Better Get Used to It
The stars are beginning to align in US-China investment relations, as China ups its overseas investment game as part of a broad set of economic reforms, and the US pulls out all the stops to attract foreign investment to help meet its economic and employment goals.
China Doubles Its Investment in the US in 2013
Chinese investment in the US reached record highs in 2013, doubling to USD14 billion. This was mainly driven by big purchases in the food, energy, and real estate sectors. But China had strong interests in other areas too, as it boosted investment in advanced manufacturing, services, and consumer products, although its entry into those areas tended to be small and medium in size.
According to the Rhodium Group (www.rhg.com), which tracks Chinese investment in the US, the figures are remarkable given that in 2012 investment from China actually fell 36%. The total number of Chinese deals in 2013 reached 82, split between 44 acquisitions of American companies and 38 so-called “greenfield projects,” which usually involve constructing new facilities from the ground up and employing new workers.
At the same time, the average size of China’s purchases climbed significantly, with the top six deals accounting for more than 80% of its total combined investment value in the US. These included Smithfield, Nexen US, Mississippi Lime JV, Chase Manhattan Plaza, General Motors Building, and Wolfcamp Shale.
(Source: Rhodium Group)
Patience and Flexibility Key to Overcoming US Concerns About Chinese Investment
While the US is expected to continue to lay out the welcome mat for Chinese investment, China’s purchases of US companies have not been without controversy or obstacles. This is because of the close scrutiny given by the US government’s Committee on Foreign Investment in the United States (CFIUS), which is the body that looks at the national security implications of foreign investment in the US. But the reality is that the vast majority of China’s investments has been approved or has not even required approval by CFIUS. And experts say that when China’s investments run into trouble or fail, it’s mostly because of commercial factors, not politics.
By far the most high-profile and controversial Chinese acquisition in 2013 was that of US pork processor Smithfield Foods, Inc. by Shanghui International Holdings Limited for USD7.1 billion. The deal was approved by CFIUS in September 2013 after a 45-day investigation into possible national security implications. But its approval triggered intense debate in the US over foreign takeovers and the transparency of the US government review process.
That the Smithfield-Shanghui deal eventually succeeded the way it did should only lead to more investments from China. One important lesson from the purchase for Chinese companies hoping to gain a controlling interest in a US firm is that they should plan ahead and notify CFIUS early in the investment process of any possible national security implications that their deal might have.
Chinese and US firms also need to flexible when it comes to structuring their deals, particularly if they might have national security implications. For example, while most Chinese purchases received approval without running into problems, some were required to divest their sensitive businesses. In one case, according to the Association of Corporate Counsel (www.lexology.com/library/detail.aspx?g=8d72c8a1-d89b-4d95-83a2-9e5143d66f37), CFIUS approved the acquisition of A123 Systems Inc., a US lithium ion battery manufacturer, by a US subsidiary of Wanxiang Group, a Chinese auto parts manufacturer. The problem was that A123 had military and government contracts and had been awarded a US Department of Energy grant of approximately USD250 million. Despite political opposition to deal because of this, CFIUS went ahead and approved it, but required A123 to divest its government and military contracts. Wanxiang was also not permitted to have access to some of A123’s technology or assets. Such proactive restructuring can alleviate anticipated national security concerns, provided both parties are still keen on concluding the transaction.
China’s Private Sector To Play Bigger Role in US Purchases
One significant change that occurred in 2013 was that private Chinese investors, rather than the big state-owned firms, entered into more medium and large-sized deals with higher investment values, according to the Rhodium Group. Historically, private Chinese firms have always accounted for the vast majority of investments in the US – on average, more than 70% in the past five years. But while the number of investments has been higher, the actual value from China’s private sector has been comparably low. Last year saw a sea change, with activity by big state-owned firms having declined, remaining mostly limited to energy and a handful of manufacturing and service industries, such as aviation or telecommunications. In 2013, private firms accounted for 87% of transactions and 76% of total value, compared to 59% of total value in 2012.
2013 Was a Taste of Things to Come
So what are some of the factors driving Chinese investment in the US?
For starters, the domestic market in China is saturated with over-capacity from 30 years of high-speed growth. Many Chinese businesses are now looking for investment opportunities in the US as part of a strategy of expanding in the global market. Chinese companies also want to move up the value chain and become more innovative. For this, they need a skilled work force and technology for which the US is still a global leader. With a foothold in the US, Chinese firms hope to upgrade their knowledge and skills to better integrate into the global marketplace.
Another factor is that Chinese outward investment is going to be needed to help support the domestic economic reforms that Beijing announced last year at the Third Plenum. Some of these are the boldest reforms to have been proposed by China in decades, experts say. One linchpin of the new reform program will be letting markets allocate resources, which will affect the pricing of almost everything Chinese firms buy and sell. With greater market forces bearing down on them, Chinese firms will then have to adjust their business models and move up into higher value-added production.
Going abroad will be key to this adjustment. By allowing Chinese firms to acquire strategic assets, increase their access to experienced and talented staff, and learn about regulations in advanced economies, the Chinese government hopes that the country’s competitiveness will also be strengthened. The reforms should bolster China’s outbound foreign investment stock from its current USD500 million to $1-2 trillion by 2020, according to a projection by the Rhodium Group.
For the US, it’s all about jobs and spurring economic growth. Since 2011, the Obama administration has been promoting foreign investment into the US as a way to accomplish its economic goals. It created SelectUSA, the first fully coordinated US government effort to recruit overseas business investment. Last November, the US held its first-ever Investment Summit in Washington DC (www.selectusasummit.com), which brought together 1,200 investors from nearly 60 countries. Over 100 investors were from China and the Greater China region. The message the US gave was clear: America remains one of the best destinations for foreign investment with skilled workers, a huge market, and innovative entrepreneurs.
And with growth rates in the US and the EU expected to pick up in 2014 and beyond, while Asia slows, the two markets are expected to lead the global economic recovery, according to bankers, corporations and development agencies who attended the recent Asian Financial Forum in Hong Kong. Among factors that should drive the US economy forward are cheap energy brought about by advancements in shale-gas extraction, a growing supply of low-cost but efficient labor, technology-driven productivity gains, and the availability of cheap capital.
All this has not gone unnoticed by Chinese business leaders. The head of China Investment Corporation (CIC), who manages its USD575 billion sovereign wealth fund, recently predicted that developed economies were set to expand faster than emerging markets. This has prompted CIC to look at strategic investments in the US, including shale-gas projects and stakes in manufacturing and technology firms. With such votes of confidence backed by deep pockets looking for higher returns, 2014 should be another record year for Chinese investment in the US.