chinese investors start to purchase controlling stakes in European soccer clubs. The Spanish club Espanyol was one of the first European clubs in which Chinese investors acquired a controlling stake, while the Czech side Sparta Prague and England's Aston Villa have been almost entirely acquired by Chinese consortiums.

More recently, Chinese investors took control of England's Wolverhampton Wanderers, and its local rival West Bromwich Albion is expected to change hands in similar fashion shortly. Other acquisitions include clubs in France and The Netherlands.

However, it is investments in Europe's global giants, such as Spain's Atletico Madrid, Italy's Inter Milan, England's Manchester City and an imminent deal involving Italy's AC Milan that have raised most eyebrows amongst the global soccer community. All these deals provide an element of knowledge transfer to China.

Chinese companies rarely hire consultants; they are far more comfortable hiring executives for a fixed period to gain access to their knowledge. Over time the competences of such individuals are assimilated into the tacit knowledge base of the host companies.

The Chinese club Wanda Dalian's stake in Atletico Madrid, for example, provides access to the Spanish club's strategic thinking, and to the operational processes of an elite soccer club, providing the Chinese investors with insight and understanding.

This includes everything from the club's youth academy set-up to the negotiation of player purchases, global branding, business marketing, financial management and innovative business development practices. It is a very pragmatic, efficient way of refining organizational practice.

For investors that own Chinese clubs, purchasing a stake in a European soccer club also unites the clubs' respective fan bases, giving European fans a "local club" in China to associate with, and sowing the seeds of a future international fan base.

Bargaining power

For investors that do not currently have ties to Chinese soccer, investment overseas raises their business profiles, strengthening their bargaining power when it comes to domestic sponsorship and media deals. It also clusters multiple fan bases (or target markets) together.

China Media Capital's 13% stake in Manchester City is in part about accessing City Soccer Group -- an umbrella brand created by Manchester City's owners that owns New York City FC, a start-up Major League Soccer franchise in the U.S., and Melbourne City FC, of Australia's A-League. The group also retains a minority shareholding in Yokohama F Marinos of the Japanese J-League. This alliance widens the market potential for CMC's fledgling media offerings while making an immediate return on investment.

The relational constructs of business in China transcend the usual transaction-focused Western approach. Social alignment and cohesive organization define the development of successful Chinese companies, rather than legal or financial practices. Investing in European soccer gives China's emerging industrial sectors an opportunity to position themselves in the vision of their president's sporting vision.

Xi has inspired a surge in soccer enthusiasm, and by showing that they are willing to help achieve it Chinese companies investing in European soccer are helping to nurture relationships that could benefit their longer-term futures.

There are other reasons for investing so heavily in European soccer. One is that European soccer is firmly established. It has a substantial heritage, and is home to some of the world's most famous club competitions, such as the UEFA Champion's League. China's sports industry is emerging fast, but it is still an infant. Its stock is rising, but it will surely experience the ups and downs of all other infant markets. European soccer offers a safer alternative for investors.

There is also a symbolic element to the relationship. Research has shown that developing economies often prefer to buy goods and services from more established economies. This is known as the "country-of-origin effect."

Associating with such economies offers Chinese consumers intangible benefits such as relationships with particular brands, countries or cultures. In some cases this gives consumers a feeling of social elevation, or higher status, perhaps reflecting a perception of greater wealth by their peers. Investing in European soccer gives Chinese investors and their associated stakeholders a social boost, while also helping to leverage their domestic brands.

China's investment in European soccer may on the surface look like a lavish spending spree, but the rationale behind it is multifaceted. Domestic improvements are being strategically complemented by overseas investment, and this is helping to associate China with soccer at both the business and performance levels. The world is starting to consider China an up and coming player in soccer and European clubs searching for investment are starting to look toward the East.

There are, however, important questions that need to be addressed. It is possible that investors are simply spreading risk across a wider portfolio by investing in both the "boom" stage of the Chinese domestic league, and the "mature" markets of Europe.

When money is being moved across borders people will ask where it comes from and why it is being invested overseas. Answers to those questions will emerge in due course. For now, though, China's European investment is seemingly a win-win for both sides.

David Cockayne is a senior lecturer in marketing and the international business of sport at the University of Huddersfield Business School. He has advised English Premier League clubs on marketing in China.

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