Will US Allow Lenovo to Buy Parts of IBM & Google?

Does it come with PRC minders listening in as a standard feature, NSA style?

Call it Reds Under the Beds, Cyber Edition. The supposed land of free trade has customarily thrown significant roadblocks in the way of Chinese firms signaling their intent to purchase US tech-related firms on "national security" grounds. The reasoning usually goes like this: Chinese firms trace part of their ownership to the PRC itself, hence there is a threat that their political overlords will ask them to incorporate spying apparatus in the electronics they sell Stateside. It's a lot of "could bes" and "what ifs" when, in reality, we know that the Yankees are no slouches on surreptitiously gathering information on everyone else. There are no hypotheticals there since US spying happens all the time on friend and foe alike.

At any rate, Lenovo--which famously purchased IBM's personal computer business sometime ago--is now looking to buy Big Blue's server business. What's more, it is also looking to purchase Google's Motorola (remember them?) cell phone unit. IBM is looking to concentrate on services. By divesting the server business it will have a negligible interest in selling the "International Business Machines" it stands for. Meanwhile, Google has not exactly revived the moribund Motorola name to compete with the likes of Apple and Samsung. So, on the shopping block both go.

Following earlier,  harrowing experiences of fellow Chinese companies Huawei and ZTE dealing with the multi-agency Committee on Foreign Investment in the US (CFIUS) that looks into foreign investment with "national security" implications, Lenovo is hiring high-priced talent to avoid such entrapment for both prospective deals.

Lenovo Group Ltd. has turned to national security insiders to win U.S. approval to buy Google Inc.’s Motorola Mobility phone unit and International Business Machines Corp.’s low-end server business, people familiar with the two deals said. 

The world’s largest personal-computer maker hired attorneys at Steptoe & Johnson LLP who held positions at the Central Intelligence Agency and the Homeland Security Department to guide its Motorola review through a key interagency panel, one of the people said. Covington & Burling LLP partners David Fagan and Mark Plotkin are representing Lenovo in the IBM server deal, according to another person familiar with the matter...

Steptoe will guide the Motorola review through the Committee on Foreign Investment in the U.S., or CFIUS, one of the people said. Partners Stewart Baker, a former senior official at Homeland Security, and Stephen Heifetz, who served in the Justice Department, Homeland Security and the CIA, are advising China’s Lenovo on its purchase of Motorola Mobility.

Covington’s Plotkin represented IBM in the $1.25 billion sale of its personal-computer division to Lenovo. He leads the firm’s national security and defense industry group, according to his biography on the law firm’s website.

In other words, Lenovo has added to the payroll those who would likely have been on the CFIUS at an earlier time to see its acquisitions push through. Lenovo has the advantage of having gone through the CFIUS process before. What's more, the businesses it intends to buy are supposedly not "mission critical" in undergirding the US telecoms infrastructure:

Lenovo’s purchase of IBM’s PC business has already been vetted by U.S. officials, and the company was cooperative and open during that investigation, Lewis said. In addition, they’re buying low-end, consumer-oriented businesses.

“If you had to pick a Chinese company that wasn’t going to run into trouble, it would be them,” Lewis said. “This is a pretty vanilla deal, as opposed to the backbone telecom products, which have always been considered a strategic industry. No one considers servers or handsets strategic.” 

I do hope so, but I somehow think that US lawmakers will make a big stink of both either way to score political points. Remember, too, that Lenovo tried to purchase Canada's BlackBerry late last year--a seemingly innocuous purchase along the same lines as Motorola--but was thwarted by the Canadian government:

Beijing-based computer manufacturer Lenovo Group Ltd. actively considered a bid for BlackBerry Ltd., but the Canadian government told the smartphone company it would not accept a Chinese takeover because of national security concerns, according to sources familiar with the situation.

Ottawa made it clear in high-level discussions with BlackBerry that it would not approve a Chinese company buying a company deeply tied into Canada’s telecom infrastructure, sources said. The government made its position known over the last one to two months. Because Ottawa made it clear such a transaction would not fly, it never formally received a proposal from BlackBerry that envisioned Lenovo acquiring a stake, sources said.

No matter how hypocritical or far-fetched, racist-protectionism persists among North Americans.

The Rise and Rise of FDI From the Global South

Much has been made of the protectionism which firms such as those from China have encountered investing in the West. I have called specious arguments on "national security" grounds unvarnished racism, and such discrimination certainly plays a part. Moreover, I have been further vindicated by leaks that reveal massive American spying on its own citizens and those of the rest of world. Who's the real "national security" threat here when one of the largest US tech firms labels its government as an "advanced persistent threat"? You are, quite frankly, a bleeping moron to believe in US security guarantees, especially when it comes to online activity. Internet freedom is effectively unlimited America freedom to spy on you.

However, developing countries' efforts to invest elsewhere is largely driving the ongoing controversy. That is, there would be nobody to discriminate against if their firms stayed home. Accordingly, there's interesting stuff in the current issue of Global Finance about the ever-rising amount of FDI originating from poor countries. Otherwise put, these are countries that in the not-so-distant past would have been mere recipients of FDI:

By far the biggest FDI story of the past few years is the rise of developing and transitioning countries as a source of outward FDI, which jumped from $65 billion in 2003 to $481 billion in 2012. Naturally, China is in a league of its own. In 2012 it came in third among the world’s top 20 investor-economies, behind only the US and Japan. Beyond the acquisitions it has been making across OECD countries, China is aggressively developing natural resources and infrastructure from Africa to the Middle East.

For example, in 2013, PetroChina bought a 25% stake in the Iraqi oilfield of West Qurna 1, right around the time construction of the new Mombasa-Nairobi railway line began in Kenya, financed by the Export-Import Bank of China to the tune of $4 billion. But the new FDI landscape does not include just China. FDI originating from emerging markets is multiplying around the world. In 2013 a Chilean bank took over an American one, a Thai energy company made its first investment in Australia, and the largest Coca Cola bottling company in Mexico acquired a competitor in Brazil.

Notably, however, Global South investors do not invest in the same way their Global North counterparts--traditional TNCs--do:

Importantly, developing and transitioning country investors display characteristics that set them apart from traditional developed-world multinationals.

For one, state-owned enterprises and sovereign wealth funds generate the lion’s share of outward investment. This raises concerns about fair competition. “SOEs may have access to lower-interest loans and better financing conditions [than non-SOE competitors],” says Masataka Fujita, who heads the investment trends section in the division of investment and enterprise at Unctad. “SWFs even have a large amount of assets under management, and, like in the case of SOEs, their governance structure is not always transparent.” Their operations are also viewed with suspicion by host economies because a foreign government is behind them.

In addition, emerging markets companies seem to prefer mergers & acquisitions over greenfield investment as a mode of entry, especially when it comes to FDI into developed countries. “They look to OECD countries because these remain the world’s largest markets and because they are interested in the technology found here,” says José Guimón de Ros, associate professor of economics at the Universidad Autonóma de Madrid in Spain. “Since the crisis, many developed-country companies are under stress and therefore cheaper, so now is a good time to buy them.” Partially as a result of this phenomenon, cross-border M&A has held steady in 2013, stabilizing global FDI flows even as investment in new productive assets has declined.

Finally, emerging markets companies are inherently more familiar than their OECD counterparts with how to do business in a developing-country setting. In part as a result, the majority of investment from emerging markets is going to other emerging markets. According to Unctad, in 2011, China exported 70%, and Brazil 40%, of its outward FDI stock to neighboring emerging economies. “Regulations in developing countries are less complicated,” says Du The Huynh, senior lecturer at the Fulbright Economics Teaching Program in Ho Chi Minh City, Vietnam. “The competition is also less fierce.”

The telecom sector illustrates this well. Vietnam’s largest mobile-network operator, Viettel, has successfully established itself in Mozambique, Haiti, Laos and Cambodia, countries that by most OECD investors’ standards are difficult places to do business.

True, the Western media headlines are dominated by South-North FDI. real Yet it's not mostly the formerly colonized investing in the heartlands of the erstwhile colonizers, but poor countries venturing where rich countries dare not--scared off by corruption and other bogeymen for white people. Yes, South-South investment is happening:

to paraphrase Aretha Franklin, Queen of Soul, poor countries are doin' it for themselves.

The (Delayed) Ascent of PRC Rating Agencies

There was another large controversy about Chinese firms operating Stateside three years ago when the PRC-based credit rating agency (privately-owned, mind you) Dagong was denied by the SEC from being granted Nationally Recognized Statistical Rating Organization (NRSRO) status. As IPE Zone readers know by now, NRSRO status is important insofar as gaining this recognition allows a credit rating agency to legitimately evaluate what is still the most liquid capital market of them all for dollar-denominated debt. Then, the SEC claimed that Dagong could not comply with the Feds' standards for tranparency if so required:

[W]e find that we must deny Dagong's application because, irrespective of the jurisdictional question, it does not appear possible at this time for Dagong to comply with the recordkeeping, production, and examination requirements of the federal securities laws.

The "jurisdictional question" concerns the Chinese SEC equivalent the China Securities Rating Commission (CSRC) having its own set of rules concerning access to such documents. At any rate, Dagong was partly culpable in not properly explaining how it would handle SEC requests for information about ratings in terms understandable to Westerner bureaucrats. Dagong even threatened to sue, but nothing came of it:

Chinese rating agency Dagong Global Credit Rating Co. called the Securities and Exchange Commission's recent denial of its application as an officially recognized bond rater in the U.S. discriminatory and said it considers taking legal action against the agency.

In a strongly worded statement posted on the company's website Sunday, Dagong said SEC's sole reason for denying its application is the commission can not conduct cross-border supervision over the Chinese firm.

At any rate, Dagong has not given up on its quest to become a global player in the ratings game. Aside from the publicity stunt of downgrading US debt from AAA status before S&P, it now has done what few PRC ratings firms are willing to do in downgrading local issuances regardless of the argument that the government always stands ready to bail out SOEs which constitute a large part of the Chinese economy:

At the end of June, Dagong Global Credit Rating Co. broke ranks with its local competitors and downgraded three bonds issued by infrastructure-construction companies wholly owned by Chinese cities. It said it was losing faith in the governments' backing of the bonds [...] The three bonds Dagong downgraded—for the infrastructure-construction arms of local governments in Jilin, Jiangxi and Hubei provinces—had their ratings lowered by only one notch and still are rated investment grade.

Another strategy aside from establishing an image of political independence at home is using Europe instead of the US as Dagong's Western beachhead:

Dagong's go-it-alone stance is a measure of its ambitions. Chairman Guan Jianzhong—a trained accountant who took over in 1998 and owns a chunk of the 20-year-old private firm, according to a person familiar with the company—has spoken bullishly about the need to break the lock-hold Standard & Poor's Ratings Services, Moody's Investors Service and Fitch Ratings have on global debt ratings. Dagong hopes investors would be open to a new ratings firm after the global financial crisis resulted in a major loss of faith in the established players.

European regulators have taken note. In June, before the downgrades, six European Union regulators approved the registration of Dagong's Milan-based unit, allowing it to rate companies in Europe. Dagong previously had been turned down by the U.S. Securities and Exchange Commission in 2010 after it applied to do the same in the U.S.

The best way to combat Western discrimination is to tell it like it is when handing out ratings, since being proven right by subsequent bond issuer performance is the best way to gain others' confidence. Besides, who exactly is going to argue that Western ratings firms are any good in this day and age? As bond issuances increase from China in particular and East Asia in general, the clout of Asian ratings firms should increase accordingly.

The lame 2010 NRSRO application aside which appeared to fail due to unpreparedness as much as discrimination, it's only a matter of time. 

Meet America's #2 Jetliner Company...Airbus S.A.S.

Mas oui! There's an old joke that the best car made in America is the (Ohio-made) Honda Accord. Similarly, we may soon hear that the best jetliner made in America is the (Alabama-made) Airbus A320. Following the lead of Mercedes-Benz, the multinational European concern has decided to set up shop in the land of the Crimson Tide to meet US demand for its bread-and-butter Boeing 737 competitor. The post below talks about how the Chinese have been continually frozen out of investing in the US over increasingly dubious "national security" grounds. Yes, there remains that brouhaha over it being forced out of a contract to make the US Air Force's next generation air tankers, but that was not really over "national security" but over "buy American" objections. The Europeans being Europeans, there are no such concerns with Airbus investment in the commercial sector despite its long-running WTO dispute with Boeing. Speaking of whom, unfavourable attention regarding the 787 Dreamliner's design faults may, by default, work in the European consortium's favour insofar as there are only two real players in this industry at present.

There is now an MSN contribution from Allan McArtor, chairman of Airbus Americas, about the consortium's selection of Mobile, Alabama as the site of forthcoming A320 manufacture after originally selecting it to build the shelved tankers:

It's the same with our relationships with the people of Alabama. When our team first started looking for an industrial base to manufacture a refueling tanker for the U.S. Air Force, hundreds of cities stepped forward. After an exhaustive evaluation process, Mobile emerged as the obvious choice.

Sure, it met our technical requirements. But so did others. A differentiator for Alabama was the unity and supportive purpose shown by every entity in the state supporting Mobile. City, state and federal representatives (Republicans and Democrats alike) came together with one goal: Show the Airbus team that Alabama would be its partner for the long term.

They spoke with one voice, which impressed our selection committees. And when the U.S. tanker project was lost, instead of hanging their heads and walking away, they said, "What else could we do?" It was indicative of the good relationship Airbus has with Mobile and Alabama—instead of giving up, we found another way to make it work. As a result, Alabama got an even better, larger-impact project.

Infrastructure was another key factor: The site was perfect, with an airport and ocean port, and adequate land at Brookley Aeroplex. Workforce was also vital. We were encouraged by the auto industry's success in Alabama because its manufacturing aspect is a trained skill similar to that of aircraft assembly. 

All's well and good, but an unspoken reason here regarding human capital is that foreign investors prefer investing in the American South--the Sun Belt--is because of its largely non-unionized workforce compared to the Rust Belt. I was struck how Alabama's officialdom explicitly mentions this selling point that Mercedes-Benz there has little use for unions:

Alabama's Mercedes-Benz plant, the subject of an active organizing campaign by the United Auto Workers, doesn't need a union, Gov. Robert Bentley said. The governor was at the Tuscaloosa County plant last week to participate in a sendoff for its president and chief executive, Markus Schaefer, who is taking an executive role at the automaker's headquarters in Stuttgart, Germany.
After the event, Bentley said the plant is a close-knit organization that works well together as a team."I really don't believe they have any need for unionization and an intermediary between them and management," he said in an interview in response to a reporter's question about the UAW campaign. "I don't think it's going to happen."

The governor added that Alabama's status as a right-to-work state helps him recruit new business. Bentley's comments are the most pointed public ones to date from a state official about the UAW's latest campaign at the Mercedes plant, which launched Alabama's auto industry in the 1990s. Previous organizing attempts there have failed.

Having escaped the clutches of European unions, you'd hardly think they'd be enthusiastic about setting up shop in America only to find that it too is thick with them. Hence the continuing popularity of Southern right-to-work states; keep the unionized whingers in the Midwest (and Western Europe too for that matter).

Latest US China-Bashing: Hog Farm Protectionism

I am a true connoisseur of all sorts of protectionism: the more obscure and inscrutable the justifications for it, the more I savour the hypocrisy. Free trade? Get outta here! In recent years, the United States has served up some of the more ridiculous examples of what is, at heart, unvarnished racism on the part of American lawmakers. (You don't see them block European foreign investment on a regular basis, do you?) When the purchase of minor American producer Unocal by Chinese SOE CNOOC, "national security" concerns were raised. There was also the matter of 3Leaf, a minor player in the server market, being subject to Committee on Foreign Investment in the US (CFIUS) harassment over interest from Huawei. Nevermind that 3Leaf was a marginal player in the server market in the same way UNOCAL was in energy, but rampant and rather irrational fears of Chinese snooping on US data were in play. After the Snowden incident, Xinhua correctly described the utter hypocrisy behind American data security concerns with the US being "the biggest villain of our age" in cyber-snooping activities.

 More recently, we have had the latest twist on American "national security" concerns regarding the Chinese. It doesn't really matter that the suitor in question isn't an SOE; I guess Yanks believe once you've seen one of them you've seen them all. I am thus wryly amused by this latest form of "hog farm protectionism" as China's Shuanghui International attempts to purchase America's Smithfield International.

A Senate committee on Wednesday criticized a major merger of U.S. and Chinese agricultural interests, saying the combination of two major pork producers could have negative impacts on U.S. food and economic security.

The hearing before the Senate Committee on Agriculture, Nutrition & Forestry was exploring the impact of a proposed merger between Smithfield Foods, the leading pork producer in the U.S., and Shuanghui, China’s largest pork producer.

The $7.1 billion acquisition is the largest purchase of a U.S. company by Chinese business interests. The merger sparked skepticism from committee members who were concerned about Smithfield’s ability to maintain compliance with food-safety standards expected in the U.S.

Read more here: http://www.mcclatchydc.com/2013/07/10/196351/senate-committee-wary-of-us-china.html#.UeFeNKxjuSo#storylink=cpy

A former US trade official, Robert Herztein, added fuel to the fire by tortuously describing this "hog farm protectionism" in terms of the Chinese unleashing tainted food products on an unaware American public:

It could, of course, be a stretch to conclude that Chinese ownership of Smithfield, the world’s largest pork producer, might impair U.S. national security...Reports of egregious food adulteration in China suggest a culture where companies have little concern for safety and health standards.

While there has been an episode of a supplier providing tainted meat to Shuanghui, it has since increased its monitoring of its supply chain. (I invite Shuanghui's critics to find the smoking gun that indicates Shuanghui promoted the use of chemicals hazardous to human health instead of implying this to be the case. Moreover, Herzstein conveniently ignores that Smithfield has been scaling back use of the controversial drug ractopamine in order to meet Chinese demands to be free of this feed additive. In the last year, Smithfield has lessened ractopamine usage in half--presumably in expectation of a China deal: 

This March, China began requiring third-party verification that U.S. pork products were ractopamine-free. Russia, the sixth-largest buyer of U.S. pork, had blocked imports of U.S. meat using ractopamine weeks before...The measures highlighted a sharp contrast with the U.S. Food and Drug Administration, which approved ractopamine for use in commercially-raised swine in 1999 and stands by that decision, saying its safety has been corroborated four times. It is used in more than half of the U.S. hog herd, analysts estimate.

By early May [2013], Smithfield already had moved two of its plants - including Tar Heel, North Carolina, the world's largest pork-processing facility - off ractopamine. When the third plant converts on June 1, "over 50 percent of our operations will have no ractopamine as part of their feed rations," CEO Pope said.

Shuanghui also has its own rather self-serving FAQ, but nevermind: I am honestly at a loss as to why Americans always ascribe the worst to the Chinese. Given such intense scrutiny, how likely would it be that they would (a) divert fuel supplies meant for the US to China, (b) build routers to deliberately spy on American communications or (c) risk a mass poisoning of American pork consumers? It makes no sense. Not only would they lock out other Chinese firms from investing in the US for years and years, but the ferocious backlash would ensure that their days of doing business Stateside are numbered. Forced divestiture or a massive public boycott; the result would be the same.

As a more pragmatic, less ideological sort, here's my suggestion to the Yanks: Why don't you let the Chinese invest and see what happens instead of pigging out on racist protectionism all the time? I truly doubt that egregious violations of public safety on a massive scale would occur, Snowden-style. For aforementioned reasons, getting rid of "national security" transgressors would be so very easy and set an example besides.