by M. Ulric Killion
CNOOC's chairman, Fu Chengyu, left, and its executive director, Zhou Shouwei, spoke in March [2005] after the company reported a surge in profit; Photo/Vincent Yu/AP (Heather Timmons, China Oil Giant Expected to Vote Wednesday on Unocal Bid, NY Times, June 22, 2005). In August 2005, Chairman Fu eventually made it official: “after fencing with Chevron, the U.S.-based ‘super major’ oil company, for the right to buy Unocal and its extensive oil and gas assets in Asia, CNOOC was giving up the fight,” (Bill Powell, Sunset for a Deal, NY Times, August 2005).
There is an article appearing in the China Daily (Dec. 4, 2009), which serves as a reminder of the struggles of Chinese investments in foreign markets, especially the U.S. market. The article is from a column written by Chen Weihua and is titled “Hard journey for Chinese investment in US” (China Daily, Dec. 4, 2009). Chen writes:
"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. [Italics added].
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."
The portion of Chen Weihua’s article, which seems appropriate to italicize or emphasize in this short writing, addresses the August 2, 2005 announcement of the China National Offshore Oil Corporation (CNOOC) to withdraw its bid to purchase California-based Unocal. Before CNOOC’s announcement, on July 20, 2009, the Unocal Board recommended that its shareholders accept the bid by Chevron. The justification for accepting Chevron’s bid is that the bid submitted by CNOOC was not high enough to offset political uncertainties that associate with the purpose (Institutional Shareholders Services Statement, Aug. 1, 2005). The later justification for a failed acquisition may appear spurious to some, but rational to others.
The reason for emphasizing this portion of Chen’s article should now become obvious. This is because the article reminds us of the historical significance of the attempted acquisition by CNOOC. Such as the issues of free and fair trade; old forms and the seemingly evolving new forms of creative protectionism; the acquisition of foreign assets that may be characterizable as strategic; the geopolitics of oil; and of the struggles of China and/or Chinese enterprises in acquiring or investing in foreign assets, especially in the context of the U.S. market.
The attempt at acquisition by CNOOC, admittedly, was not the first instance of China and/or a Chinese enterprise attempting to purchase a U.S. firm or U.S. assets. For instance, in December 2004, China’s Lenovo Group purchased IBM’s PC unit. In the context of a U.S. market, China’s acquisition efforts actually commence as early as 2002. This earlier effort commences, in 2002, when the China Netcom Communications Group purchases the Asian subsidiary of Global Crossing. Notwithstanding the failed acquisition of California-based Unocal, this was also not China’s first foray into the geopolitics of oil. This is because, in 2005, CNOOC did manage to purchase a 17 percent interest in MEG Energy in Canada. During the same period, in 2005, China’s Sinopec also purchased a 40 percent stake in the Canadian oil sands project.
In terms of the political environment of a U.S. market, what follows was a predictable response to the CNOOC’s attempt to purchase Unocal. A U.S. congressional response actually ensues immediately following the submission of a bid by CNOOC, as there was a stir in the halls of congress as early as June 25, 2005. In other words, once the U.S. Congress caught wind of the proposed and potential acquisition by a Chinese firm, some members of the U.S. Congress immediately geared up to take legislative action. Peggy J. Crawford, PhD, and Terry Young, PhD, (Fair Trade or Strategic Concern: The Unocal War, Garziadio Business Report, Vol. 11, Iss. 3 (2005)), summarizes the U.S. congressional response as follows:
“. . . 41 members of Congress sent a letter to Secretary of the Treasury John Snow asking the Committee on Foreign Investments in the United States to “perform a thorough review” of the offer to determine whether CNOOC was using government funds or purchasing sensitive technology. The House of Representatives passed two bills in late June that would block the proposed takeover because it “could threaten to impair the national security of the United States.” Then during hearings on July 13, 2005, Rep. Duncan Hunter (R-Ca.), chairman of the House Armed Services Committee, said that Chinese ownership of Unocal would compromise U.S. national security and that he would try to stop the acquisition if Unocal shareholders or President Bush didn’t. Other witnesses at the hearing, including former CIA Director James Woolsey and Frank Gaffney, president of the Center for Security Policy, emphasized the strategic value of oil and the failure of China to follow international economic rules”. (Internal citations omitted).
As earlier mentioned, the attempt by CNOOC to purchase Unocal serves as a historical lesson and reminder of the roads that both China and the United States have taken into the foray of the world multilateral trade system. The date of CNOOC’s attempt to purchase Unocal, which is in 2005, also corresponds with China’s subsequent accession to the World Trade Organization (WTO).
In the aftermath, as we approach the year 2010, China has admittedly engaged in the global market, while both China and the United States seemingly employ both old and new (or creative) forms of protectionism (e.g., Buy American legislation; Buy China provisions; evolving forms of AD/CVDs, etc). The later is a truism that seems applicable to all members of the WTO.
In these respects, and borrowing from the title of Chen’s article, it is true that there is a “hard journey for Chinese investments in the US.” However, is it not likewise true that there is an arduous journey for American investments in Mainland China? Notwithstanding there are successful American investments in Mainland China, it is still a difficult journey. Both countries present their own distinctive variety of protectionism against foreign acquisition, especially in the market of key industries, geopolitics of oil or strategic assets. The difficulties of foreign investments on both sides of the Trans-pacific share equal blame. Moreover, it is problem that will persist so long as countries continue to employ old and new forms of protectionism, notwithstanding countries truly embracing the ideals and aspirations embodied in the WTO agreement.
Copyright © Protected - All Rights Reserved M. Ulric Killion, 2009.
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