When Investing in the U.S., Look to the States

January 23, 2014

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The following is the English version of an article that originally appeared in China’s New Fortune magazine.

New Fortune Jan 2014

A recent report by the Economist Intelligence Unit (EIU) ranked 67 countries for their attractiveness as destinations for Chinese investment. Using investment criteria cited by Chinese companies in an earlier study, the EIU named the United States the most attractive country in the world for Chinese investment.1

That result may come as a surprise to Chinese businesses with global ambitions.  Most of the news about outbound investment by Chinese companies into the U.S. focuses overwhelmingly on the obstacles those companies face.  For every story about a successful deal, such as Shuanghui’s acquisition of Smithfield Foods, there are multiple stories about the troubles endured by Huawei or Ralls.  American media generally tend to cover bad news more heavily than good news, and this is equally true of news about China.

Even some Chinese voices express caution when discussing outbound investment to the U.S.  A recent story in the Global Times quoted a research fellow at the Chinese Academy of International Trade and Economic Cooperation as saying that “Chinese enterprises that expect to explore the overseas markets should be aware of the barriers they may encounter, including barriers of technologies, tariff and politics.”2

Of course, any company, whether domestic or global, should proceed cautiously when making new investments outside of their home markets. But that caution should be based on an accurate assessment of the environment in which they are investing.  Chinese companies should learn the right lessons from the experience of others who have gone before them; and although they should proceed carefully, they should not allow themselves to miss out on excellent opportunities for growth.

The fact is that Chinese investment in the U.S. is expanding rapidly and is still relatively small, given the sizes of both economies. The cumulative amount of Chinese investment in the U.S. is $35 billion – one-third which occurred just this year. Still, while China is now the world’s second largest economy, it ranks 13th in overseas direct investment. Clearly, there is a lot of room for growth. Chinese investors seeking to capitalize on this opportunity must first seek to fully understand what the most formidable obstacles are; why they exist; and where they are most likely to arise, in order to avoid them.

The obstacle to overseas investment that tends to get the most attention is political opposition– manifested most dramatically when the U.S. government blocks a deal by a Chinese company. In reality, this happens very rarely. The agency responsible for reviewing deals for national security concerns is the Committee on Foreign Investment in the U.S. (CFIUS).  As U.S. Ambassador Gary Locke has pointed out relentlessly, “A vast majority of foreign investments from all countries, including China, do not raise national security concerns.”3  CFIUS pays no attention to most Chinese acquisitions;  among those that do get reviewed, most are approved. The two biggest deals, Wanda’s acquisition of AMC Theaters and the Shanghui/Smithfield deal, were approved fairly promptly by CFIUS.

One important way for Chinese companies to facilitate investment in the U.S. is to steer clear of the national government and build relationships at the state level. State governors in the U.S. (the equivalent of provincial governors in China) are extremely welcoming of Chinese investment. The best evidence of this is the large number of state leaders who have visited China in order to strengthen commercial ties.

Consider the case of Michigan, whose governor, Rick Snyder, is among the most passionate advocates of attracting Chinese investment to his state.  He has visited China three times since becoming governor in 2011, most recently last September.  To date, there has been more than $1 billion in Chinese investment into Michigan, most of it connected to the automobile industry, which is based in Detroit.  But Governor Snyder promotes Michigan for much more than its capabilities in auto manufacturing.

Steve Hilfinger is Chief Operating Officer of the Michigan Economic Development Corporation, the state agency that promotes Michigan as a destination for investment.  He points to several successful Chinese acquisitions of companies in Michigan. These include the purchase of the battery manufacturer A123 Systems by Wanxiang, and the acquisition of Nexteer Automotive by the Chinese company Pacific Century, which bought Nexteer from General Motors. Hilfinger noted that Nexteer is the largest employer in Saginaw County, Michigan.  You can be sure that the people of Saginaw know the value of Chinese investment in the U.S.

But Hilfinger points out that Michigan manufactures a lot more than cars.  He says that any industry requiring high manufacturing skills and tight tolerances, such as medical devices and aerospace, can find the resources it needs in Michigan. He is particularly proud of the state’s public university system, which has 17 institutions. And he notes that one-third of the foreign students in Michigan’s public colleges come from China.  Finally, Hilfinger points to the city of Detroit as a place where huge investment opportunities exist.  It is a city that is working its way out of bankruptcy, but also one in which private investment is at an all-time high. Frankly, the city has nowhere to go but up.

Doug Rothwell, President and CEO of Business Leaders for Michigan, a private sector group that promotes investment in Michigan, also affirmed that Michigan is an ideal manufacturing location for Chinese companies. He advises Chinese companies investing in Michigan to “Become part of the community. Understand the community’s goals and make investments that fit the community’s aspirations.  Hire local talent and embrace local customs and culture.  Think of yourself as an American company located in Michigan with Chinese shareholders.”

There are many opportunities for Chinese investment in the U.S., but companies must be smart and informed when choosing where to invest.  To the extent possible, Chinese companies considering foreign direct investment should find targets that do not raise issues in Washington.  They should avoid sensitive industries and focus on states such as Michigan, which are aggressively courting their investment. That way, when they announce their investment plans, they will immediately have American allies advocating on their behalf: local supporters with a strong interest in the success of Chinese investors.  Even if concerns are raised in Washington, state officials will work with the Chinese side to help allay those concerns.

Just to prove how much Governor Snyder is committed to China, he has agreed to be the keynote speaker at a high-profile event celebrating the Year of the Horse. Organized by the Detroit Chinese Business Association, this Chinese New Year’s celebration will take place on February 27.  All Chinese companies who can make it to the event are invited – one good indication that they are extremely welcome in the state of Michigan.

1 China Going Global Investment Index, The Economist Intelligence Unit, www.eiu.com, 2013
2 http://www.globaltimes.cn/content/829073.shtml
3 http://www.scmp.com/business/china-business/article/1317163/no-special-hurdle-chinese-deals-locke-says