Why U.S. angst over Chinese buyouts is warranted

By Shihoko Goto
January 27, 2014

For some people, Jim Beam may be more American than apple pie. Yet the U.S. public took it in stride earlier this month when Suntory, a Japanese conglomerate, bought the bourbon distillery for $13.6 billion.

This was a sharp contrast to U.S. reaction when a Chinese meat producer sought to buy the ham producer Smithfield Foods last year. The deal came under heavy attack. Shuanghui International Holdings faced formidable opposition on Capitol Hill last summer. Union workers and consumer advocates voiced well-publicized concerns about food safety and security.

By year end, though, Shuanghui was able to close the deal for $4.7 billion, the biggest takeover of a U.S. company by a Chinese group.

But worries about Chinese takeovers of key U.S. companies are a deepening concern to both policymakers and consumer advocacy groups. And the American public has reason to be wary of these acquisitions.

It would be folly to dismiss worries about the Smithfield buyout as a cultural misunderstanding or irrational fear. U.S. concerns about Chinese buyouts are not simply déjà vu of the American worries during the Japanese buying spree of the 1980s and ‘90s. Instead, we need to understand China’s rationale behind this acquisition, and examine how it may affect U.S. consumers. We also should explore how this deal fits into the larger picture of Beijing’s overseas asset-buying strategy.

Some now dismiss the current U.S. fear of an insatiable Chinese appetite for all things American as an over-reaction. After all, the argument goes, when Japanese lust for U.S. assets spiked roughly two decades ago — Japan’s buying spree ranged from Rockefeller Center in New York City to the Pebble Beach golf course in California — American hostility toward Japan also surged. But it eased as Japan’s economic fortunes plunged and the Japanese relinquished their hold on some major purchases — many of which had been based on irrational business decisions.

China’s spree, however, is far different. Not only does the Smithfield deal give China’s biggest meat processor a U.S. foothold, it is viewed as a template for many future large-scale buyouts of U.S. companies by Chinese conglomerates.

“Smithfield might be the first acquisition of a major food and agricultural company,” Senator Debbie Stabenow (D-Mich.), chairwoman of the Senate Agriculture Committee warned last July, “but I doubt it will be the last.”

What sets these Chinese acquisitions apart from most other foreign purchases is that Chinese entities are state-owned — and so driven by national interests as well as economic. Chinese investments in the United States doubled in 2013, according to a recent report on Chinese foreign direct investment trends by the Rhodium Group.

If 2013 marks the first year of a wave of Chinese acquisition of U.S. assets, it may also mark the beginning of Chinese authorities’ strategic maneuvering for U.S. interests.

After the Smithfield buyout, Chinese companies are now better equipped to address the various hurdles that future acquisitions may face. It has allowed Beijing to think through what its real needs are, and to experience the public relations campaigns critical to winning over the U.S. public.

Beijing’s appetite looks strategic — focusing on energy and real estate, as well as food. These economic sectors are key to ensuring China’s domestic growth. Buying out Smithfield or Chesapeake Energy is no vanity purchase, driven by a company’s ego — like so many of Japan’s acquisitions at the height of the 1990s economic bubble. Rather, it reflects Beijing’s longer-term vision for its own national security.

Shuanghui’s determination to buy Smithfield despite the many obstacles demonstrates that the corporation is serious about making this investment yield returns for the entire Chinese economy, not just the company’s bottom line.

Meanwhile, given many Chinese companies’ poor track record in adhering to food safety standards, U.S. consumers should be worried about how the new ownership may affect their diet. Though it may increase U.S. agricultural export opportunities, it could also result in lowered standards.

Food safety scares are an increasingly serious problem in China. Pesticides are often misused and toxins have been found in many staples, including milk. Perhaps the most notorious incident, the poisoning of baby formula, sparked outrage among Chinese and foreign buyers alike.

Such concerns did not arise from Suntory’s buyout of Beam Inc. After all, Maker’s Mark whisky or Courvoisier cognac are non-essential to the American diet. (Though some may dispute this.)

Moreover, even as worries about Japanese products have increased following the 2011 Fukushima nuclear disaster, the country still has a high food safety standard.

Most important, the strong U.S.-Japan bilateral ties are military and political as well as economic. The U.S. public indifference toward Suntory’s buyout of Jim Beam reflects the two allies’ close relationship.

Gone are the days when American lawmakers gnashed their teeth against yet another U.S. buyout by Japan Inc. In addition, once the Japanese economic bubble burst, many of the investments were, in turn, sold off. How resilient the Chinese economy is, however, remains to be seen. It’s also unlikely that Chinese investors will relinquish their U.S. purchases so rapidly.

 

PHOTO (TOP): Employees work inside a Shuanghui factory in Zhengzhou, Henan province, March 15, 2013. REUTERS/Stringer

PHOTO (INSERT 1): Smithfield ham slices are on sale at the Taste of Smithfield restaurant and gourmet market in Smithfield, Virginia, May 30, 2013. REUTERS/Rich-Joseph Facun

PHOTO (INSERT 2): A child suffering from kidney stones receives medical treatment at a hospital in Hefei, Anhui province, September 19, 2008. Nearly 10 percent of milk samples from three top Chinese dairy companies was tainted with melamine, the government quality watchdog found, after testing for the banned chemical that has killed four children. REUTERS/Stringer

17 comments

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You do realized that Shuanghui is a private company, right?

Posted by NYQ | Report as abusive

I am wondering who sponsored this article? It rather purports, somewhat disingenuously, to be taking the side of the American people.

In reality, this article likely sides with some American business interests that don’t give a hoot about the American people, but are willing to pay for a public relations campaign.

We must keep in mind that any business grouping of humans sitting at a table, from tribal times to today, from small-town tiny partnerships to multinational corporations — naturally tend to say, in their meetings, “It’s us against the world.” And it is. How could it be otherwise?

After all, life itself is a competitive struggle. And business is especially so.

The PROBLEM is that the populace of any given country erroneously believe that the corporations that are legally chartered in their country have Patriotic notions.

A patriotic corporation? Nothing could be further from the truth. Corporations chartered in America — like Goldman, Exxon, IBM, Apple, Intel, Google, Smithfield Foods, or Jim Beam Distilleries — are legally created, by a legal document, to do what’s in the interest of their shareholders, period.

That’s why you see these American-chartered companies routinely outsourcing American jobs, selling and divulging American technology to foreign partners, selling weapons to foreign governments, importing low-wage foreign H1B Visa engineers to replace American engineers, and allowing the foreign engineers to take their newly learned skills back to their home countries to compete against America.

In short, corporations, whether American-chartered, Chinese chartered, or Mexican-chartered, have zero patriotic notions. Patriotism is not part of the human-corporate-animal. How could we expect otherwise?

That is OK. The problem is that the common populace of each country, for example America, or British, or Chinese or French, erroneously think the “American”, or “British”, or “Chinese”, or “French” corporation is on their side. When in fact, the corporations, in many ways, are their worst enemies, selling them out at every opportunity, treacherously, from within the city gates.

Americans have been stabbed in the back by American corporations in the corporate drive for globalization.

Why should I care whether Jim Beam Distilleries is owned by a Russian oligarch, and American oligarch, or a Chinese oligarch? All three types of oligarchs are currently preying, with increasing freedom, upon the populace of the American people, destroying the American middle class.

Posted by AdamSmith | Report as abusive

We have a government that is removing constitutional rights, corporations making more investment overseas than in this country and politions who are seeking to reduce benefits to the american people. It’s hard to get scared of the chinese when our own do this to us. It seems more a battle over who will be our slave masters than a truly concerning trend.

Posted by brotherkenny4 | Report as abusive

Communist China is gaining control of American free enterprise. This will give China’s dictators enormous influence over American politicians.

Essentially, we are being colonized. It is hard to recognize the danger, because we have never faced anything like this before. We have never before had a broad swath of strategic industries taken over by a huge foreign dictatorship.

Oppose this now, while you still can!

Posted by DifferentOne | Report as abusive

US congress is fascist, 100% driven by corporate interests and blind to everything except the dollar bill. Vote independent and ensure your vote counts to clean house.

Posted by UScitizentoo | Report as abusive

The thing about corporate acquisitions is that they almost always disfavor the buyer. If you look at stock market responses to announcements of corporate acquisitions, the typical response is for the price of the buying company to decrease, while the price of the company to be bought increases. There are various reasons for this, including (a) the fact that companies are not put up for sale unless something is wrong with them and (b) the fact that a corporate acquisition typically requires the buyer to pay the so-called “control premium” of approximately 30%, which represents the greater value of purchasing control of a business as opposed to a share of the profits, such as are represented by shares of stock. Another factor is that many corporate acquisitions are driven by distortions in stock prices. When there is a large number of corporate acquisitions in which the buying company pays with its own stock, it may be a signal that the certain classes of companies (the buyers) are overvalued relative to other companies on the stock market. When there is a large number of corporate acquisitions in which the buying company pays in cash, it may be a signal that certain classes of companies (the targets) are undervalued relative to other companies on the stock market.

As for issues related to acquisitions undertaken for political reasons rather than for economic reasons, nothing is more likely to increase the power of the United States relative to other countries than to have other countries fool around in the U.S. corporate acquisitions market by making decisions based on factors other than economics. Quite simply, economics is the only thing that drives financial markets, and to make decisions based on factors other than economics is to give away money to the market participants who know what they are doing.

Finally, the record of success of corporate acquisitions — in terms of providing a net profit to the acquiring company — is very discouraging for buyers. Most major corporate acquisitions are ultimately money losers for the buyers. That is probably because the target companies would not be for sale if they did not have problems.

Posted by Bob9999 | Report as abusive

a

Posted by Wantunbiasednew | Report as abusive

Show me ONE United States major company that is edgy in any technology that is NOT effectively controlled by US government. State-owned, equity interest is just one way to control company, preferred by China because it is simple. When free market rules are not in line with US interests , US cries “foul”. Any of the following: Boeing, Intel, IBM, any major bank or oil company cannot be bought by any foreign company even at triple todays capitalization. Just acknowledge that any large United States company is effectively state-owned. So any of their acquisitions, always supported by US government are benign, just because we buy. Chinese are not US so their acquisitions are of course evil. I like sophisticated Reuter’s journalism.

Posted by Wantunbiasednew | Report as abusive

The culprit in this is the US consumer. You don’t buy it, they can’t sell it. The business of governments and business is business as usual. Nebulas entities of power are easy targets in the blame game. Jobs and security will increase when us consumers decides to take responsibility for their own welfare, though buying the US made products of US owned companies. Every job that left this country was paid for at the checkout counter. The modern Chinese navy was paid for with US credit cards. WE fund their corporate and government espionage. I’m proud to be an American, and I’m sick of the “big brother should do something attitude.” I was sick of it thirty years ago.

Posted by nozone | Report as abusive

I would like to know the names of all companies owned by the Red Chinese. From this article I have only Smithfield Foods. This article did not change my mind. It confirmed what I already know.

So, does anyone have any names to add to the list? I want to know where NOT to buy.

Posted by rocque | Report as abusive

Lets face it..there is a very large “For Sale” sign over this country. Dollar bill wallpaper will be next.

Posted by rikfre | Report as abusive

OMG – does this author even understand economics?
> She is implying that the Chinese companies are state owned
> State owned companies are not as efficient as private
> If they are raising capital from the government – then the US divisions benefit as they are getting investment from Chines taxpayers

Whats the problem?

A free market – means a free market. On our end we might think a company like Boeing creates millions of American export jobs – but does it? Or is it subsidized by billions in military contracts funded by US taxpayers. I don’t really know but I say let any company buy any company.

Posted by John2244 | Report as abusive

Today’s China is a totalitarian regime that tries to disguise itself behind the pseudo-capitalistic facade.
But hey, for the US corporate bosses… pecunia non olet!

Posted by UauS | Report as abusive

It is far too late to worry about the unintended consequences of free trade with China, especially for the US.

Why?

The Chinese government in the late 1970s had a severe problem after the collapse of the Maoist regime, which was a country near total economic collapse.

At that point they came up with a brilliant idea. Why not use the greedy wealthy class of the US to fund Chinese economic recovery?

It is indeed ironic that the US wealthy class is suddenly realizing that opening free trade with China may have been a massive mistake in just about every way imaginable.

The Chinese have used the US wealth (initially, then expanded to the EU) as a springboard to catapult themselves from a third-world nation not much different than North Korea, to the “heir apparent” for the greatest geopolitical power on earth.

It is ironic, indeed, because it was the European nations (along with the US later) that succeeded in destroying a stable culture that had lasted for thousands of years.

The Europeans attempted to get the Chinese people hooked on drugs so they wouldn’t have to pay them for trade goods, as well as managed to overthrow the Chinese government, thus ushering in the reign of Maoist communism.

The weapon the Europeans used?

Free trade.

The irony lies in the fact that the Chinese are now about to destroy both the US and European as nations by the exact same weapon used against them.

The supreme irony is that the never-ending greed of the wealthy class prevents them from understanding what China is doing.

Unfortunately, we will all suffer for their greed and incredible stupidity.

Posted by EconCassandra | Report as abusive

@EconCassandra: Ditto! And at the same time the Russian mafioso government is buying greedy European politicians and bureaucrats in droves… What a world we leave for our children!

Posted by UauS | Report as abusive

@NYQ: Do you realize that Yukos was a private company too?
In totalitarian states like Russia and China it doesn’t matter much… and that’s a MAIN difference.

Posted by UauS | Report as abusive

Everything will be fine.

Posted by TheNeutralParty | Report as abusive