Chinese companies are buying up U.S. companies and other assets at a record pace in 2012. The country is spending some of its huge dollar holdings before they depreciate, while acquiring – in addition to hard assets in the U.S. – the market share, technological know-how, talent and training expertise that often come with them.
In the past, China's designs on acquiring U.S. companies have hit strong resistance on national security grounds. Last year, for example, China's largest telecommunications equipment company – Huawei – voluntarily walked away from its acquisition of 3Leaf, a U.S. server technology company, under pressure from the U.S. government. The U.S was concerned about Huawei's connections with Chinese security services (the company was founded by a People's Liberation Army soldier), though Huawei said it had no connections with the Chinese government. Earlier attempts by Huawei to buy a network company – 3Com Inc. – and to sign a contract with Sprint Nextel worth billions of dollars were also turned aside over national security concerns in the U.S. In 2005, the U.S. nixed efforts by the Chinese oil giant CNOOC to buy up UNOCAL, a U.S. oil company.
To shed some light on the latest run at U.S. companies by Chinese firms, Knowledge@Wharton asked two Wharton management professors to offer their thoughts on Chinese acquisitions and the potential for a U.S. backlash. They are as follows:
I view the [potential U.S.] backlash (as in UNOCAL-CNOOC) as idiosyncratic and unpredictable. Step back from particular acquisitions – or the number of acquisitions – and ask how the U.S. public views Chinese economic strength.
First, the public believes that China is stronger economically than the U.S. (we used to believe Japan was stronger).
Second, U.S. public opinion is not particularly apprehensive about growing Chinese economic strength – we're more apprehensive about growing Chinese military strength.)
Third, there is little or no partisan divide on attitudes toward Chinese investment in the U.S. Democrats are prone to bash China on jobs, of course; Republicans will bash China on national security issues. Within the parties, especially the GOP, there are deep fissures on China. The Cato Institute, for example, wants open markets, while The Heritage Foundation tends to see "other-than-market" considerations driving Chinese acquisitions in the U.S. Rick Perry embraced the Hauwei investment as part of his "Texas miracle" program, and was bashed by the far, far right for his stance on Hauwei.
China rebuilt the port of Boston and no one peeped. But when a Chinese company proposed to acquire a U.S. petro firm whose assets were mainly in Asia, Congress reacted. The difference is public relations: COSCO (the Chinese shipping company that built the port) had deep experience lobbying the Congress, while CNOOC (the Chinese oil company) at the time did not. CNOOC has since gotten wiser and is utilizing top lobbyists in its current push to acquire the Canadian energy giant Nexen. But Canada's right wing is pushing back on China, and it isn't clear where this will end up.
China needs to spend their foreign reserves before they depreciate. But they cannot spend these reserves domestically without pushing the renminbi upward. Hence, China's investment goes outward. The reaction [in the U.S. and elsewhere] is driven by whether the motive is interpreted as financial or "other than market."
There are some U.S. companies starved for cash who turn to China, for example, in auto parts where Wanxiang (China's largest auto parts maker) is buying a lot. Equally important, there are Chinese companies wanting to diversify outside of China due to the inherent risks at a time of government transition, and that will pay premium prices for the privilege. (I cannot find another explanation for Beijing Oceanwide Realty's investment in Lenovo's parent company, Legend Holdings.) But don't imagine that all Chinese companies go out from strength. Often it is from weakness. Or fear. It's a complicated story.
China holds a large proportion of outstanding U.S. government bonds. [This is] because they have a large amount of foreign currency reserves. Chinese companies would also like to buy other types of assets, especially those [that provide] access to market share, technology or other resources in the U.S.
There are several policy issues here. First, the U.S. is committed to free capital flows, so curtailing foreign investment in the form of M&As carries costs.
Second, having said that, the U.S. should be concerned if the acquirers are foreign state-controlled companies, no matter the country of origin. This is especially true for "national security" industries.
Third, we should get used to this type of headline. More and more Chinese firms, and firms from emerging economies in general, will engage in M&As in Europe and the U.S.