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KONINKLIJKE INDUSTRIEELE GROOTE CLUB, 16 SEPTEMBER 2013 Chinese investment in The Netherlands Patterns and drivers Ona Akemu, Wendong Deng Rotterdam School of Management

Chinese investment in the Netherlands: Patterns and Drivers

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Page 1: Chinese investment in the Netherlands: Patterns and Drivers

KONINKLIJKE INDUSTRIEELE GROOTE CLUB, 16 SEPTEMBER 2013

Chinese investment in The Netherlands

Patterns and drivers

Ona Akemu, Wendong Deng

Rotterdam School of Management

Page 2: Chinese investment in the Netherlands: Patterns and Drivers
Page 3: Chinese investment in the Netherlands: Patterns and Drivers

Developing country MNEs

• Internationalisation

• Impact on host country

Ona Akemu

Wendong Deng

Who are we?

Enterprise governance structure

• Social capital

• Managerial vision

• Diversification strategy

Page 4: Chinese investment in the Netherlands: Patterns and Drivers

Roadmap of my talk

At home

In China

Key figures and patterns

The pull factors – why NL attractive?

Success and failure

Push factors

The domestic situation

Background 1

2

3

4

Types of Chinese outward investment

Where does investment go?

Policy debates in Europe

Trends

What’s in it for you?

Page 5: Chinese investment in the Netherlands: Patterns and Drivers

China = mainland China + Hong Kong + Macau

(Taiwan not included in my definition)

Page 6: Chinese investment in the Netherlands: Patterns and Drivers

Types of Chinese investment abroad

• Liquid investment

• China holds $1.3trln T-bills

• Total reserves $3.4trln

Portfolio investment 1

• High net-worth

individuals

• Residence permit,

passport key drivers

Real estate investment 3

Source: Financial Times, US Gov Treasury

‘Retail’ investment 2

• Owned by immigrants

• Small scale

• Not tracked by

investment agencies

Foreign direct investment 4

• Purpose is control of

Dutch enterprise

• Encouraged by

investment agencies

Page 7: Chinese investment in the Netherlands: Patterns and Drivers

Now, some definitions…

Foreign direct investment (FDI) FDI stock FDI flow

‘Cross-border investment

associated with lasting

interest/control in company’

‘Net amount of FDI that

flows into a country in a

year.’

‘Net value of all FDI held by

foreign firms (Chinese) in

country (Netherlands) at year

end’

Page 8: Chinese investment in the Netherlands: Patterns and Drivers

Source: UNCTAD.

extracted16.08.2013

China rising in absolute terms: FDI stock nears $2trln

Chinese outward foreign direct investment stock, 1990-2012 ($billion)

Page 9: Chinese investment in the Netherlands: Patterns and Drivers

China rising in relative terms – contributing larger share

Source: UNCTAD. extracted16.08.2013

China includes Hong Kong and Macau

1990 2012

Total global OFDI ($2.1 trillion) Total global OFDI ($23.6trillion)

Outward FDI stock of top investing countries as percentage of total global OFDI (1990, 2012)

Page 10: Chinese investment in the Netherlands: Patterns and Drivers

Will the trend continue?

Source: 2012 China Innovation Survey by Booz, BenCham, CEIBS and

Wenzhou Chamber of Commerce (page 8)

Page 11: Chinese investment in the Netherlands: Patterns and Drivers

Will the trend continue?

Page 12: Chinese investment in the Netherlands: Patterns and Drivers

Looking at Europe…

Page 13: Chinese investment in the Netherlands: Patterns and Drivers

Where some of the $2trillion goes

Page 14: Chinese investment in the Netherlands: Patterns and Drivers

Where does the rest go?

It depends on who you ask

Source: Chinese MOFCOM, 2010; Rhodium Group 2012

Top ten recipient countries of Chinese OFDI in Europe 2010 stock (€million)

Source: Eurostat. Extracted 19.08.2013

Page 15: Chinese investment in the Netherlands: Patterns and Drivers
Page 16: Chinese investment in the Netherlands: Patterns and Drivers

Chinese ‘stealing’ European know-how?

‘I am in favour of foreign investments …but the

question is if the Chinese company will invest

in Europe or if this is a camouflage to bring

know-how to China’

Antionio Tajani, EU industry commissioner (2010) speaking on

Xinmao’s failed bid for Dutch firm, Draka. Italian company

Prysmian finally bought Draka for €900million Source: Reuters.com

‘We see vanishingly few [Chinese investments] , which

seem senseless from the perspective of commercial

logic... (page 68)

Page 17: Chinese investment in the Netherlands: Patterns and Drivers

The debate continues…

Fuelling Europe versus a shopping spree

Page 18: Chinese investment in the Netherlands: Patterns and Drivers

Let’s take a closer look at home…

Page 19: Chinese investment in the Netherlands: Patterns and Drivers

Chinese FDI in NL has also increased markedly

Chinese outward FDI stock in The Netherlands 1990-2011 (€million)

€2,625million

Source: De Nederlandse

Bank, Extracted 16.08.2013.

Excludes special financial

institutions (SFIs)

Page 20: Chinese investment in the Netherlands: Patterns and Drivers

€1.3billion

€10.4million*

€944million

(Van Gansewinkel)

*Transaction recording increased stake from 79 to 98%

You’ve probably heard about these

2002

2003

2013

Li Ka-Shing (85), Chairman Hutchinson Whampoa

Page 21: Chinese investment in the Netherlands: Patterns and Drivers

How about these?

(Anti-infectives business group)

40%*

2011

€1.4million

* To invest additional 3.5million raising stake to 70%

2011

€210million 50%

2011 €7million 100%

Target Date Consideration Stake Acquirer

Source: company websites, press releases, Zephyr database

Page 22: Chinese investment in the Netherlands: Patterns and Drivers

You'd be smiling too…

Source: BYD website

Page 23: Chinese investment in the Netherlands: Patterns and Drivers

Siz

e o

f p

are

nt

co

mp

an

y

Very large

(>$500mln)

Large

($50-500mln)

Small, medium

($1-50million)

State-controlled Privately-controlled

Controlling party

A feel for range of ‘parents’

Source: Company websites, annual

reports; Orbis database;

Page 24: Chinese investment in the Netherlands: Patterns and Drivers

Active in sectors from automotive to travel

Conglomerates

Dairy products Industrial computer systems

Communication equipment

Telecommunication equipment

Toys, juvenile vehicles

Mining & construction machinery

Financial services

Medical devices

Automotive

Transportation equipment Travel

Page 25: Chinese investment in the Netherlands: Patterns and Drivers

Ow

ners

hip

Wholly owned

subsidiary

Joint venture

Greenfield Brownfield

Establishment mode

Wholly-owned and brownfield investments

Page 26: Chinese investment in the Netherlands: Patterns and Drivers

Reality check: Chinese FDI in NL is still very

small…

Page 27: Chinese investment in the Netherlands: Patterns and Drivers

Inward FDI stock in the Netherlands per country of origin (2011), €’000 million

Chinese FDI : €2,625million =

0.6% FDI in NL

Reality check

Chinese FDI in NL still a drop in the bucket. US is still our most important foreign investor

Source: De

Nederlandse Bank,

Extracted 16.08.2013.

Excludes SFIs

Page 28: Chinese investment in the Netherlands: Patterns and Drivers

Reality check

Even including special financial institutions, Chinese OFDI still a miniscule fraction

Top thirty FDI sources of OFDI stock in The Netherlands in 2011 ($billion)

Chinese OFDI in NL - €14.7billion

Still 0.5% of total FDI (€2,773billion)

Source: De Nederlandse

Bank, extracted 16.08.2013.

Page 29: Chinese investment in the Netherlands: Patterns and Drivers

Let’s see the key patterns in NL…

Page 30: Chinese investment in the Netherlands: Patterns and Drivers

How many Chinese companies in NL?

It depends on what you mean by Chinese-owned companies. My definition is same as NFIA

Company in NL with parent company registered in China (mainly mainland).

Do not track investment by Chinese individuals or in retail, ‘horeca’.

Similar to regional investment agencies. Help companies set up in NL.

Companies owned by first-generation, second-generation Chinese from

mainland China, Hong Kong, Macau, Taiwan.

670 in Amsterdam MRA. Predominantly in ‘horeca’, financial services

Sources: Gemeente Amsterdam, Chinees ondernemenschap in Amsterdam in beeld (2012)

Page 31: Chinese investment in the Netherlands: Patterns and Drivers

Sectoral spread

Source: own analysis of NL firms with Chinese ultimate owners in Orbis database

Textile, apparels is the dominant sector for mainland Chinese firms

Percentage of firms active in sector

310 entities (Mainland China)

Page 32: Chinese investment in the Netherlands: Patterns and Drivers

Sectoral spread

Source: own analysis of NL firms with Chinese ultimate owners in Orbis database

If Hong Kong firms included, services the dominant sector Percentage of firms active in sector

441 companies (Mainland China, Hong Kong)

Page 33: Chinese investment in the Netherlands: Patterns and Drivers

Functions

Wholesale & retailing (often a.k.a. marketing, sales) main functional activity of mainland Chinese companies

Wholesale & retail Finance/holding

companies

69% 9%

13%

Professional

services

Page 34: Chinese investment in the Netherlands: Patterns and Drivers

53% of Chinese firms less than 5 years old

Number of Chinese subsidiaries established in Netherlands per five-year period between 1980 and 2013

Source: own analysis of 441 NL firms with Chinese ultimate owners in Orbis database

Page 35: Chinese investment in the Netherlands: Patterns and Drivers

50

Many, many small companies; located in Randstad

Percentage of Chinese-owned firms located in Amsterdam,

Rotterdam, Den Haag, and Schiphol areas

35

Number of Chinese-owned firms employing more than five

people

519

Highest number of employees at Chinese-owned firm (Huawei,

2011)

Source: own analysis of 441 NL firms with Chinese ultimate owners in Orbis database

30

Percentage of Chinese-owned firms employing only one person

Page 36: Chinese investment in the Netherlands: Patterns and Drivers

Where do they come from?

Beijing (14%)

Shanghai (10%)

Hangzhou (4%)

Wenzhou (9%)

Shenzhen (7%)

Fuzhou (2%)

Qingdao (2%)

40% of mainland firms come from first tier, second tier cities from the

East Coast of China

Guangzhou (3%)

310 mainland Chinese-owned entities only. Excl. 131 Hong-Kong firms

Page 37: Chinese investment in the Netherlands: Patterns and Drivers

Why do they come to The Netherlands?

• Country factors

• Access to markets

• Access to technology

• Other?

Page 38: Chinese investment in the Netherlands: Patterns and Drivers

Geography

Country factors

Workforce Sure, taxes?

Source: Ernst & Young (2012:15)

Page 39: Chinese investment in the Netherlands: Patterns and Drivers

Access to market

Founded 2001. Sales (2012) -

$1.1bln

Set up 2009 in Hoofdorp

Sales, marketing, European HQ

They target Dutch and proximate European markets

Founded 1958. Sales (2011) –

$2.9bln

Set up 2012 in Almere

Sales, marketing, European HQ

Source: company websites, annual reports, BOM foreign investment

First Chinese vehicle to

obtain complete European

type-rating

Set up 2011 in Helmond.

Research, test, sales,

marketing

Page 40: Chinese investment in the Netherlands: Patterns and Drivers

Ah, that Dutch

special punch…

Page 41: Chinese investment in the Netherlands: Patterns and Drivers

‘Holland is traditionally a strong

country in the dairy industry. Their

quality of milk resources and

techniques is one of the best in the

world. The environment of milk

resource is unique and can't be copied. ’

Yuanrong Chen, CEO of Chinese company Ausnutria on the 2011 merger between his company and Dutch dairy firm,

Hyproca. Source: PRNewswire (June 2011)

Page 42: Chinese investment in the Netherlands: Patterns and Drivers

A study of nine R&D Dutch firms which

were acquired by Chinese parents

Tom Hoorn, RSM (2012)

Supervised by Ona Akemu and Mark Greeven

Page 43: Chinese investment in the Netherlands: Patterns and Drivers

Managers speak

Why was your company acquired by Chinese parent?

‘It is about the hard technologies...it is

also about organisational expertise and

financial management, so the soft side of

innovation’ Managing Director, Company A

‘They saw what we could provide for

them and they were very interested in

our competencies to develop products

ready to be applied in their systems’

Managing Director, Company F

‘They really bought

company for knowledge

and development

competencies that we

have here’

R&D Manager, Company H

Source: Hoorn (2012)

Page 44: Chinese investment in the Netherlands: Patterns and Drivers

‘The quality level of industrial vehicle development is higher in Europe... China lags twenty years behind us,

but they see that they have to develop. Integrating our local development capabilities and know-how helps

them solve problems they face’

Managing Director, Company C

Source: Hoorn (2012)

Page 45: Chinese investment in the Netherlands: Patterns and Drivers

Getting some ‘special punch’

Source: AAC Capital Partners (2011); China Daily (2011); Zephyr; company websites

2007

CIMC acquires 80%

of Burg

€108mln

Beijing Hainachuan

Automotive

acquires Inalfa Roof

Systems

2009

XEMC acquires

Darwind

€10mln

2011

Undisclosed

2011

China Hi-Tech

Group acquires

GINAF

2012

€7 mln

Navinfo acquires

Mapscape

Examples of acquisitions of tech companies in NL by Chinese parent

Undisclosed

Assets

Sum

Page 46: Chinese investment in the Netherlands: Patterns and Drivers

Institutional quality

‘I feel good to pay taxes here [in Netherlands]’

Chinese entrepreneur speaking about tax office, NFIA support in doing business in The

Netherlands. Name undisclosed for confidentiality reasons

‘In China, local government does not care about us

because we are small company. But here they welcome

us’

‘…here I don’t need guanxi with tax authorities’

Page 47: Chinese investment in the Netherlands: Patterns and Drivers

OK, it is not always that simple

Mixture of strategic asset-seeking and seeking new market/customers

Examples

Company has existent R&D capability. Invests in

NL to deepen capacity for European market

Deepen design

capacity

1

Company targets Chinese customers ‘going global’,

Dutch companies going to China

Follow existing

customer

2

Always strategic?

3 Not sure, but… ?

Page 48: Chinese investment in the Netherlands: Patterns and Drivers

Yep…

Source: Rotterdambusinessschool.nl

Page 49: Chinese investment in the Netherlands: Patterns and Drivers

Don’t discount copycat behaviour

Page 50: Chinese investment in the Netherlands: Patterns and Drivers

How prepared are they?

Page 51: Chinese investment in the Netherlands: Patterns and Drivers

Source: KPMG Report, World Class Aspirations (2010)

Most important factor in identifying target for acquisition?

Page 52: Chinese investment in the Netherlands: Patterns and Drivers

Pre-investment preparation channels

Source: Ernst & Young (2012: 34)

How did you prepare before investing in the Netherlands?

Page 53: Chinese investment in the Netherlands: Patterns and Drivers

Pre-investment channels

Use

B

G

Chinese embassy NFIA, regional foreign

investment agencies M&A advisory,

intermediation

Informal personal

contacts

B

G

G

B

Formal interfirm

network

B

G

? ?

B Large firms

G Small firms

‘Gut-feel’ for the intensity of use of various sources of information on Dutch firms by Chinese investors

High

Low

Page 54: Chinese investment in the Netherlands: Patterns and Drivers

Are the SMEs well-prepared?

Source: somedesignblog.com

Page 55: Chinese investment in the Netherlands: Patterns and Drivers

What do Chinese firms bring to NL?

Page 56: Chinese investment in the Netherlands: Patterns and Drivers

Perhaps, another reason?

Page 57: Chinese investment in the Netherlands: Patterns and Drivers

Listen to managers again

What is the benefit of being acquired by the Chinese parent company?

‘They teach us about requirements

for many applications in larger

systems in Chinese market. We are

specialised in a very small niche. By

doing joint projects, it helps us

grow.’

Managing Director, Company B

‘We gain practical experience in applying

our technology in the Chinese market.

We need lab tests and research before

building a prototype…they have

hundreds of installations running in China

so they have a lot of practical

experience.’

Managing Director, Company G

Source: Hoorn (2012)

‘’Even before they took over, they

pushed us to start hiring more

R&D personnel since they were

interested in our development

capabilities’

R&D Manager, Company H

Page 58: Chinese investment in the Netherlands: Patterns and Drivers

How successful are Chinese-owned firms?

http://www.bnr.nl/?service=player&type=fragment&articleId=1829720&audioId=1829727 Source: Windpower; BNR.nl

Page 59: Chinese investment in the Netherlands: Patterns and Drivers

SMEs also have their stories

How successful have you been in NL? Two Chinese SMEs tell their stories

Wood products Studio equipment

Why did you invest in

NL?

Business performance

since start 30% 10%

What

else?

Market better than expected. Need

more employees

‘New world open for me’

Proximity to customer; new

customer

Main market is Germany,

but Dutch market also

good. Need additional

employee

Decline of U.S.

business

Industry

Source: Disguised for confidentiality reasons

Page 60: Chinese investment in the Netherlands: Patterns and Drivers

How about failure?

Source: NFIA (Onno Bogers)

Annual number of net ‘surviving’ and closed Dutch subsidiaries of Chinese parent firms (2000-2013)

22% 4%

Failure rate Failure rate

Page 61: Chinese investment in the Netherlands: Patterns and Drivers

38% of Chinese firms disappeared after two years

Source: One of the investment agencies

(Confidential)

Page 62: Chinese investment in the Netherlands: Patterns and Drivers

We’ve talked about Europe and NL.

Now, let’s talk China

Page 63: Chinese investment in the Netherlands: Patterns and Drivers

What pushes Chinese firms to

internationalise?

Page 64: Chinese investment in the Netherlands: Patterns and Drivers

New faces

Fierce competition - how do you respond?

Page 65: Chinese investment in the Netherlands: Patterns and Drivers

Dif

fere

nti

ati

on

Technology

Internationalise to gain technology, but focus largely

on Chinese market

Internationalise to gain technology, develop

innovative capability, open channel to ‘sophisticated’

European market.

Linkages with

other firms

Internationalise as part of diversification

Build

relationship

(brand,

marketing)

Chinese consumers more ‘demanding’. Firms

internationalise to acquire established brands

principally for Chinese market

Acquire, build own brand internationally. Move

beyond being ‘Chinese’ company

Co

st

Price Many Chinese companies compete here

Internationalise to NL to sell essentially same

product as in China. Many SMEs do same

Local market International market

Market focus

Page 66: Chinese investment in the Netherlands: Patterns and Drivers

Some serious questions

• Will Chinese economic model work in future?

• Challenges and opportunities?

• Trend outward FDI?

Page 67: Chinese investment in the Netherlands: Patterns and Drivers

New faces

What is the next economic engine of China?

Lika shing picture

Page 68: Chinese investment in the Netherlands: Patterns and Drivers

What will the future bring?

The optimist:

‘China can maintain 8% of growth for 20 years,

based on continuous technological innovation

and industrial upgrades.’

The pessimist:

‘China’s economic system has reached its limits.

China is running out of surplus labor.’

Lin Yifu (Former Chief Economist, World Bank) Paul Krugman, 2008 Nobel Laureate in Economics

Source: Wall Street Journal

Page 69: Chinese investment in the Netherlands: Patterns and Drivers

Declining growth rate?

China’s GDP growth rate (in percentage) 2010-2013

Page 70: Chinese investment in the Netherlands: Patterns and Drivers

Economy relies heavily on fixed investment

GDP structure China versus USA (% GDP, 2008)

Fixed

infrastructure

investment

Net exports

Government

expenditure

Consumption

44

8

13

35

15

-5

20

70 Source: International Monetary Fund

Page 71: Chinese investment in the Netherlands: Patterns and Drivers

Source: IMF, Xinhua Net

Real estate boom to bubble…

How many mainland Chinese cities can you spot?

House price to wage ratio for top 15 cities in the world (%)

* Mainland Chinese cities

*

*

*

*

*

*

Page 72: Chinese investment in the Netherlands: Patterns and Drivers

Source: IMF, Xinhua Net,

…to bust?

Residential real estate investment (as % GDP) for US, Ireland, Spain and China

Page 73: Chinese investment in the Netherlands: Patterns and Drivers

Yet, ghost cities

Page 74: Chinese investment in the Netherlands: Patterns and Drivers
Page 75: Chinese investment in the Netherlands: Patterns and Drivers

Government supports drive for resources…

In Zambia (copper)

Angola (oil)

Congo DR (pretty much

everything)

In Nigeria (oil, lots of it) In Ghana (‘new kid on the oil block’) South Africa (Iron ore, gold, diamonds)

Page 76: Chinese investment in the Netherlands: Patterns and Drivers

Severe environmental degradation

Page 77: Chinese investment in the Netherlands: Patterns and Drivers

Rich China, poor China

Who do you believe: official statistics or your eyes?

VS.

Page 78: Chinese investment in the Netherlands: Patterns and Drivers

The pretty, the not-so-pretty face of corruption

Page 79: Chinese investment in the Netherlands: Patterns and Drivers

Does Li Ka-Shing know something we don’t?

Sell China

Buy Europe

Park & Shop $4billion (July 2013)

Shanghai OFC RMB6billion (Aug

2013)

Guangzhou Metropolitan Plaza

RMB 2.6 billion, (Aug 2013)

UK: HKD 7.8 billion (July 2013)

AVR Afvalverwerking : €944million

(Jun 2013)

O2: €850million (June 2013)

Page 80: Chinese investment in the Netherlands: Patterns and Drivers

Source: Property Observer, Private Wealth Report (2013); Hurun Report (2012)

$12.3billion

Value of U.S. residential real estate

bought by Chinese between April

2012 and March 2013

AUD5.4billion

Value of residential real estate

bought by Chinese in Australia in

FY2013

Footloose rich?

60%

Percentage of rich Chinese (net

worth > RMB 100million) who

have migrated or planning to do so

33%

Percentage of rich Chinese who

own overseas assets. 30% of the

rest have plans to invest in next 3

years

Page 81: Chinese investment in the Netherlands: Patterns and Drivers

€250,000 for

residence permit

€300,000 for

residence permit

‘Golden Green

Card’ € 500,000

‘Green card’ anyone?

New entrepreneur

Law: €500,000

Page 82: Chinese investment in the Netherlands: Patterns and Drivers

But, leadership has responded to

serious challenges in the past…

Page 83: Chinese investment in the Netherlands: Patterns and Drivers
Page 84: Chinese investment in the Netherlands: Patterns and Drivers

Recap

Chinese FDI in NL on the rise. Miniscule compared to traditional foreign investors

1 Picture in

NL

What

attracts

them to NL

2

What

‘pushes’

them out

3

Access to Dutch and proximate markets

Technology, ‘soft’ innovation capabilities

Infrastructure, English-speaking workforce, tax regime?, residence permit opportunities?

Chinese companies predominantly in sales, marketing

Small operations (1-5 employees)

Domestic competition

Response – find new markets, upgrade capabilities, acquire more sophisticated technology

Government support

Industry upgrade – change development model

Resource-seeking

Page 85: Chinese investment in the Netherlands: Patterns and Drivers

• No fiscal/monetary stimulus

• Curb financial risks

• Need for economic structural

reform

Page 86: Chinese investment in the Netherlands: Patterns and Drivers

What does it all mean for FDI from

China?

Page 87: Chinese investment in the Netherlands: Patterns and Drivers

1

2

3

4

Industry upgrade

Boost domestic

consumption

Reduced

restrictions on

FDI

Resource scarcity

Firms improve technology,

capabilities by acquiring high-

end companies

Firms acquire brands to

differentiate products

SMEs become bolder, better

organised to venture abroad

Demand for (new, clean?)

energy. Active government

support

Page 88: Chinese investment in the Netherlands: Patterns and Drivers

Thank you for your attention

Page 89: Chinese investment in the Netherlands: Patterns and Drivers

• Jack Li (China Greencorp). Name changed to protect confidentiality

• John Wang (Good equipment Limited). Name changed to protect confidentiality

• Onno Bogers (Netherlands Foreign Investment Agency)

• Mingqin Wang (B.V. Brabant Onwikkelingsmaatschappij)

• Lilian van Ende ; Ms. Qin Yao (Rotterdam Investment Agency)

• Wubbo Everts (North Netherlands Investment Agency)

• Anna Elferink (Utrecht Investment Agency)

• Laurens Kok (West Netherlands Foreign Investment Agency)

• Albert Shi

• Samantha Weil (Limburg)

• Carine van Oosteren (Onderzoek en Statistiek, Gemeente Rotterdam)

• Jun-Qing Zhang (Oost NL OV)

• Ane Papme (Flevoland)

• Tom Hoorn, Mark Greeven (Rotterdam School of Management)

• Flickr.com; Google Images; Wikicommons (How do I live without you?)

Acknowledgment