Why do the Chinese Invest in European Football?
The Sport Business Silk Road. Professor Aaron Smith and Professor James Skinner from the Institute for Sport Business, Loughborough London analyse why the Chinese Invest in European Football and evaluate the impact on the sport.
Sport has long been an established part of Chinese culture and society with majority funding historically provided through a centrally planned system under state control. The system has proved reasonably reliable, clearly evident in Olympic success culminating in China’s 51 gold medals at the Beijing Summer Olympics. Now, however, the Chinese sporting strategy has assumed a more aggressive posture with a radical surge in the ownership of European football clubs. President Xi Jinping’s ambition to turn China into a football powerhouse together with his desire to build a commanding domestic sports industry have stimulated an unprecedented buying spree of foreign football clubs. From the sport business perspective, the question remains as to whether the Chinese ownership of European clubs provides automatic access to commercial opportunities in China and elsewhere in the world. To answer the question, we must first consider the Chinese sporting context and its burgeoning political economies. As we shall see, the Chinese appetite for football is growing along with their economic ambitions.
Over the last 30 years, while Chinese industries globalised, sport was slow to embrace the commercial marketplace and to become more self-sufficient. Slowly, however, the Chinese government sought to exploit the economic and political value of the sports sector. While a more open-door policy was established in the 1980s, the first serious indication of government intention came in 2010 when China’s State Council issued a ‘Guiding Opinion’ encouraging China’s sports industry to seek a greater market scale. While a start, the Guiding Opinion lacked sufficient detail or strength to tackle China’s complex sports administrative approval procedures.
In 2014, two announcements gave the Guiding Opinion teeth. In March, President Xi Jinping, a fervent football fan, issued a 50-point road map for the development of China into a global football power, while in October the State Council under Premier Li Keqiang, issued a document entitled ‘Several Opinions of the State Council of the People’s Republic of China on Accelerating the Development of the Sports Industry and Promoting Sports Consumption’. Sport had finally become national strategy and sport development an official policy with the aim of incorporating sport into China’s economic growth and political capital. But the strategy has also transgressed borders, venturing deep into the capitalist world of sport’s most lucrative and prominent businesses.
In May 2016, China’s 13th five-year plan directed that the sports industry should comprise one per cent of GDP by 2020, an increase from its then believed 0.63 per cent. The eventual goal was for the sports industry to increase from around $US50 billion to a $US750-800 billion industry by 2026, to have 500 million sports participants, and to establish sports facilities in all Chinese neighbourhoods. Considering that in 2014, the size of the entire global sports industry was estimated to be only $US1 trillion, a Chinese target of $US750 billion within 10 years was a prodigiously ambitious aim. Keep in mind that in 2008, the average GDP per capita was a little over $US3,000. Yet by 2016, that figure was well over $US7,000. The Chinese population, immense at 1.4 billion, with a middle-class growing at a rate of two to three per cent per year, has the money to spend on sports and entertainment. In addition, China has almost 600 billionaires, many of whom are either willing or able—perhaps whether they like it or not—to tie in to the Presidential and State dream.
Despite some set-backs, in the last couple of years, the sports industry has powered ahead at a hasty rate of 16 per cent a year, driven by the marketing of sport and sporting goods. Indeed, China has become the world’s largest supplier of sporting goods equipment, the majority of which are manufactured by small scale enterprises. Founded on the success of former NBA star Yao Ming and retired Chinese tennis star Li Na, sponsorship deals have grown exponentially. Prior to Li Na’s Grand Slam victory in Melbourne, Chinese sports sponsorship was worth an estimated $US2 billion a year. By the beginning of 2017, that figure had grown to about $US18 billion. The overwhelming success of Nike’s sponsorship of Li Na and the NBA’s sponsorship of Yao Ming proved the value of home grown stars.
The sports media rights and sponsorship markets had exploded by 2015. Ti’ao Dongli, a major Chinese sports broadcasting company, acquired the five-year broadcasting rights for the Chinese Super League (CSL) at a cost of around $US1.3 billion, a massive increase from the $US50 million the CSL had received only two years earlier. Multimedia rights were on-sold to China’s leading Internet-based company, Le Sports, for $US420 million, and Chinese Insurer Ping An became a prime sponsor.
A year later China Everbright, a leading financial services company, together with Beijing Baofeng, an Internet entertainment and technology company specialising in virtual reality and digital entertainment, acquired a majority interest in MP & Silva, one of the world’s largest media rights companies. Also in 2016, the Hisense Group sponsored the UEFA European Championship. Hisense claims that the sponsorship increased sales in China by almost nine per cent and sales elsewhere by close on six per cent.
Of all sports, football became the key driver. Almost certainly this was due to three major factors. Firstly, it was essential, politically, economically, culturally, and patriotically, to be involved in sports – China’s 13th five-year plan had made that plain. Secondly, football is the passion of President Xi Jinping and many Chinese billionaires saw the political advantages that association with football might provide. Thirdly, football is the most watched game in the world, making up more than 40 per cent of profits in the entire sports industry. To ignore football was to ignore a large part of the sporting world.
The Chinese forays in football ownership became serious in 2007 with an ill-fated attempt by Hong Kong resident Carson Yeung to take over then English Premier League side Birmingham City Football Club. It took a further two years before Yeung secured complete control of the club at a cost of £81 million, a figure more than three times the £24m value at which Birmingham had been trading during the preceding six-month period. However, Yeung was later arrested in Hong Kong in connection with alleged money laundering and sentenced to six years in jail. Birmingham City have now been purchased by another Chinese company, Trillion Trophy Asia Ltd, and its future remains unclear, still relatively unknown in China.
While involvement in football started gradually, it increased at an exponential rate. The giant Alibaba Group purchased a minority holding in Guangzhou Evergrande, a five time CSL champion and the first Chinese club to participate in the FIFA club world cup.
During the period 2015 to 2017, Chinese investors poured almost $US2.5 billion into world football, purchasing stakes in, among many others, Italy’s Inter Milan and AC Milan, England’s Manchester City, West Bromwich Albion, Aston Villa, Birmingham City, and Wolverhampton Wanderers, Spanish clubs Espanyol, Granada CF, and Atletico Madrid, French club Sochaux, Dutch club ADO Den Haag, and Czech club Slavia Prague. Even clubs in the US and Australia have been brought into the Chinese sphere.
Most Chinese investors have not simply sought to involve themselves in football because of their love of the game. Rather they are using their position to vigorously market their own products. In June 2016, Suning Holdings Group, one of the largest non-government retailers in China, purchased a controlling interest in Italian giant Inter Milan for the sum of 270 million euros ($US307 million). In addition to the initial cost, Suning took on a large, but undisclosed, portion of the loss-making club’s debt. Zhang Jindong, the billionaire chairman of Suning Holdings and a man with noted connections to President Xi Jinping, noted that the aim was to integrate Suning into the local area and then into Italy. “Ours is an international business,” he stated, “and our brand will soon be big in Europe too.”
Suning’s business model exemplifies the Chinese strategy. Its multi-faceted entity includes Suning Sports, which has interests in e-commerce sports media and owns a top club in the Chinese league, Jiangsu Suning. According to a Suning Sports Group document, the aim of the sports division is club ownership, sports media rights, player agencies, training institutions, broadcast platforms, content production and sports related e-commerce. Through strategic expansion and acquisitions Suning wants to establish a “sporting ecosystem along the whole supply chain.” As one of the first mainland Chinese businesses to have a controlling interest in a major European club, Suning’s strategy in sport appears to have been an important first step.
Unlike Carson Yeung’s earlier foray into European football, Suning’s involvement seems to have a more thoughtful, unified, and integrated strategic approach. When announcing the purchase of the club, Zhang Jindong, a man with noted connections to President Xi Jinping, acknowledged Inter Milan’s “glory of the past”, and sought “the glory of the future.” He also carefully avoided announcing the purchase as a Chinese takeover of the club, instead declaring that, “Inter Milan firstly belongs to Italy, Europe, [and] definitely to the whole world.” This carefully formulated comment underlies the strategic positioning of the group. Indeed, Suning’s strategy in sport seems to be long term. In 2015, Suning Sports paid La Liga $US270 million for its video site PPTV to have the Spanish football league’s exclusive media rights. Sweetening the pot, Suning are both able and willing to part with cash for players as witnessed by their Chinese team Jiangsu Suning, which has outlaid 28 million euros for Chelsea player Ramires, and an even more staggering 50 million euros for Shakhtar Donetsk’s Alex Teixeira. Add to that deals for multi-year naming rights including for the club’s first team and youth training centres as well as rights agreements as the official training apparel partner for the senior and youth teams. Additionally, Suning has secured brand visibility via advertising boards and logo positioning throughout the stadium and on shirts. Undeniably, buying a majority interest in Inter Milan raises Suning’s profile in both the commercial and political sphere and satisfies both the economic and political factors at play in China.
At this time, the degree of success the investment Chinese companies are making into sport and the influence that it might make on the marketing of their products remains uncertain. After all, government support into other industries has not always guaranteed success. And there appears little understanding of how, or if, China’s destabilising mountain of debt may impact upon them. For some individuals and companies, the cost of long-term personal and financial commitment will become a burden.
But for some like Wanda Group’s Wang Jianlin, one of China’s richest men, there are few fears. As he put it, “The Wanda Group is not solely about making purchases in the sports industry,” rather its aim is “to enlarge and strengthen its business in related industries like tourism through involvement in the sports industry.” He emphasised that, “The longer you build your brand, the better you’ll benefit. That’s the merit of the sports industry.”
Football is not the only sport that has interested China’s billionaires. Soon after buying control of Spanish football club Granada CF, Lizhang Jiang, General Manager of Shanghai Double-Edged Sports together with real estate investor Meyer Orbach, bought a minority share in the NBA’s Minnesota Timberwolves. More purchases of US franchises are on the cards.
Does Chinese ownership of a European club provide automatic access to commercial opportunities in China and elsewhere in the world? To a large extent commercial opportunities in China and elsewhere depend upon the size and background of the potential owners, on their ability and willingness to expend capital to make a club successful and well-known, on their willingness to play a long strategy, and upon the strategies they adopt to leverage their purchases.
Buying a European football club represents a relatively trouble-free way of moving capital out of China, but it also equates to value at home. The effect of a European club’s brand on the value of a company in China can be transformative. Accordingly, we might conclude that once a Chinese company has made an acquisition and put that asset into a Chinese-listed company, the club’s value will become significantly higher than in its domestic market. And, that’s good business. The new silk road will be paved by leather.
This article was written by Professor Aaron Smith and Professor James Skinner from the Institute for Sport Business: Loughborough University London.
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