May 06 2008
faltering US economy = great opportunity for chinese
The Los Angeles Times recently published an article entitled “Chinese Firms Bargain Hunting in U.S.” ( h/t to CDT). Ironically, I had just posted an article recently about western companies going into China because the U.S. economy was faltering. ( here) And while I had also written about China’s growing economic muscle ( here), the LA Times article puts two and two together: Chinese companies are setting up shop in the U.S. because it is actually cheaper or almost cheaper to set up shop here. Scary thought. But the more the west goes to China and drives up costs (particularly raw materials and HR costs), the more that China might be tempted to bring more of that capital here.
Here are excerpts of the article:
Liu Keli couldn’t tell you much about South Carolina, not even where it is in the United States. It’s as obscure to him as his home region, Shanxi province, is to most Americans.
But Liu is investing $10 million in the Palmetto State, building a printing-plate factory that will open this fall and hire 120 workers. His main aim is to tap the large American market, but when his finance staff penciled out the costs, he was stunned to learn how they compared with those in China.
Liu spent about $500,000 for seven acres in Spartanburg — less than one-fourth what it would cost to buy the same amount of land in Dongguan, a city in southeast China where he runs three plants. U.S. electricity rates are about 75% lower, and in South Carolina, Liu doesn’t have to put up with frequent blackouts.
About the only major thing that’s more expensive in Spartanburg is labor. Liu is looking to offer $12 to $13 an hour there, versus about $2 an hour in Dongguan, not including room and board. But Liu expects to offset some of the higher labor costs with a payroll tax credit of $1,500 per employee from South Carolina.
Liu is part of a growing wave of Chinese entrepreneurs expanding into the U.S. From Spartanburg to Los Angeles they are building factories, buying companies and investing in business and real estate.
For years, investment between the U.S. and China flowed one way, with American firms spending billions in the Asian nation. But the Beijing government’s $5-billion stake in Morgan Stanley and $3-billion investment in the private equity firm Blackstone Group brought China’s overall investments in U.S. firms to $9.8 billion in 2007, up from $36 million the year before, according to Thomson Financial.
“It’s a lot of pressure going to the largest market in the world,” Liu said. But he thinks it’s certain to help his business become more competitive. “That’s one of the real benefits from this expansion.”
(emphasis added in bold) We all know that the dollar has been weakening and that international players are finding bargains here. It’s just an interesting surprise to discover its not just the CNOOC’s and the Blackstone’s that are coming to the west–it’s even smaller Chinese operations quietly coming in. It isn’t terribly surprising once I think about it a little–because it does make a lot of sense. It’s just that I wouldn’t normally put two and two together in this sort of way.
What does this mean for corporate attorneys? Or more specifically, for U.S. corporate attorneys? The large M&A market is sputtering in the U.S. according to a recent article in the Recorder. ( here, subscription required) However, the mid-level deals are still alive and kicking according to the article. These Chinese businessmen bringing business to the U.S. will be mid-level deals at best. And more likely, need corporate attorneys who can help them set up shop: entity formation, real estate transactions, employment agreements. In other words, basic corporate lawyers. This is a bit of good news in a rather slow economy.
And for those M&A, LBO, and structured finance folks who are out of work with the spate of layoffs, maybe its a good time to do entity formation work. Here’s a start for retraining:
Maybe I will get around to doing that analysis of different U.S. corporate entity types once my work slows down.
I find this to be great news for both China and the US in their respective economies, but that the Chinese should keep in mind how Americans have reacted in the past to the Japanese when they started to set up shop during the 1980s recession.
Nonetheless, perseverance will the day and Japanese firms will become standard place after they go through a number of rough patches (eg: China’s oil company trying to own a stake of our oil market).
Demerzel,
Point well taken. Sadly, I wouldn’t be too surprised if there was such a reaction, but I am hopeful that perhaps the American people know that this was a long time coming anyways.
Tom
Maybe China will surpass the USA, but that’s not really surprising to anyone who has been to Chine for some time. If You just have been there as a tourist, it doesn’t count.
I’m in China right now and I can see one thing. People here are actually working. Back in the West people wonder how to spend their week. It’s like: Oh today is Monday, I need to find freetime activities for the next 7 days.
Ok, some people come to China and enjoy themselves and work as a teacher. Basically they go on with what they had done in the USA, but if You want to come to China and become a big player, everything You need is here and everything around You is extremely motivating. Go to a bar in the evening and enjoy a beer. You will find more entrepreneurs than at a business meeting in the USA.
The only remaining question is, is 2015 the correct date? I have my doubts it will happen so fast, but we will see.
Junjie,
I have no beef with you that it will overtake China. I think it will. I just have my doubts as to 2015, as do you.
As for your observations, I think its true. Not just in China, but also in places like Japan. It’s a very different work culture. Thanks for sharing this–I think it is very helpful to have some inside perspective for myself and my readers.