Many Chinese companies have been cashing in on a weak US dollar and stepping up their presence in the US mergers and acquisition (M&A) market in fields ranging from automobiles and oilfields to real estate. The path of snatching up inexpensive assets and operating them successfully is expected to be rocky, yet ultimately rewarding.
Karl Sauvant, executive director of Vale Columbia Center on Sustainable International Investment, a joint center of the Columbia Law School and the Columbia University Earth Institute, as well as several other experts in the field are trying to advise Chinese firms how to cut down on tuition fees in their expansion into the US.
With foreign currency reserves of $2.3 trillion and still rising by at least $200 billion a year, and a current account surplus, China can afford large investments overseas. But while it is a good time to buy inexpensive assets in the US, it is good only if it fits into the overall strategy of the Chinese company. It is believed that 80-90 percent of M&A activity from China is conducted by State-owned enterprises (SOEs), which has led to suspicions in the US that there are motives beyond normal commercial concerns, such as being part of the country's foreign or defense policy.
The Committee on Foreign Investment in the United States, a governmental agency that reviews national security implications of foreign investment, is required to screen every M&A case by a foreign state-owned enterprise, whether it's from China or France. And behind closed doors, screening of projects from China's SOEs might be stricter since many in the US still regard China as an adversary or strategic competitor on many levels.
Still, experts say they believe the US and Europe welcome FDI, and are more open in admitting FDI than China, already the largest FDI recipient among developing countries, including $60 billion from the US in the last three decades.
Before embarking on global expansion, Chinese companies are advised to prepare carefully, especially if it's in a sensitive industry. Sauvant, who also serves on the China International Investment Council under the Ministry of Commerce, attributed the failed acquisition of Unocal by China's CNOOC two years ago to a lack of preparation, such as not knowing how to navigate through the political corridors in Washington DC.
Preparation should also include human resource personnel who know how to make the M&A work in the US. A key to success for Chinese companies is clearly to blend in by helping the local economy and society and becoming a good corporate citizen.
Experts believe that China can learn much from Japan's experience in the 1980s. Studies show that inbound FDI form China in the US today displays a striking similarity to Japanese investment 20 years ago.
Even though Japan was an ally of the United States, investment from the country was criticized harshly by the news media, the public and politicians in the early 1980s for their employment practices and aggressive buying of some landmark assets such as the Rockefeller Center in New York. However, the Japanese learned quickly to adapt and thrive by improving their labor practice and contributing to community development. Today, Japan remains a major source of FDI in the US and Japanese affiliated companies employ some 600,000 US workers. And no one is picking on Japanese FDI like in the 1980s.
Sauvant, who has been editing the book Investing in the United States: Is the US Ready for FDI from China which will come off the press early next year, believes the challenge for Chinese firms will be greater, considering the suspicion toward Chinese firms as well as the bilateral trade deficit, currency dispute and rows over intellectual property rights.
Chinese firms are advised to carefully avoid any operational malpractices that would worsen the negative impressions of Chinese products and corporate conduct.
Despite the rocky roads ahead, experts believe that Chinese investment will be finally accepted in the US just like the Japanese FDI two decades ago.
(China Daily 12/04/2009 page8)