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Thursday, September 24, 2020

Threatening Mergers -- September 24, 2020




Threatening Mergers


 By LARRYROMANOFF – September 24, 2020


In joining the WTO, China made substantial commitments to relax the restrictions on foreign investment, on ownership of assets and the transfer of technology. Coupled with increasingly open capital markets, these acquisitions created convenient conditions for the expansion of foreign control of many economic sectors, with takeovers increasing almost exponentially, led by US and European multinationals. It was originally hoped that the large influx of foreign corporations would inject vitality into the development of China's economy, and it may have done so, but at the same time, has also brought serious negative effects. In particular, foreign Joint Ventures evolved from initial cooperative efforts to a situation where an increasing number of industries and industry segments were dominated by a few foreign MNCs, forming virtual monopolies in some cases.


These foreign-funded enterprises now number about 450,000, and have grown at a double-digit rate, often controlling a market share of 30% or more, accounting for more than half of China's total exports and 20% of its tax revenue. In some developed regions, these foreign enterprises once accounted for more than 40% of all assets, 35% of all added value creation, and a large number of employees. The number of foreign takeovers and acquisitions in China has been growing at a rate of 50% or 60% in the recent few years. In 2010, China recorded 1,800 mergers and acquisitions with a value of $82 billion. Among other effects, these developments greatly increased the cost of commercial development land in smaller centers like Suzhou and Kunshan, and other red lights were flashing as well. And according to a World Bank study of some 12,500 foreign firms in more than 100 Chinese cities, their return on investment was well over 20% - much higher than that of domestic firms - but with a much lower average tax burden. In a real sense, these firms were being paid to take over the country's commerce.



Unfortunately for China, the adage, "most pretty, first married" applies fully here, in that the most attractive domestic firms are invariably the prime targets of so-called "foreign investment", presenting a serious threat to China's economic control and strategic industries. Initially, most Chinese companies failed to anticipate the brutal and predatory nature of US multinationals, and often unwittingly placed themselves in a position where their brands disappeared at an alarming rate after entering a Joint Venture. A lack of uniform standards and a firm hand on these multinationals coupled with the expansion desires of local officials, led to the sale of many domestic enterprises at too low a price, or the sacrificing of long-term benefits for short-term gain. In any case, this all began to lead to the loss of prime assets, foreign dominance, and a constant creeping erosion of domestic economic control.



The fact is that the foreign joint venture partners - contrary to their contractual undertakings with the government in establishing these JVs - are unwilling to develop and promote domestic brands for fear of losing captive technology to latent competitors. The usual result is the transfer of bits of useless and badly-outdated technology and the launch of a few low-end models instead of genuine cooperation in R&D and marketing. We can argue their reluctance to nourish potential competitors is understandable, but that commitment to share was the basis of the very approval of those same JVs. The time to have expressed that reluctance was before entering into those joint ventures which, it must be pointed out, the Chinese government approached in good faith. The result is very large-scale auto manufacturing that is almost totally dependent on foreign firms with no benefit to the domestic industry. Once again the foreign firms have reneged on their commitments and are in fact conspiring through their actions to remove domestic brands from the market. This determination is not casual. As I noted elsewhere, GM took a heavy financial bath by pushing Saab auto into bankruptcy primarily if not solely to prevent a Chinese firm from obtaining some useful auto technology. They do not care about developing local talent or management expertise, but instead centralise everything to maintain control. Local JVs in China will most often learn little, the JV will have no useful technology transfer or osmosis, and only the foreign partner will benefit.



This circumstance of excessive and focused foreign investment inevitably leads to foreign control of a country's economy, forming a direct threat to the development of related domestic industries and to the basic economic security of the nation. In a developing country like China, a high level of foreign investment results in these firms controlling the rate of expansion of various domestic market segments, curbing competition from domestic firms and limiting their rate of growth and survivability. The percentage by which foreign firms dominate a market is of great importance to a developing nation, and most multinationals, especially American ones, have market domination as a first purpose. If this percentage domination reaches 30% of a general industry or 50% in a specific industry, the domestic situation becomes dangerous. At this level, it can become almost impossible for domestic firms to thrive or even compete effectively. A significant number of foreign multinationals have each purchased many domestic firms, with the result that China has in a sense "sold out" much of an industry to foreigners, creating domestic difficulties almost impossible to repair.



Furthermore, this investment-led development forces a synchronous expansion in Chinese industry, creating a situation where Chinese firms are increasingly only a cheap labor component of a foreign-owned supply chain. China in effect would have become simply the blue collar workers for the foreign firms who controlled the JVs, owned the technology and know-how, controlled the markets, and expatriated their great majority share of the profits. As one example, in a recent year, China exported more than 5 billion pairs of shoes, reaping less than 20% of the total profits, while the remaining 80% went to the foreign brands and their distribution channels. In this circumstance, China's low-cost manufacturing creates low prices of goods in foreign markets and rising prices at home for foreign goods but, as foreign multinationals increasingly dominate local markets, the terms of trade worsen for China.



Since dominant foreign firms force domestic wages to minimum levels, China's share of value-added production actually decreases with these JVs. This predatory, and skewed, division of labor would result in China remaining a poor country forever. This is one reason that China's wage growth rate was initially low, at a small percentage of that in countries like the US. The original development model that permitted the disappearance of China's venerable companies and established domestic brands, was one that also had a negative effect on the pattern of social income distribution. It is clear it was not China's goal to make the Chinese the workers of the world for rich Western multinationals, but rather the objective was to build a society where it is the Chinese who are well-off, rather than a few foreigners.



For generations, the huge US multinational corporations, with the full backing of the State Department, used their size and power as well as times of a strong currency to buy up large sectors of many countries. When the US had cash, its corporations went around the world buying up everything attractive in sight, encouraged by the bullying of their government who would bludgeon to death any nation that objected. Canada awoke one morning in the 1950s to discover that US companies owned almost the entire country. Almost all mining and manufacturing, lumber and paper, were owned or controlled by US firms. Most products on the shelves may have been made in Canada, but were manufactured by domestic subsidiaries of American firms. Canada's entire auto industry consisted of American manufacturers. Most significant sectors of the Canadian oil industry were American-controlled. Most of the wholesale trade was American, as were much of the transportation and distribution networks. Almost every program on Canadian TV was American. Almost every book used in Canada's elementary and high schools, and universities, was written and published in the US. It took Canada 50 years to buy itself back. It is always instructive to see how negatively the US reacts to the reverse process. When Japan began buying US assets in the 1980s, there was hell to pay. Rhetoric in the media was so strong it seemed another war was imminent. Foreign companies wanting to expand in the US - or the Right-Wing world, which includes Canada, Australia and the UK, will have the process effectively shut down. For Japan, it was 'because you're yellow'; for China, it's 'because you're communist'. And often veiled in a cloak of "national security". The Economist magazine had an article claiming that China's state-owned firms were on a shopping spree, and telling us:



"There is, understandably, rising opposition to this trend. The notion that capitalists should allow communists to buy their companies is . . . taking economic liberalism to an absurd extreme."



We might as well ask if Protestants should be able to buy assets in a Catholic country or Arabs in a Jewish one, or maybe blacks in a white one. We are not so effective as we imagine, at separating racism and bigotry from practical commercial concerns. This is much more about Imperial Prerogative than about security or form of government. I can buy you because I'm white and therefore superior to you, and because it's my right granted to me by my god. It is written in the Western Bible of Capitalism that commerce is God and US multinationals are His Archangels. Certainly the analogy is fitting, since the US approaches this with a truly religious fervor. The US Capitalist model is founded on a Judeo-Christian white supremacy that is absolutely racist, looking on much of the world with open contempt. "We can buy you, but you can't buy us." It is due to this theological Capitalist model that Americans have their overwhelming sense of entitlement to colonising the world, and react so ferociously to the opposite taking place. But this is all nonsense and American jingoism. There is no practical or philosophical principle to support the thesis that American companies have a God-given right to enter any nation without restriction and purchase anything they want.



The good ship US is nowhere near as open and dedicated to market freedoms as popular American jingoism suggests. This theory applies only when the US is doing the buying and it is your ship that is sinking. The driving factor is global corporate dominance. The agenda shared by all sections of the US government, the multinational corporations, the European bankers, and the media, is a determination to dominate the world's commerce, nation by nation and market by market. This US drive for supremacy is not only military, but political, economic and commercial. American companies seek domination because the US capitalist model is a viciously predatory one that accepts no surrenders and takes no prisoners. Wherever possible, it eliminates all competition and dominates every market, striving for a market share of 100%, and will stop at nothing to keep competitors in the dark and out of the market. Of course, the US reacts violently to any foreign nation exercising such a predatory agenda on its soil. Any approach by a foreign company to take over a significant American business is seen not only as a potential economic loss, but as a political, ideological, and possibly even a military, challenge. The US government will assist American corporations in obtaining unfettered freedom to purchase any and all viable assets in other countries, and will support this with the military, if necessary. In fact, this is now, and has always been, one of the main reasons for the existence of the US military - to use threats of force to assist the US commercial domination of industry sectors around the globe. More than 100 years ago, the US military hijacked the Kingdom of Hawaii so Senator Bob Dole's relatives could obtain control of the plantations.



Upon entering a country, US firms will typically overwhelm a market segment with advertising to weaken and threaten domestic firms. Then, with their huge reserves of available capital and financing, they will seek out and purchase the major players in each industry segment, and close them down to kill the brands. In the newly-created void, consumers are faced with American or nothing, other choices having been obliterated. Virtually all of the famous American consumer-goods companies operate in this predatory manner: P&G, Pepsi, Coca-Cola are some of the worst. The list of venerable foreign brands that have disappeared from various markets due to this predatory mercantilism would shock most Americans who are isolated by a blanket of media silence and never learn the truth about their own nation's behavior. Any action by a domestic government to prevent such destruction of their renowned brands is loudly condemned by the Americans, who will exert enormous political and economic pressure on a weaker nation to conform to this American model. The US government, in cooperation with the State Department and even the CIA, with all its so-called NGOs, will combine their efforts to inflict this same agenda on any nation weak enough to be overcome. Very often, the US government will arrange for its industry groups to file actionable protests against these nations or take charges to the WTO, in a bid to exert yet more pressure to open wider the doors for its multinationals to plunder more easily. This is the American definition of "a level playing field". Some European industry groups like Nestle, Unilever and Danone have learned from the Americans and copied their model quite effectively.



These practices were being extolled by foreign governments, banks, and experts in so-called "think tanks", preaching the gospel of China's corporate landscape reform by imparting foreign management practices and supposedly transferring advanced technology. However, they were simultaneously - and knowingly - working to channel many industries into foreign hands to the long-term detriment of China as a whole. These threats occurred not only in important strategic industries, but in home appliances, food and beverage industries, light manufacturing, farm machinery, clothing, and so on. While China was being praised for following the recipe advocated by mainstream Western (developed-country) economics, the inherent fallacies in the wave of foreign investment through outright purchase or M & A were being exposed. If this process had been permitted to continue, one day all leading companies in all industries in China would have been foreign-owned, and the Chinese people would have had no remaining capacity or influence on their own industries and markets. At that point, a nation would lose control of the foundations of its own economic policies, including the regulation of everything from monopolies to price regulation and its own technological progress. As well, the nation would have slowly bled to death from the increasing outflow of profits to these foreign multinationals. It is to China's credit that the government awoke early to the dangers of the predatory form of Western capitalism, in time to retain control of the nation's economy, industry and resources, and to protect China's national interest. During this development, the US government and its multinationals were whining and exerting every manner of political pressure on China's government to further "open the doors", to "embrace the free market" and give the US "a level playing field". It is worth noting that the US would never permit such industry domination on its own soil by any foreign companies, most especially those from China. As always, American hypocrisy at its finest.



The US media also cooperate fully by demonising such a nation to their public, with accusations of lacking a "rule of law" or of succumbing to "economic nationalism" or "not playing by the rules". News firms like the Financial Times solemnly warn us that today "Investors must continue lobbying the Chinese government to resist the temptation of economic nationalism." The FT also advises us that "If a potential transaction risks provoking "nationalistic" objections, investors will need (to be clever enough) to couch the deal "in the language of mutual benefit"." It is interesting to read the Western spin on these takeovers and acquisitions in China, the US government and many media columnists attributing any difficulty to China's "economic nationalism", casting an unfavorable moral cloud on China's decisions. But it was the US in the case of Japan a few decades ago, and in the case of China today, that American economic nationalism was the over-riding force in acquisition rulings. When Japanese firms began buying up American icons in the 1980s, the US media were almost having seizures about the threat from this "Yellow Peril". And today economic nationalism is prevalent in US protectionism. Acquisition attempts by Chinese companies in the US have not only encountered immense difficulties but often slanderous personal attacks, entirely for political reasons. CNOOC's $18.5 billion bid for Unocal, a US energy firm whose assets were mostly in Asia, was denied on the grounds of US national security and energy security. In fact, it was the Asian assets that were of most interest to China, and the US refusal was clearly intended to inhibit China's attempts to secure adequate energy sources. Huawei and ZTE have been shut out of American markets and blacklisted from purchases because of supposed threats to US "national security". Haier's proposed acquisition of Maytag, a major US household appliance manufacturer, foundered due to an astonishing amount of patriotic nationalism, where another US company overpaid by about 20% just to keep the company out of Chinese hands.



As noted above, foreign Joint Ventures in China, mostly involving American firms, but including some European, progressed to the point where they totaled almost 450,000, often controlling 30% or more of an industry and, in some regions, accounted for 40% of all assets and 50% of all exports. The number of foreign takeovers and acquisitions in China has been growing at a rate of 50% or 60% in recent years and, in one year alone, 2010, China recorded almost 2,000 such mergers with a value of almost $100 billion. Yet Chinese firms today own just 6% of global investment, while at their peak, Britain and America owned more than 50%. Out of 1000 top global companies today, more than 600 are American. How many US companies are in China? Hundreds of thousands. How many Chinese companies are in the US? Maybe five. If you research the numbers, then you will know who is buying up whom. The difference between the USA and China owning a significant part of the worlds assets is a very simple one: China deserves it. The USA has 300 million people, China has 1400 million people. There is nothing wrong or sinister in China's corporations owning five times as many assets as those of the US.



Yet in the light of this, we are constantly faced with the astonishing ignorance of Americans, in terms of anything occurring outside their borders, especially involving the actions of their government and corporations. Consider this comment from an American, posted in response to a typical article in the Wall Street Journal: "Since China doesn't allow foreign companies to invest in corporate assets in China, the US shouldn't allow China to buy corporate assets in the US." This American, whose only source of information is the pathologically-slanted US media, is apparently totally unaware of the extent to which US companies have completed asset acquisitions in China. And that is to the credit of the media and their columnists, on the same page as the US State Department and the American MNCs, preaching competition, free trade and open markets while demonising China and deceiving the American public.



On this topic, June 21, 2016, we had an article in the Wall Street Journal, the mouthpiece of the State Department, by Andrew Browne, denigrating China for a handful of attempted corporate investments in Germany, and further suggesting the entire world is preparing "a protectionist backlash" against this monster, the backlash "fueled by the rise of populist politics". According to Browne, China is "snapping up Western technology and brands" at an alarming pace, with "trillions of dollars" to blow around. Bu Browne tells us "China doesn't reciprocate. The world's second-largest economy comes dead last in a list of countries ranked according to their openness to foreign investment ..." Well, that's a surprise, given that China had, at last count, nearly 450,000 registered foreign businesses, a very large portion of which were American. Browne continues that China "is sliding further backward", "squeezing out", "hobbling", and otherwise hindering the poor American companies desperately wanting to invest in China but who cannot. And even worse, China is "maintaining strict limits" on the chaste and maidenly American banks who, even more desperately, want to introduce China to a 2008 financial meltdown ["an area in which they excel"] - but one with "Chinese characteristics". Browne particularly laments that China's defense industry "is completely off-limits" to American firms, apparently unable to imagine why. As a contrast, he lists India as a shining example of a nation that "will allow foreign investors [i.e. American vulture banks] to buy 100% of defense ventures', neglecting to mention that his own country (either the USA or Israel) would start a third world war before permitting Russia or China, or indeed anyone from anywhere, to purchase 100% of KFC, much less of a defense contractor. But Browne is nevertheless full of praise for India, being "now more open than any other country in the world."



Interestingly, in his tirade against China's "snapping up" everything in the world, Browne provides no examples of these dearly-departed snapped-up, most especially no examples of any such American firms slain in sacrifice. Of course, that's because he has no examples to offer, but let's not spoil the man's story. Browne does offer the obligatory and often-mentioned case of Shuanghui buying the American meat firm Smithfield, as an example of "China buying America", but neglects to mention that Shuanghui is not in any sense a "Chinese" company, being listed in Hong Kong and primarily owned by US vulture funds. The Shuanghui-Smithfield deal was in fact a reverse takeover, giving the US firm Smithfield a position of dominant control in an important sector of China's food supply. And, on the subject of food, Browne informs us that China "jealously guards" its food industry from foreign takeovers, apparently ignorant of the hundreds of Chinese food companies purchased by American firms, or that Pepsi vows to become "the largest food company in China". Browne then includes the also obligatory accusation of China's "rampant theft of intellectual property", apropos of nothing at all and, as always, with a total absence of evidence, a slanderous accusation apparently equating to irrefutable evidence. I've dwelt on this because Browne's article is typical of the daily flood of such articles in the Wall Street Journal, all viciously slanderous, heavily biased, intentionally misleading and always containing numerous fabricated facts and false statements that could be sensibly categorised only as outright lies. Browne fits the mold perfectly, so much so that I use his articles in my EMBA classes as case studies in unethical journalism as well as in the propaganda component of American imperialism. But this article is only one of thousands, and from only one of dozens of US media outlets, all directed in a broad sense and all forming part of the US' intense pressure on China to "rebalance" its economy. I will deal with this topic in more depth later, but a few observations are in order here.



The US wants China to reduce its infrastructure development and cut back on manufacturing and turn to services, on the claim this is more 'sustainable' and will somehow save the world. Infrastructure is of course critical to a nation's development and provides the momentum for it. If Wuhan to Chongqing takes 13 hours, there won't be much trade, but if a new high-speed rail line cuts that trip to three hours everybody will be travelling and the momentum created by that infrastructure will take on a life of its own. But for now let's concentrate on the commercial sector. For manufacturing, the US is demanding China reduce capacity by 30% or more, resulting in the output of most major industries falling by that amount, and with many smaller industries disappearing altogether. The Americans are not completely clear on how this would help China, but let's ignore them for the moment. The important fact is that this enormous manufacturing cutback will be borne by Chinese manufacturers in China. But that raises a question: will the American manufacturers in China also rebalance? Will they also reduce their capacities by 30%? Of course not. They will be expanding by 30% to 50% in their determination to 'dominate China's markets'. And that means the US will eventually be manufacturing 50% or even 80% of all the goods in China - and 50% or more of all the goods in the world, as it once did. The only difference will be that much of that manufacturing will be done in other countries, but the net result will be the same.



And if American firms control 50% or more of China's manufacturing, they will control the country's entire economy. If they control manufacturing, they will control the choice of products being made, and their quality. They will control all the cultural values contained in all those products, values which will be entirely American. If they control that extent of manufacturing, they will also control virtually all R&D, and will have the power to decide which products reach the market and which are withheld. They will be able to prevent new entrants to every market. If the Americans control manufacturing, they will also control wage levels and benefits and, eventually, labor laws. They will also control price levels, that degree of market control being sufficient to set price levels for virtually all products. Long before this finally played out, China would have lost control of its economy and become a US economic colony. And that is the intent, the Americans merely being a conduit for the transmission of this philosophy, obtaining and following the orders issued from their masters, the European banking families that control them. But let's not lose the main point: Browne's article and the entire American bullying apparatus are directed entirely toward attempts to force China to willingly abandon the precise strategy that produced its astonishing development, abandon hope for any future progress, and turn all its manufacturing capacity over to the Americans so as to become a US colony.



Nestlé made a $12 billion purchase of Pfizer Inc.’s baby-food business, and has also purchased a 60% stake in Chinese candy maker Hsu Fu Chi for about $1.7 billion, in one of the largest foreign takeovers of a Chinese company. Yum! purchased China's Little Sheep hotpot chain, with 470 restaurants in the Chinese mainland. AB InBev is on the shortlist to buy China's Kingway Brewery, valued at $700 million. French giant LVMH has acquired a stake in mainland fashion maker Ochirly. AstraZeneca has purchased Guangdong BeiKang Pharmaceutical. Concord Medical Services (Carlyle Group) has acquired a 52% stake in Chang'an Hospital, a 1,000-bed facility in Shaanxi Province. US-based Medtronic, the company involved in a US scandal with patients dying from defective heart pacemakers, has purchased Chinese medical device maker China Kanghui Holdings for $816 million in cash. Boots, Europe's biggest pharmacy chain, purchased a stake in China's Nanjing Pharmaceutical. Cardinal Health, the second largest drug distributor in the US, acquired Zhejiang Dasheng Medic, China's second largest company in terms of hospital sales. Not all applications for takeovers of Chinese firms are approved. Coca-Cola's proposed takeover of Huiyuan Juice was refused because it would have given the US company dominant control of China's juice market, in fact about 80% of the total market for those goods, and not the 20% the US media stated.



We also have a distressing number of acquisitions proposed by predatory American banks and hedge funds, firms that should rationally be prohibited from this kind of commerce since they have neither knowledge of, nor long-term interest in, these industries, and this kind of 'investment' is always a one-way street. Typically, they financialise a company and then destroy it, forcing quality degradation, cutting staff and expenses to the bone, then extracting an enormous profit from an IPO, after which the shrunken skeleton often struggles to survive. These US financial institutions are heavily supported by political and media pressure, but should be banned totally from all commercial categories of what is called 'foreign investment'. Warburg Pincus bought a share of Huiyuan; Goldman Sachs tried to purchase Shineway, China's largest meat producer, after already purchasing Shuanghui and orchestrating its takeover by Smithfields. The Carlyle Group tried to purchase Xuzhou, one of China's largest construction machinery companies. What does Goldman Sachs know about operating a meat company, or Carlyle about construction machinery? Clearly, they don't intend to own and operate, but to financialise and extract cash; nothing else would attract them. The US media proudly boast of the many mergers and acquisitions initiated by these vultures but never provide the public with details of the destruction and eventual demise of many of the victims.


Just as no one should be able to buy and sell foreign currencies except for direct use in international trade, so likewise these so-called financial groups, criminal vultures and scavengers all, should be prohibited from purchasing stakes in foreign companies except as silent shareholders through a stock exchange.


These American banks, hedge funds and other so-called financial groups have left a trail of hundreds of corpses around the world, most often in undeveloped countries from which the news never escapes into the West, and this trail absolutely includes not only corporations but national governments as well. In 1997, Bankers like Goldman Sachs, people like George Soros, and stealthy predators like the US FED were happy to pump billions into Asian financial markets, creating bubbles while destroying currencies, then absconding with a massive profit and leaving behind devastated national economies. Americans blithely refer to "The Asian Financial Crisis", apparently ignorant of the fact that their own institutions and speculators caused it solely from greed, while bankrupting Thailand in the process.





Larry Romanoff is a retired management consultant and businessman. He has held senior executive positions in international consulting firms, and owned an international import-export business. He has been a visiting professor at Shanghai's Fudan University, presenting case studies in international affairs to senior EMBA classes. Mr. Romanoff lives in Shanghai and is currently writing a series of ten books generally related to China and the West. He can be contacted at:



Larry Romanoff is one of the contributing authors to Cynthia McKinney's new COVID-19 anthology ''When China Sneezes''.



Copyright © 
Larry RomanoffMoon of Shanghai, 2020