Could GM, Microsoft End Up in Chinese Hands?

[David Farber <dave () farber net>]

Begin forwarded message:

From: eekid () aol com
Date: June 27, 2005 8:12:22 AM EDT
To: dave () farber net
Subject: Could GM, Microsoft End Up in Chinese Hands?



Could GM, Microsoft End Up in Chinese Hands?

William Pesek Jr.

June 27 (Bloomberg) -- Executives at Unocal Corp. and Maytag Corp.  
are on the cutting edge of a trend that's sure to shake up corporate  
America as rarely before: China's desire for Western brand names.

Lenovo Group Ltd.'s agreement in December to buy the personal  
computer business of International Business Machines Corp. for $1.25  
billion was the first sign China is becoming rapidly more  
internationally acquisitive.

Now, with CNOOC Ltd., China's third-largest oil company, going after  
Unocal and Haier Group, its largest appliance maker, bidding for  
Maytag, there's no mistaking China's strategy. And those here in  
Washington pushing China to let its currency rise should know they're  
making that pursuit easier for Asia's No. 2 economy.

By acquiring household names, China wants to boost global sales and  
distribution capabilities. Because brands take time to build, it's  
logical for companies like Lenovo, CNOOC and Haier to look for quick  
entry points into the U.S.

This is really phase two of China's mergers and acquisitions  
strategy. The first entailed locking up the foreign commodity  
resources -- mining companies, mostly -- China needs to feed its  
economic rise. Just about every company of this sort in Canada,  
Australia, Southeast Asia, Africa and elsewhere is a target.

Raising Eyebrows

Phase two will likely raise far more eyebrows in Washington. U.S.  
Treasury Secretary John Snow already is fielding questions about  
whether the Bush administration plans a national security review of  
the Unocal deal. Tensions may rise even further as more Chinese  
companies scoop up marquee Western names.

As politicians concerned about China's trade surplus with the U.S.  
demand a stronger Chinese currency, they should keep two properties  
in mind: Pebble Beach and Universal Studios.

It was the purchase of those American icons by Japanese in the 1980s  
that had people from Seattle to Miami fretting over their economic  
future. One member of Congress even warned the U.S. was ``rapidly  
becoming a colony of Japan.''

As with China, the concern back then was Japan's huge trade surplus.  
Bothering average Americans even more was the perception Japanese  
were buying up the U.S. on the cheap. Are Chinese about to become a  
similar target of U.S. fear and loathing? Yes, in all likelihood, and  
a Chinese currency revaluation may accelerate things.

Target of Scorn

Chinese purchases of U.S. companies and properties will be more  
affordable if the yuan rises the 10 percent, 20 percent or even 40  
percent that analysts expect. Stronger Chinese purchasing power could  
make China the target of U.S. scorn that Japan was 15 or 20 years ago.

Sound farfetched? After all, for all the hype about China's economy,  
the per capita income of its 1.3 billion people is a fraction of U.S.  
living standards. And China has a dearth of internationally known  
companies that operate on a global scale and market their products  
abroad.

Yet things could change rapidly. The important story of tomorrow  
isn't how much foreign capital is flowing into China -- it's the  
mounting tide of investment flowing out as an increasing number of  
Chinese firms spread their global operations.

Observers including Joseph Quinlan, chief market strategist at Banc  
of America Capital Management, have been pointing out that this  
likelihood has gotten lost in the debate over China's pegged currency.

Trophy Acquisitions

Just wait until it helps Chinese manufacturers buy up what's left of  
the U.S. textile industry. Or when a stronger yuan aids Chinese  
electronics firms in acquiring key U.S. component makers, or helps  
Chinese real estate tycoons snap up trophy U.S. properties, or when  
executives at General Motors Corp. or Microsoft Corp. get calls from  
acquisitive Chinese executives.

Here, Japan's post World War II experience may be instructive. In the  
early 1970s, the idea of Japan scooping up Columbia Pictures, Pebble  
Beach, Rockefeller Center and Universal Studios seemed preposterous.  
Yet by the 1980s, you may have been traveling to Tokyo or Osaka if  
you wanted to see your favorite Picasso or Van Gogh painting.

Rather than bow to U.S. demands for more market access and a yen  
revaluation, Japan went on the defensive. It encouraged investment  
outside Japan and eased currency restrictions. Loan programs and  
other incentives helped boost Japan's presence as a major economic  
power by the start of the 1980s.

Jumping Barriers

Might China follow the same route? The more the U.S. hammers China  
about its growing trade imbalance, the more inclined Chinese firms  
will be to jump potential trade barriers by investing directly in the  
U.S.

None of this is to say it's a bad trend. Some struggling U.S.  
companies that aren't well managed or are otherwise out of favor  
might be rejuvenated by a Chinese partner. It would be a mistake for  
U.S. politicians to fall into the same kind of xenophobia they  
exhibited with Japan.

At the same time, China faces serious challenges like maintaining  
rapid growth to create jobs while also avoiding overheating. And  
multinational companies won't exactly roll over in the face of  
competition, complicating things for Chinese corporations with little  
global experience.

Yet China, like Japan a few decades ago, is encouraging the process,  
prodding executives to look overseas and offering incentives to help  
companies go global. What does all this mean? Get ready America --  
Corporate China is coming.

To contact the writer of this column:
William Pesek Jr. in Washington, through the Tokyo newsroom, or at  
wpesek () bloomberg net, or.

Last Updated: June 26, 2005 20:59 EDT

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