A New Asian Invasion
A New Asian Invasion
In the banks and boardrooms of New York, the jargon of global capitalism found a new name for the world's largest communist power: the "aberrant buyer".
This week, Chinese companies have muscled in on two of the highest-profile deals in the US, with takeover bids that are shaking up the market for mergers and acquisitions and raising political tensions between two countries with an already strained relationship. China National Offshore Oil Corporation (CNOOC) plans an offer worth $19.6bn for Unocal, the oil group, while Haier, a maker of domestic appliances, is leading a $1.28bn approach for Maytag, known for its Hoover vacuum cleaners.
The bids, both trumping earlier deals led by US buyers, follow other Chinese acquisitions, such as the takeover by Lenovo of IBM's personal computer business, and form part of a wider trend of companies from emerging markets looking to acquire expertise from developed economies. The arrival of Chinese buyers brings obvious comparisons with the influx of Japanese investors to the US in the late 1980s and early 1990s, which coincided with similar fears of rising economic dominance from Asia.
But in contrast to the Japanese acquisitions of New York's Rockefeller Center, the Pebble Beach golf course and Hollywood film studios, Chinese companies seem more interested in industrial businesses than trophy assets.
As purchasers, they are attractive to sellers from the US and Europe because they can afford to take a radically different approach in assessing how much long-neglected assets are worth. China's strategic desire for natural resources, global brands and a short cut to international markets, combined with unprecedented access to cheap money from the country's state-owned banks, means its companies are ready to outbid more traditional trade purchasers and private equity groups.
"In M&A, the aberrant buyer wins, and today Chinese companies have the advantage of extraordinarily cheap financing," says Michael Klein, head of global banking at Citigroup. "They will seek to lock in this opportunity in the same way that an internet company such as AOL used its currency to buy Time Warner."
"There is a lot of action and a lot of interest," says Michael Gisser, a mergers and acquisitions partner at Skadden Arps, a New York law firm. "Even if only a dozen deals get done in the next year or two, it will have a sizeable impact, because these are generally not small acquisitions."
Chinese buyers are also suspected of a different sort of aberrant behaviour, however. The interest in Unocal and Maytag has reignited fears that the Asian giant is not playing fair in its attempts to build global champions.
In the case of Maytag, the worry is that Chinese ownership may accelerate the loss of manufacturing jobs from the US, especially if the owners decide that its brands and marketing channels are better off without its relatively high-cost factories in the Midwest. Though Haier already operates one US manufacturing plant, the fear of Chinese asset-stripping among Maytag employees is such that many favour another takeover proposal led by US private equity firms – a class of investor hardly known for reticence in cutting costs.
On Unocal, worries over losing a valuable national asset are complicated by concerns about US energy security and China's appetite for natural resources – even though Unocal's reserves are largely outside the US. Thomas Donnelly, a defence expert this year appointed to the US-China Economic and Security Review Commission, which reports to Congress in Washington on the security implications of bilateral financial ties, is among those urging caution. "I think there is a fairly strong argument [in favour of blocking a CNOOC/Unocal deal] not simply because Unocal is a national asset," he says. "Part of the picture is also the strategic question of how China is approaching energy supplies."
Dick D'Amato, the commission's chairman, argues that – unlike when Americans were concerned about Japanese acquisitions of US assets – there is little goodwill to ease difficulties with China. "There is a currency issue, the intellectual property issue, on North Korea they are not helping us, we have this big military build-up . . . What in this relationship is working?" asks Mr D'Amato.
Many in Washington agree, at least that the timing is awkward. William Reinsch, president of the National Foreign Trade Council, a business organisation, warns that "paranoia" about Chinese activities is growing. "There has always been a distinct minority of people who are highly suspicious of the Chinese and believe we are heading into conflict with them," he says. "They are always there in the woodwork – under any administration – and unfortunately the Chinese make that easy from time to time."
The depth of feeling is easy to overstate, not least because of the difficulty in translating it into action (see below) and one important distinction exists between this issue and other tensions between the US and China: American business has little or no desire to oppose Chinese acquisitions – not least because it has far more at stake in investments going the other way.
The National Association of Manufacturers, which has been vocal in protesting against what it sees as China's manipulation of its currency, is typical of business lobbies that are taking a relaxed stance on takeovers. "We have our issues with China, but investing in the US is not one of them," says Frank Vargo, NAM vice-president for international economic affairs. "If they were to buy companies simply for the purpose of acquiring brands and shutting down factories, that would be a problem, but I don't see that as very likely." Lee Raymond, chief executive of Exxon, spoke for many of America's larger businesses on Tuesday when he said it would be a "big mistake" for Congress to interfere in a bid by CNOOC.
Nevertheless, hawks like Mr D'Amato scoff at the suggestion by the US Chamber of Commerce and others that Chinese acquisitions of US companies simply represent capitalism at work. "The government of China is leading these acquisitions – this is government-led policy, this isn't capitalism," he says.
After an initial flurry of deals, mainly in resources, Chinese enterprises are branching out, making offers in the last year in sectors covering computers, cars and car parts, telecommunications, white goods and textiles. Nearly all of the companies making the bids are state-owned, or were founded by arms of the state, and are going overseas with the explicit backing of the government's industry policy.
"The government is pushing to create national champions to reduce dependence on foreign technology," says Paul Gao, of McKinsey, the consultancy firm, in Shanghai. "They have looked at Japan and South Korea and they see the success of these two countries' native-born entities."
Whereas Japan and South Korea fostered local champions by blocking direct foreign investment, China has run a relatively open economy and actively solicited the entry of foreign companies. In the process, however, Chinese enterprises, especially in value-added export sectors, have come to depend on foreign technology and have failed to develop brands. State-owned companies thus have a mandate from Beijing to look overseas for deals – though concluding any purchase remains subject to official approval.
Gatekeeper for overseas investments is the National Development and Reform Commission, China's top economic planning body, which has substantial powers over foreign purchases made by government-backed enterprises. All significant investments overseas must be approved by the State Council, China's cabinet, but the deals are first scrutinised by the NDRC, which exercises a sway over enterprises similar to that wielded in the 1960s by Japan's ministry of international trade and industry.
The approval process reduces the speed at which Chinese companies can strike deals overseas – one factor that is hampering Haier in finalising a bid for Maytag – and limits their flexibility in negotiations. "If there is some uncertainty about getting approval and how long it will take, then a seller has to take that into account," says Kurt Berney, a partner with O'Melveny and Myers, a law firm, in Shanghai.
The NDRC's role as a planning body has been diminished by its failure to predict power and raw material demand during China's growth surge since 2001. Still, scepticism within the NDRC about the wisdom of Shanghai Automotive Industry Corporation buying MG Rover made it difficult for the Chinese car company to proceed with a full bid for the British enterprise, which ceased production as a result.
The NDRC's oversight role in part reflects domestic controversy over the outward investment policy. Many Chinese officials and academics worry that inexperienced companies may squander money on ill-judged deals, as the Japanese did in the 1980s and 1990s.
Beijing favours investment both ways in order to deepen economic ties – especially with the US, create constituencies for China in Washington and ease bilateral political tensions. Less clear is the extent to which the authorities seek to control the pace of expansion abroad in order to avert political problems around "China Inc". Lenovo's deal to buy IBM's PC business was delayed until after the 2004 US presidential election, say executives with knowledge of the transaction. But they add that the decision to wait was taken by the company and its advisers, not the government.
Though Lenovo's success has encouraged bidders such as Haier and CNOOC, the scale of the US political backlash depends greatly on how they treat the acquired businesses. Judging how big Chinese groups integrate their US targets is hampered by the short record of such acquisitions. But in the industrial Midwest, smaller Chinese companies have been snapping up distressed – often privately held – automotive and engineering companies and some lessons are becoming evident.
The century-old Ingersoll Production Systems, an Illinois-based maker of systems for building automotive power trains, was bought three years ago by Dalian Machine Tool, China's largest machine tool maker. The Chinese company not only retained all 65 employees but made the acquisition contingent on one of them, Phil James, being chief executive of the unit. Mr James says: "They wanted it to be locally managed. They understood that there would be cultural issues and they wanted to work with somebody they knew."
Top executives of Dalian Machine Tool visit Ingersoll about once a year while Mr James goes to China "frequently". He adds: "I don't know if this is true of all Chinese companies but it's true of this one: they are very long-term in their thinking and they have been very hands-off."
The case shows how Chinese companies are as keen to acquire American management techniques as they are to buy into distribution systems or technology – a factor that may lead them to tread carefully.
Mr James is now a member of Dalian Machine Tools' board, advising on international strategy. He concludes: "They recognise that for them to become global they have to learn a lot about American management practices. But this is not a 12-month process."
Definition of 'national security' to be tested
Whether Fu Chengyu, the chairman and chief executive of CNOOC, is able to take over Unocal will ultimately be decided by an opaque government panel in Washington: the Committee on Foreign Investments in the US, writes Stephanie Kirchgaessner.
The committee was established in its current form during the administration of former president George H.W. Bush to vet foreign acquisitions of US assets and companies on national security grounds. Today, the question of what role it should play in approving or blocking international acquisitions of US companies is hotly contested.
The committee has blocked only one deal – the takeover of Mamco Manufacturing by a Chinese company in 1990 – but through indirect political pressure it has derailed a handful of other transactions. Under CFIUS guidelines, the committee must decide whether it will review a case within 30 days of receiving notice of the intended transaction and is given up to 90 days to investigate the deal.
At the centre of the arguments over the committee is the question of how the inter-agency panel should define national security. Should the US, as some argue, treat the preservation of its economic interests – whether through trying to maintain leadership in some industries or through control of natural resources – as fundamental to its national security?
Critics say that the committee, which is chaired by the Treasury department and includes representatives from the departments of commerce, homeland security, justice and defence, has been too lax in its oversight of acquisitions and too narrow in its focus.
Dick D'Amato, the chairman of the US-China Economic and Security Review Commission, who helped draft the statute that created the committee, says he believes it is not functioning properly.
"The Treasury has been unwilling to stop many of these transactions or even call them into question. After thousands of transactions they have intervened in less than five. There is something about that that bothers me," he says.
One Washington lawyer and CFIUS expert says there have been two shifts in the way the committee has operated in recent years. "The first is that the government is now interested in a much broader set of acquisitions that affect critical infrastructure and not just defence or other security-related companies. The second is an obsession with China," the person says.
That obsession was made evident to IBM this year, when the technology company's planned $1.75bn sale of its personal computer business to Lenovo, a Chinese PC maker, was reviewed by the committee under intense political pressure from some Republican congressmen, who said the deal raised national security concerns.
Although the sale was ultimately approved with some security-related modifications, the three-month review underscored the political sensitivity of deals with Chinese companies.
Mr D'Amato says he believes CFIUS needs a revamp, beginning with its leadership. He proposes that the office of homeland security should chair the committee, that it ought to be more transparent and that it should report to Congress.
Donald Manzullo, an Illinois Republican who chairs the House of Representatives' small business committee and a critic of the
Lenovo deal, calls the Committee on Foreign Investments a "secret society" that lacks accountability and must begin vetting deals beyond the traditional definition of national security.
Oil, Mr Manzullo says, fits into that category. "With Unocal, the Chinese have a great need for energy. Should the Chinese government – because the Chinese government equals CNOOC – be allowed to buy Unocal and further manipulate prices? What happens if the world oil supply is hoarded? Isn't that a national security issue?"
Additional reporting by Jeremy Grant and Francesco Guerrera