China Daily Global Edition (USA)
CHINESE INVESTMENT: A decade’s journey in the US
Chinese investment in the US began to increase in scale around 2007 and 2008, and then continued to grow in the next 10 years or so. According to Rhodium Group, a New York-based research company that closely follows Chinese outbound investment, the cumulative value of that investment exceeded $109 billion by the end of 2016.
There are more than 3,200 Chinese-owned operations in the US, found in 98 percent of US territory. They cover almost every major industry and provide more than 140,000 jobs.
In this article, we retrace the journey of that investment and examine its current state.
Rise of Chinese investment in the US
Foreign direct investment (FDI) between China and the US long had been a one-way street — from the US to China — starting in the late 1970s, when China opened up and welcomed foreign investment.
In that process, China became the world’s factory, and about a decade ago, with its emergence as the world’s second-largest economy, China started investing in the US.
Data from the Ministry of Commerce show that since 2014, the amount of new Chinese investment into the US has surpassed that from the US to China. Rhodium’s data in the following chart show that FDI from China has grown steadily during the past decade, reaching a record $46 billion in 2016, which makes China one of the top sources of FDI in the US.
In the past five to six years, Chinese investment worth billions of dollars has made headlines in the US, including acquisitions such as Shuanghui (WH Group) buying Smithfield Foods for $7.6 billion in 2013; Lenovo purchasing Motorola for $2.91 billion in 2014; and Haier securing General Electric’s home appliances businessfor $5.6 billion in 2016.
There also were several headline greenfield investment projects, such as Shandong Yuhuang investing $1.85 billion in a new methanol plant in Louisiana; Shandong Sun Paper pouring in $1.3 billion to launch a new factory in Arkansas; Fuyao Glass spending $600 million to convert an abandoned GM factory in Ohio; Geely’s Volvo contributing $500 million for an auto production facility in South Carlonia; China Jushi allocating $300 million to produce fiberglass in its new plant in South Carolina; and Golden Dragon breaking ground for a copper tube manufacturing facility in Alabama with an investment of $100 million.
Forces that drive the investment
What has driven this growth? A few forces stand out.
More relaxed regulations and incentives from the Chinese government encouraged companies to go abroad. That, combined with the companies’ own needs to enter the global market, has propelled the capital flow.
In the process of China becoming the world’s second-largest economy and due to its interaction with the global market, many Chinese companies have matured into big corporations with the potential and aspirations to become world leaders.
To achieve that, they needed to increase their strength in areas such as advanced management skills, cutting-edge technologies and premium brand recognition. Investing in developed countries such as the US offered that opportunity.
The changing dynamics in China’s economy and society also have pushed Chinese companies to look abroad. Labor costs are steadily rising; raw materials are no longer as abundant and affordable; many products have reached saturation levels in the domestic market; and a growing middle class is increasingly looking for premium foreign products and services.
Chinese companies are watching their competitive advantage lessen domestically and need to look elsewhere to regain it.
According to a 2015 China General Chamber of Commerce-USA survey, among more than 140 Chinese companies in the US, the top five reasons for them to invest in the US are: to gain US market share; acquire advanced management knowhow; get access to advanced technology; meet the demand of overseas development for existing clients; and enhance corporate image.
Other reasons include producing goods in the US to supply to China, reducing dependence on the Chinese market and cutting the cost of international trade.
For instance: Shandong Yuhuang’s new plant will produce methanol for the Chinese market by making good use of North America’s abundant low-priced natural gas; Hisense Group’s acquisition of Sharp America will provide access to the global TV market and retail channels charted by Sharp; Fuling Plastic’ setting up a manufacturing facility in Pennsylvania is not only to reduce the cost of transporting its plastic service ware to top US fast-food chains, but also to meet clients’ demands for providing closer services; and Fosun Group’s acquisition of multiple entities in the US is to meet its goal of being a global investment firm catering to the Chinese middle class’ demands for healthcare and an affluent lifestyle.
Investment patterns and trends
FDI usually is achieved through greenfield projects and mergers and acquisitions (M&A). According to Rhodium Group, M&A is the dominant entry mode for Chinese investors in the US, but greenfield investing has surged in recent years.
Some Chinese companies have used a combination of both approaches.
Major appliance maker Hisense Group — after more than 10 years of building brand recognition in the US market and gaining entry into major wholesalers such as Wal-Mart, Best Buy, Costco and hhgregg — acquired Sharp America for $23.7 million in July 2015.
Wanxiang Group, China’s largest auto parts manufacturer, started its US operation in 1994 as a small sales office in a Chicago suburb. It gradually became a major supplier to the Big Three automakers (Ford, General Motors and Chrysler) and later acquired more than 100 assets and operations in 26 states, with more than 16,000 employees.
Although Chinese companies invest in almost all major industries, a few fields stand out as most attractive to investors.
According to a report issued by the Asia Society and Rosen Consulting Group in April 2016, China ranked third in US commercial real estate-acquisition volume in 2015, with Chinese developers building multibilliondollar projects in several major cities, including New York, Chicago and San Francisco.
Chinese capital also has poured into Silicon Valley in Northern California to take advantage of its talent pool, innovation, research capabilities and opportunities for startup collaboration in the technology industry. Major internet and high-tech companies all have set foot in this booming area.
The automotive industry is another where Chinese investors aspire to become major players. The financial crisis of 2008 significantly reduced the value of many US auto parts makers, a good number of which were acquired by Chinese companies afterward. Detroit and its nearby areas now have more than 100 Chinese companies in the auto parts field.
A turning point in 2017
Chinese investment in the US, however, started to shrink in early 2017 and continued the trend throughout the year. Rhodium’s data show that overall Chinese FDI in the US dropped by 35 percent in 2017 to $29 billion.
Considering that more than half of the 2017 transaction value actually came from the completion of pending deals in 2016, the drop was even sharper.
The decline is partially due to the Chinese government’s adjustment in regulating FDI, especially investments made by state-owned enterprises and in the fields of real estate and hospitality, and sports and entertainment.
At the end of 2016, concerned about the drain of foreign reserves due to a decade or so of Chinese companies going abroad, and due to the realization that the development of Chinese enterprises overseas was not necessarily healthy, the government began to shift its overall accommodative approach to a more selective one, scrutinizing new big investment projects and discouraging “irrational” and “disguised” investment.
The uncertainty of the US political environment under US President Donald Trump’s administration, which has shown a tendency to take a more protectionist approach to trade, and the increased scrutiny of Chinese investment by US governmental agencies, especially the Committee on Foreign Investment in the United States (CFIUS), also have played a role in slowing the flow of Chinese capital to the US.
According to Rhodium, an unprecedented number of Chinese deals were delayed or abandoned in 2017 as parties failed to obtain approval from CFIUS, which screens foreign acquisitions for potential national security risks.
Those scuttled deals included Canyon Bridge Capital’s acquisition of Lattice Semiconductor, Ant Financial’s proposed acquisition of Moneygram Financial, and the most recent: Huawei’s agreement with AT&T to provide smartphones to its US customers.
A group of US senators and congressmen initiated a bill in 2017, the Foreign Investment Risk Review Modernization Act, or FIRRMA, which defines China as one of the “countries of special concern”.
The bill will expand the scope of CFIUS screening, and it appears to already have affected CFIUS’ approach, especially to Chinese M&A activity in information technology.
In its annual report to the US Congress published in September 2017, CFIUS said that Chinese deals made up 29 percent of the 143 transactions it reviewed in 2015, the highest among all nations.
Even though global Chinese FDI started to rebound in the second half of 2017 after Beijing completed its policy adjustment, increased US regulatory oversight and uncertainty continued to discourage Chinese FDI in the US throughout 2017.
According to a survey conducted by the China General Chamber of Commerce - USA (CGCC) in 2017, among more than 200 Chinese companies polled in the US, one-fourth of the respondents consider the CFIUS review process to be politicized and opaque.
Fifty-three percent believe that the US government will increase its regulatory oversight, and 63 percent believe that M&A transactions involving Chinese companies will be subject to more frequent and stringent reviews.
Continue to gain confidence and expand in the US
Even though, compared with the 2016 amount, Chinese FDI slipped significantly, the total of $29 billion is still the second-largest year on record during the country’s 10-year or so investment path in the US, according to Rhodium Group.
And though 2017 did not see big deals by Chinese companies, it was a year that Chinese companies that already have invested in the US consolidated or expanded their market share and investment scale.
Electric bus builder BYD, which has manufactured many environmentally friendly buses for a number of large US cities, added a wing to its plant in Lancaster, California.
Auto parts maker BWI opened its first US plant in Indiana after acquiring part of Delphi Automotive eight years ago and expects to create 450 jobs.
Worldlawn, a lawnmower-maker in Nebraska, expanded its facility, anticipating a rising market share.
Sanhua, a supplier of parts to the heating, ventilation and air conditioning (HVAC) and refrigeration industries, hired more workers for its plant in Mississippi.
CW Bearing, another auto parts maker, moved to an expanded headquarters in Michigan and acquired a company to consolidate production.
Those companies’ activities in 2017 are in line with the results of the CGCC survey.
A majority of the more than 200 companies surveyed expressed optimism and confidence about their US investments. Sixty-one percent said they have expanded their business activities in the US, and 71 percent said they will increase their workforces. Fifty-three percent said they maintained their market share in the US, and about 40 percent said they have increased their share.
In the years ahead, the overall China-US relationship will no doubt continue to experience ups and downs. The bilateral investment dynamic, however, very likely will still play its role as the “ballast” and “buffer” to the larger relationship, as the Chinese government often put it, due to investment’s interweaving the two countries’ economy and enhancing the two countries’ interdependence, which affect the lives of citizens in both countries.