A galloping start in US investments
China is the 26th largest investor in the US, but two announced deals in the first month of the new year show that more are on the way as relations between the two super powers improve, say trade experts, China Daily’s Zhang Yuwei reports from New York.
The year of the Horse in the Chinese lunar calendar got off to a good start for Chinese investments in the United States with the announcement of big deals and more that are expected to be in the pipeline. This week Lenovo Group Inc, the world’s largest personal-computer maker, agreed to buy Google Inc’s Motorola handset division for $2.91 billion, making it China’s largest-ever tech deal. The acquisition also puts Lenovo in the fast-growing smartphone business in the US as worldwide PC sales slow. Last year, the global PC market declined 10 percent to 314.5 million units, according to International Data Corp. The news came just days after Lenovo announced the purchase of IBM’s low-end server unit for $2.3 billion.
Both moves reflect comments made earlier by Gerry Smith, president of the Americas for Lenovo, that the company’s goal is to “become the No 1 smart-connected devices company in the world.” It’s now No 3 after Samsung Electronics Co and Apple Inc in the global smart-connected device market.
Lenovo, which calls itself a “global company with Chinese roots”, has co-headquarters in Beijing and Raleigh, North Carolina. It has been focusing on its “PC-Plus” strategy; that Lenovo is “a devices company, not just a PC company”.
Overall, Chinese investment in the US in 2013 doubled to a record of $14 billion, driven by large-scale acquisitions in food, energy and real estate, according to New York-based research firm Rhodium Group, which tracks overseas Chinese investments. In that investment surge, private firms are dominating capital inflows, accounting for more than 80 percent of transactions and more than 70 percent of total transaction value.
The pick up by private firms in comparison with State-owned enterprises reflects the commitment of the Chinese government to focus on development driven by the private sector, said David Riedel, president of New Yorkbased Riedel Research Group. because “Lenovo is an established player in the US”, said Gafni, who served as deputy national intelligence officer for CFIUS Support within the Office of the Director of National Intelligence. The 2005 deal went through even when IBM devices were widely used in the US government.
Gafni pointed out that one potential concern would be that there is “sensitive information” relating to the customers of Google — which owns Motorola — that the US government doesn’t want to share with any foreign companies.
Also, if any part of the transaction that concerns licensing from Google, it can be another potential issue because CFIUS doesn’t independently look at licensing transactions. It looks at acquisition of control.
“But if the licensing of the certain intellectual property is something you cannot separate from the rest of the transaction, in this case CFIUS might want to consider these issues and to see if they are ‘sensitive technology’,” Gafni said, which he adds, might prolong the review process but not necessarily mean it will fail.
Ni Pin, president for Wanxiang America, says CFIUS is just “a process issue”.
“As long as you are transparent, you follow the procedure and follow the rules, and address the issue, then it should be OK,” Ni said after the deal was closed.
As for 2014, Aaron Brickman, deputy executive director of SelectUSA within the US Department of Commerce, said that it is going to be “exciting” for Chinese investment in the US. He said he based his optimism on “successive years of increased bilateral engagement between companies from our countries.”
SelectUSA was established in 2011 by executive order of President Barack Obama. The government-wide program encourages and facilitates foreign direct investment (FDI) in the US and reshoring — the reversing of outsourcing of business operations back to the US — to create jobs and spur economic growth.
China is the 26th largest investor in the US, according to the US Bureau of Economic Analysis.
“There is still a relatively small amount of Chinese investment in the US, but this is growing,” Brickman said. “No company is truly global unless it is in the US and we got the job creation here and another global brand here, it’s a truly win-win.”
Brickman said Chinese investment “learns from one deal at a time” and Chinese companies succeeded in the US “on a case-by-case basis”.
“We see that the learning curve getting less steep for Chinese companies in terms of Chinese firms succeeding and finding partners here,” Brickman said. “We are seeing a second generation of Chinese companies now who have the luxury of following their peers, of seeing success stories and good case studies about how to engage in the US.”
Among the total of 82 deals last year — 44 acquisitions and 38 green field projects — and six transactions accounted for more than 80 percent of total combined value, according to Rhodium. They were: Shuanghui-Smithfield; CNOOC-Nexen US; Sinpec-Mississippi Lime JV; Fosun-Chase Manhattan Plaza; General Motors Building (40 percent stake acquired by group led by Soho China CEO Zhang Xin); and Sinochem-Wolfcamp Shale.
Brickman said cheap energy costs in the US have “a domino effect throughout the US economy’’ because not just energy-intensive industries, but all types of industries are considering investing in the US.
Brickman said that it’s important for Chinese investors to continue to understand the US market and to work with professionals and services, including the legal and business strategy sides.
Carl A. Valenstein, a Washington-based partner with the law firm Bingham McCutchen LLP, says many opportunities are lined up for Chinese investors particularly in infrastructure, which were detailed in a recent US Chamber of Commerce Report.
Completed deals last year have shown that Chinese investors are becoming “more sophisticated in managing the risks associated with such transactions, which include national security concerns and adverse reactions to Chinese ownership in certain industries”, Valenstein said. Diverse investment
“The largest Chinese US investment transaction to date — the Smithfield acquisition — cleared the CFIUS process notwithstanding substantial opposition,” Valenstein said. “Potential limitations on Chinese investment in the US in 2014 may also arise from Chinese laws and regulations, including the Chinese outbound investment approval process and State-imposed conditions on outbound investment,” he added.
In the last decade or so, Chinese investments in the US have showed diversity, ranging from textiles to chemicals and automotive components to today’s real estate, food and energy sectors. Brickman sees consumer products as a future growth area.
Chinese investors’ expanding their investment portfolio means that “they are evaluating opportunities across newer sectors in the US,” Brickman said.
Lindsay Conner, a partner and co-chair of entertainment and media practice at Los Angeles-based Manatt, Phelps & Phillips, LLP, says Chinese investment in the US will see strong growth in the media industry.
“Particularly in the entertainment industry, increased investing activity between China and the US has been welcomed on both sides of the Pacific, and I believe this trend will grow stronger each year,” Conner said. “Chinese investors who have made US investments have found they received real value, and much less interference from the US government than they may have initially feared.”
From big deals like Dalian Wanda’s acquisition of AMC Theatres, to smaller deals like Galloping Horse’s acquisition of Digital Domain, investments have been completed smoothly and profitably, Conner noted.
“As the tide of cross-border investment grows, people in both China and the US will be more comfortable with those investments, and will understand each other’s business culture better and better,” he said.
Rhodium predicts that Chinese interest in US assets will remain “strong” this year because economic reforms in China provide a more liberal policy environment for Chinese outbound investors.
The Third Plenum of 18th Central Committee of the Communist Party of China last November promised to upgrade the market’s role from “basic” to “decisive” in economic development. The Third Plenum was the first one since the new leadership led by Chinese President Xi Jinping took over and was seen as setting the tone for economic directions and policies for the world’s second-largest economy in the coming years.
“The Third Plenum very much helps this process because the more China reforms domestically and improves its economy, the easier it will be for China to compete internationally as well,” said Frank Lavin, a former US undersecretary of Commerce for international trade.
Dan Steinbock, research director at the India, China and America Institute, said reform established by the Third Plenum will take time to be executed and take effect mostly in the “medium-term”.
“To both sides, then, it is not yet the reality of the reforms that’s decisive; it’s too early for that. Rather, it’s the intention, direction and the early experiences and pace of the current reforms that really matters,” said Steinbock.
“From the US perspective, the determination and direction of the reforms will make China an even more attractive trade and investment partner; from the Chinese perspective, only the broad and deep implementation of the reforms will support the growth transition from investments and net exports toward consumption and innovation in the mainland,” he added.
On the political and bilateral relations side, the world’s two largest economies have moved forward by conducting different talks.
Both countries said they are ready to implement the consensus reached between presidents Xi and Obama following the two leaders’ meetings at Sunnylands in California last June.
In December, the two countries concluded their annual trade talks, agreeing to remove some trade barriers and build a foundation for a new model of super-power relations.
The Joint Commission on Commerce and Trade (JCCT), which marked its 30th anniversary last December, has witnessed soaring bilateral trade, totaling $500 billion last year from $4 billion 1983 when it was launched. The discussions covered 40 topics in trade and investment and reached tangible results, according the Chinese Foreign Ministry.
Carlos Gutierrez, former US Commerce secretary, who now serves as a vice-chair of global strategy firm Albright Stonebridge Group, said even these talks don’t get into a lot of specificities, it is important to reach “broader agreements”.
“You have some people who are critical, and they want to see something just more than broad, but they don’t understand that the important thing is to agree on a general direction then the details happen,” Gutierrez said in an interview. “Every year we were making progress — maybe the words sound familiar but the execution was moving ahead — so this is a continuation,” noted Gutierrez, who participated in the JCCT during his term between 2005 and 2009.
“The top issues were issues during my time, so that means they are still around because they will take different shapes,” Gutierrez said of the recently-concluded JCCT.
Bilateral talks made further progress last July when the two countries announced at the close of the fifth US-China Strategic and Economic Dialogue their intentions to negotiate a US-China Bilateral Investment Treaty (BIT) that would cover all stages of investment and sectors.
The current round of BIT negotiations is being held in China and still is at “an early stage in the negotiations”, according to a US State Department spokesman without further details.
“A successful high standard BIT negotiation would support an open global economy by facilitating and protecting investment and enhancing transparency and predictability for investors of both countries,” said the spokesman, who asked not to be named.
Robert Kahn, a senior fellow for international economics at the Council on Foreign Relations (CFR), said State-owned enterprises, market access and property rights are major issues that the two sides should focus on in this ongoing BIT.
Heading into this year, another major talk that trade and investment experts are watching closely is the Trans-Pacific Partnership (TPP).
The US-led trade pact TPP — now with 11 other members ranging from Australia and Peru — was a regional free trade agreement among Chile, New Zealand and Singapore back in 2005. Japan and Mexico were among recent members of the trade pact that aims to promote trade, innovation and economic growth. China said last year it will study the possibility of joining the talks.
Justin Yifu Lin, former senior chief economist with the World Bank, said it is generally beneficial to join the pact because its role is getting more important in the global economy. Because of the size of the Chinese economy and its active dynamics in trade with other countries, it should “certainly participate in the discussion about the new trade framework”, said Lin. Impact on China
“China follows the progress of the TPP, is not currently in talks but does not exclude eventual membership. It is a prudent approach,” said Steinbock, adding that the pact became “less open and less inclusive” since the US joined it in 2010.
“Since the talks have been clouded in secrecy, it is hard to say because the pros and cons of the TPP membership depend on the final agreement,” Steinbock said.
Lavin, who founded Export Now, an online platform that helps US businesses to sell through e-commerce to China, said the main impact on China — if it joined — would be that it gains greater access to foreign markets.
“An additional impact is that China would have to allow its market to be more open and it would have to reduce or eliminate its subsidies to State-owned enterprises, so that they would fairly complete in the marketplace,” Lavin said.
CFR’s Robert Kahn said the process for China to join will be “tough” because there are challenges to get some agreements done.
“I think there is still hope to get the TPP agreement in 2014 but to get there you will probably need to have some real concessions made for the US,” said Kahn.
Kahn said even trade and investment talks such as the TPP and BIT will take some time, the two countries’ intention to continue to engage in the these negotiations will still be a “very positive” sign to the market and investors from both sides.
“When you are making an investment decision and if you knew this was the direction things were going you will feel a lot more comfortable,” Kahn noted.
“The US economy is probably going to be one of the better-performing economies this year (compared to Europe and the emerging markets) because there is more stability in the US in the sense that monetary policy is on a more predictable path”, said Kahn. Contact the writer at firstname.lastname@example.org
A customer looks at a Smithfield product at a grocery store in New York. Chinese company Shuanghuai, now named WH Group, acquired Smithfield for $4.7 billion, making it the largest investment by a Chinese company in the United States.