Welcome to U.S.-China Relations, this is Michael Feltz your host for today’s segment, along with Jeremy Ford and Catherine Hennessy. This segment is titled “Chinese Investors Enter the U.S”. Thank you for visiting us at http://www.sohnetwork.com Many Americans have concerns as to weather or not China will wield its holding of the U.S. National debt as collateral in a threat since China holds huge U.S. currency reserves. In May of 2010, U.S. officials, including Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner, arrived in Beijing for talks on rebalancing the global economy. The purpose of these talks is to press China to allow the value of its currency to rise. Beijing, however, is intent on drawing attention to its other contributions to the global economy, including fast-rising outbound investments. Census.gov reported that as of April 2010, the current U.S. trade deficit was about $43 billion, while U.S. National Debt was around $13 trillion. Both of these are imposing and larger-than-life numbers, which will require numerous steps to balance out. Balancing importing and exporting is one of the steps. Currently, China is over-exporting manufacturing merchandise to the U.S. However, instead of importing goods from the U.S., China is trying to take a sidestep by making a spark of out-bound investment in America.
This sidestep was actually taken by the Japanese auto makers in the 1980’s, when they responded to complaints about their imports by opening U.S. plants. Unlike the Japanese who rebuilt the plants in the U.S., most of the Chinese investors are simply investing and purchasing, rather than rebuilding the plants. There are also many Chinese companies purchasing failing businesses, such as the 400-employee Marriott in Downtown Los Angeles which was bought out of foreclosure. Another company acquired a shut-down shopping center in Milwaukee, with plans to turn it into a mega-mall for 200 Chinese retailers. More Chinese out-bound investments include Anshan Iron & Steel Group in Mississippi, $450 million auto-industry supplier Tempo International Group in Michigan, the $1 billion Tianjin Pipe Group plant in Texas, Machine-tool maker Top-Eastern Group in Seneca, South Carolina, Yuncheng Gravure Cylinder plant in Spartanburg, South Carolina, and Haier Refrigerator plant in Camden, South Carolina. You may have wondered why the American labor cost has been sky-rocketing, and how the Chinese investors can make profits. Well, Jeremy Ford has more details about how Chinese investors survive in the U.S. First, we will discuss the Yuncheng Gravure Cylinder plant located in Spartanburg, South Carolina, which specializes in printing labels around plastic soda bottles.
. Today some 33 American states, ports, and municipalities have sent representatives to China to lure jobs once lost to China back to the states. So far, Chinese companies have invested $280 million and created more than 1,200 jobs in South Carolina alone. They have come to South Carolina because by Chinese standards America is darn cheap. Yes, you heard it right. The land is cheap, the electricity is cheap. The biggest difference is that the labor is expensive. Although it is true that American workers are much more expensive than Chinese workers, and the overall cost of making a widget in China remains lower, for hundreds of Chinese companies like Yuncheng, the U.S. has become a better, less expensive place to set up shop. The cost of land Yuncheng purchased in Spartanburg at $350,000 for 6.5 acres is only one-fourth the price they would have paid back in Shanghai. Electricity is cheaper too. It costs about one third the price paid in China. Yuncheng pays up to 14 cents per kilowatt-hour in China during peak usage. What’s more is that in the U.S. there are rarely any brownouts, which is a sporadic problem in China. Besides affordable land and reliable power, states and cities are offering tax credits and other incentives to woo Chinese manufacturers. Beijing, meanwhile, has mandated that Chinese companies globalize by expanding to key markets around the world and is chipping in by offering to finance up to 30% of the initial investment costs. The enticements are working. Chinese companies announced new direct investments in the U.S. of close to $85 billion in 2009 alone. And when China finally allows the value of its currency, the yuan, to appreciate, Americans can expect to see Chinese projects, many of which are small today, really take off and have an impact on the U.S. economy. This could be a good thing for relations between the two countries because it will eventually balance out the flow of U.S. investment into China. China’s aggressive interest in U.S. investments suddenly gives Washington some leverage as it seeks to negotiate with Beijing on tariffs, trade issues, and economic policy. None of this matters much in Spartanburg. Skilled workers at Yunchen Gravure Cylinder plant will earn $25 to $30 an hour, line operators $10 to $12. That is a lot more than the $2 an hour that unskilled laborers earn in China, and by being physically closer to companies like Coca-Cola, Yuncheng can respond more quickly when they need new labels designed for their soda bottles. This is Jeremy Ford for SOH Radio Network
President Obama’s naming China a “strategic partner” instead of the “strategic competitor” label it had under the Bush administration sets a new tone for the relationship between these nations. Politically, China remains a communist country, despite its capitalist economic trends. But significant changes are in the making. Take for example, machine-tool maker Top-Eastern Group, a tool manufacturer based in China’s coastal city of Dalian. Top Eastern acquired a factory, in Seneca, South Carolina near the Georgia border, along with three other facilities from Kennametal, one of America’s largest machine-tool makers, after the Pennsylvania based company, reported significant losses in the quarter before the sale (citing a slowdown in industrial activity). The founder of Top-Eastearn is a Chinese self-made entrepreneur who started in 1994 with just $500. He now has worldwide sales of more than $120 million, 4,000 employees, and factories in Germany and Brazil. In the months since his purchase of Kennametal for $29 million, he has invested another $10 million to upgrade machinery, built a $3 million logistics center, brought back Kennametal’s furloughed workers, hired 120 more, and now has his 260-employee plant working overtime filling orders for the Cleveland Twist Drills, Chicago Latrobe, Putnam, and Bassett brands he acquired. He brought back the company’s old name and emblazoned it on a sign out front. He also employs American managers to run it in his absence rather than bring over Chinese because quote “there’s good, experienced people and good know-how already here in America.” and unquote How can he make a drill bit factory profitable where Kennametal had struggled? By increasing productivity with new equipment and cutting costs, plus, he forges his own steel, and he owns the mines back in China for two of its more expensive components. That fact that he can source from himself means he keeps the margins and now his tools are officially made in the U.S. The cost of making those products is much higher than in China, but the problem is customers will only accept “made in U.S.A.” products, so he has no choice. Lots of customers here in the U.S. have government contracts that have “made in U.S.A.” requirements. And how do the employees feel about having a Chinese entrepreneur come to their rescue? So far there’s little sign of anti-Chinese sentiment among South Carolinians, who watched their state lose its manufacturing industry to low-cost countries like China. Plus, what would they think of communists creating work in their home state? Will Chinese companies survive in the America soil? Catherine Hennessy will take you to a real life scenario of a company run by a Chinese boss with American employees.
Haier was the first Chinese company to build a factory in the U.S., which was a refrigerator plant in Camden, South Carolina back in the year 2000. This company had the Chinese flag flying higher than the American flag and the South Carolina state flag out front. Conservative media got wind of it, called for protests, and the resulting public rang the factory to complain. The Chinese executives at Haier had no idea flags were such a big deal. The complaints continued until about a year and a half ago when Haier America factory president, who was new to the job, decided to fix it. He had two of the poles lowered so that the U.S. flag looks highest from all angles. Haier’s human resources director, one of the first hired by Haier, had guided the Chinese through the realities of American-style personnel management including convincing them that they needed to offer health insurance. He once even asked South Carolina’s man in Shanghai, to fly home from China to talk to a Chinese manager who was arousing employee resentment by publicly embarrassing the workers, Chinese-style, for their mistakes. He said quote “Having a Chinese manager didn’t work. That’s why they took all the Chinese managers out of here.” and unquote. What is perhaps most startling about the Haier factory is that it is actually shipping goods back to China. Best known for its mini-fridges for dorm rooms and studio apartments, Haier’s U.S. plant also makes large units, suitable for large American homes but too large for a typical Chinese household. Now a growing number of wealthy people in China want to supersize too, so Haier has realized it can ship a small number, maybe 4,000 a year, of its highest-end refrigerators home and sell them for $2,600 apiece, more than China’s average annual income of around $2,000. There aren’t enough wealthy customers yet to make it worthwhile retooling any of the 29 Haier factories in China, but the nearby deepwater port in Charleston, South Carolina make export easy enough. Haier also ships U.S.-made refrigerators to India, Australia, Mexico, and Canada. Tthis is Catherine Hennessy for SOH Radio Network.
Chinese newcomers would do well to learn from Haier’s missteps as well as its great strides. Chinese investors certainly will come a long way to enter a highly sophisticated market and are bound to survive on the American soil if they do the following: 1. You have to be a good corporate citizen, 2. Source locally, 3. Contribute to causes and charities in the local communities, 4. Be familiar with how to navigate the corridors of Washington, 5. and you should have Americans in key managerial positions. With more Chinese investors entering the U.S. it will definitely help U.S.-China relations. Is the U.S. ready for FDI from China? In Boston, this is Michael Feltz for SOH Radio Network. Thank you for listening and tuning in to http://www.sohnetwork.com. Until next time… signing off.