China's US spending passes landmark
By Benjamin A Shobert
Outbound investment by Chinese businesses in United States entities last year
exceeded for the first time US investments in Chinese companies, according to a
recent report from Dealogic, a fact too easily lost amid cries of concern over
China's ownership of US Treasuries, now estimated at around US$789.6 billion.
Cumulatively, Chinese outbound merger and acquisition (M&A) activity was at
an all-time high in 2009; however, the actual amount invested - $28.6 billion -
was still a distant third to the
United States' international M&A activity, estimated at $51.5 billion.
Answering the question of what is to be made of this inversion, of Chinese
outbound investment now exceeding inbound US investment in China, presents an
interesting challenge.
Admittedly, 2009 is a year most multi-nationals would like to forget. Marked by
scarce capital, frightened consumers and a receding domestic economy, most
American companies dramatically pared back their growth plans. As a result, it
may not be too surprising that Chinese companies overtook their American
counterparts with respect to outbound investment.
The nature of the deal-flows from both countries further suggests a more
nuanced interpretation of this change; namely, that while American M&A
activity within China remains extremely diverse, Chinese outbound investment
(whether in the US or elsewhere outside of China) is still predominantly
focused on securing natural resources and forward integrating into sources of
critical raw materials deemed integral to China's manufacturing infrastructure
and industrial capacity.
Overall, of the biggest international deals completed by Chinese companies in
2009, three were explicitly to expand access to oil fields (the purchase of the
UK company Emerald Energy, of the Swiss company Aldex, and finally the
Singapore Petroleum Co). Two of the five biggest were for other raw materials
in the mining sector, both of which were Australian companies (Felix Resources
and the Oz Minerals).
The motivation for these acquisitions appears to revolve around China's desire
to have tangible ownership of particularly critical raw materials in the hopes
that, should scarcities emerge, it can lay claim to these first, or even at the
exclusion of other international players. Similarly, but often overlooked by
many, is that ownership of these entities provides an additional lever of
control for Beijing to manage inflationary pressures on high profile at-risk
commodities like oil, coal, steel, copper and aluminum.
But thus far, Chinese attempts to acquire US raw material suppliers like those
they were successful with internationally in 2009 have been met with extreme
resistance, as best evidenced by the rebuffed attempt in 2005 on the part of
China National Offshore Oil Corp (CNOOC) to purchase Unocal. The need for
reliable access to energy which propelled China forward into the Unocal deal
has not diminished or gone away; instead, Beijing has changed its focus towards
other countries more amenable to changes in ownership of their raw material and
energy sectors.
As has been seen over the last several years since the CNOOC deal fell apart,
this has meant China has sought out ties with countries and regimes the
established international order is deeply troubled by; many had been
intentionally isolated in the hope that the countries in question would have to
reform. This phenomenon has been widely discussed, but the failure of the
CNOOC-Unocal acquisition may provide a cautionary note about how US-China
business relationships could change for the worse in the coming years.
Whether hungry for raw materials, energy, access to markets or new technology,
Chinese businesses recognize the need to locate these regardless of where they
may be found. To this point, companies in China have shown a remarkable
resilience in searching out and finding critical inputs to their success. If
these can be found and accessed in the US, then American businesses - and the
American economy at large - have the potential to benefit. But to the extent
Washington feels it politically necessary to limit further integration of
Chinese businesses into the national economy, China will increasingly turn
towards other countries deemed more hospitable to investment.
A good test of this will be the anticipated 2010 purchase of the GM Hummer
brand by Sichuan Tengzhong Heavy Industrial Machinery (Tengzhong). Announced
last year, but not a part of the 2009 investment totals between the two
countries, this deal will present an interesting insight into the political
climate for Chinese businesses looking to further invest in the US. Most
industry watchers expect the deal to be ultimately approved, but not before all
manner of media uproar and calculated pot-shots on the part of Washington
insiders about how this deal represents the death of American industry.
The Hummer brand, originally envisioned as an extension of the successful US
military vehicle, is manufactured in Northern Indiana, a
manufacturing-intensive region heavily impacted by the recession of the past 18
months. Its demise and its now-apparent rescue at the hands of a Chinese
company pose a challenge to those who would stand in Tengzhong-Hummer's way: if
not this as the exit strategy for GM, then what?
Unfortunately for the new entity, the challenges is it likely to face are going
to be equal parts political pressure and cultural adjustments. Most important
is the message this will send to other businesses in China, specifically those
outside the natural resource or energy sectors: if the price to enter North
America is not only the hard costs themselves but the ability to withstand
political attack, do they really need to be here at all?
The inflection point reached in 2009, where Chinese businesses invested more in
the US than the US did in China, may prove to be misleading over the long term
if the Tengzhong-Hummer acquisition is handled badly by American politicians
and the national media. Chinese businesses desire to be in North America, and
many recognize the need to build brand recognition in the US, and to forward
integrate into new parts of their business in order to get closer to their
customers, capturing more of the value-added portion of their go-to-market
distribution channel.
For many American businesses, the ability to attract Chinese investors could
mean jobs kept, plant capacities preserved, and new products launched. But if
the price of investing in America is weathering accusations about their agenda
or intentions, Chinese businessmen will likely look elsewhere for investment
opportunities, just as China did in the natural resource segment once the CNOOC
bid for Unocal was spurned.
Ultimately, Chinese investment in the US faces three primary challenges, each
of which is exemplified in the Tengzhong-Hummer acquisition. First, the
political pressures and name-calling likely to result from any worthwhile and
high-profile activity between an established US company and its Chinese suitor.
Second, Chinese companies have to prove that they can adapt their management
cultures to the American way of doing business.
Even with its purchase of IBM's laptop business almost five years in the
rear-view mirror, Lenovo still faces persistent questions about its ability to
integrate the two cultures and execute a business plan that builds on what both
entities were purported to do best (the one, low-cost manufacturing; the other,
branding, product development and distribution). As Chinese businesses have
continued to grow, their chronic shortage of skilled managers has become
increasingly obvious. Consequently, many Chinese businesses simply lack the
ability to export a competent Chinese manager into their newly purchased
American subsidiary. The unfortunate result is that many Chinese companies
avoid seriously considering how to purchase or invest in American businesses
simply because they recognize their own inability to manage a culture foreign
to their own.
Third, for the Chinese economy to advance to the next stage of global
competitiveness, their national champions must prove they can use M&A
activity to fund expansions of more than raw manufacturing power; that they
can, in fact, build innovative products that consumers want. As much as the
world respects China's manufacturing power, very few know of, or are interested
in, any Chinese brands. The opportunity for Chinese businesses is not only to
invest in one of their key export markets, but to find in North America a set
of skills that will enable them to build fewer "me-too" products, and more core
innovations.
While China's investment in the US may be most visible and obvious through its
holding of the national debt, China's outbound investments in America seem to
suggest a country serious about taking the next step of further integrating the
two economies together. They face enormous challenges in doing this - learning
new skill sets, navigating a culture very much foreign to them, being open to
different ways of making business decisions - but these were all many of the
same issues American businesses had when they first invested in China.
More critically, China's desire to take this next step, to foster increasingly
large investments between the two country's private sectors, sends a strong
message of mutual reliance. For those who would look otherwise negatively at
China's outbound investment in the US, it might be wise to consider what the
other options are: distance and distrust. Neither should be an option for the
US or China.
Benjamin A Shobert is the managing director of Teleos Inc
(www.teleos-inc.com), a consulting firm dedicated to helping Asian businesses
bring innovative technologies into the North American market.
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