Tech company headquarters moving to China?

From WSJ Blog on China:



April 30, 2008, 4:33 am

If at First You Don’t Succeed…


Here’s one novel solution for what to do when your company’s planned sale to a Sino-American investment group is upended by U.S. fears about China: move your headquarters to Beijing.



That’s not quite what U.S. network equipment company 3Com is doing - but it’s close. A month after its deal to be bought by U.S. private equity firm Bain Capital and Chinese telecommunication gear maker Huawei Technologies fell apart because of purported national security concerns over Huawei’s planned minority stake, 3Com announced Tuesday that it had replaced its CEO with a new boss - who will be based in China.



Robert Mao, the incoming chief (pictured), is a fluent mandarin-Chinese speaker and a veteran of China’s telecom business, having headed operations there for both Alcatel and Nortel. He replaces Edgar Masri, a veteran of the U.S. tech industry who was appointed in August 2006 (and who isn’t fluent in Chinese - although he’s been studying, as he discusses in this YouTube video.)



3Com’s official headquarters will remain 10,800 kilometers (6,700 miles) away, in Marlborough, Mass., where a newly named COO will oversee the company’s business outside China. But the relocation of the CEO job shows just how important China has become for global technology companies - especially 3Com. While much of its business has fallen on hard times in recent years, 3Com has been booming in China. In the last quarter, fully half its revenue came from the country, and H3C Technologies, its Chinese subsidiary, was the only major business segment that made an operating profit.



Its headquarters may still be in Massachusetts, but 3Com’s heart is increasingly in China. -Jason Dean

Chinese model of economic development?

From the FT:

China’s champions: Why state ownership is no longer proving a dead hand
By Geoff Dyer and Richard McGregor



Published: March 16 2008 17:58 | Last updated: March 16 2008 17:58



When the Aluminium Corporation of China acquired a 9 per cent stake in Rio Tinto last month, the Chinese state-owned company pulled off a number of firsts. Not only was it the biggest ever overseas investment by a Chinese group, it was also the largest ever dawn raid on the London stock market.



Yet while most of the attention focused on what the share purchase meant for BHP Billiton’s efforts to acquire Rio Tinto, the acquisition heralded another important trend – the quiet revolution under way in the Chinese state sector, which has produced a new generation of confident companies with global ambitions.



A decade ago, China’s state-owned sector looked like an economic disaster waiting to happen. In the aftermath of the 1997 Asian financial crisis, average profit margins in Chinese state companies fell to close to zero, and many reported huge losses. The government felt it had no option but to embark on a brutal programme of closures that left tens of millions without jobs.



Fast-forward 10 years and the situation is almost unrecognisable. In 2007, the combined profit of the 150 or so companies controlled by the central government is expected to have reached Rmb1,000bn (£70bn, $140bn, €90bn). In the five years to 2008, this figure rose by 223 per cent. At the end of last year, the list of the world’s 10 most valuable companies contained four groups controlled by the Chinese state – even if this partly reflected the relatively high valuation of the Shanghai stock market.



What we are witnessing, in other words, is an experiment in capitalism that could challenge much of the conventional wisdom about state ownership. Plenty of countries have strong state-owned companies in semi-monopolies such as telecommunications or heavily regulated sectors such as energy and mining. Yet China is trying to create a series of leading public companies in industries exposed to cut-throat competition, where technology, design and marketing are crucial features – just the sort in which state-owned companies have typically suffered at the hands of private rivals.



At a time of growing discussion about whether there is a genuine “China model” for economic development that involves a much bigger role for the state, the fate of China’s public companies could help change the terms of the debate.



One of the most interesting tests will be in the car industry. Chinese companies have startled the auto industry over the past three years by grabbing a 26 per cent share of one of the most competitive markets in the world – which is also now the second-largest. The company with the fifth-biggest brand in the local market – ahead of Nissan, Ford and Hyundai – is the state-owned Chery Automobile.



Based in Anhui, a poor province inland from Shanghai, Chery has benefited greatly from local government assistance in terms of access to financing and land purchases. Critics also claim that the company cut a few corners in its earlier years – its highly successful QQ micro-car was very similar to General Motors’ Chevrolet Spark.



But Chery has also proved skilful at marketing, for example using the internet to create buzz among young car-buyers, and has displayed a ruthless control of costs – neither of which are traditional attributes of state companies. Industry executives have also been impressed by the heavy investment the company has made to boost its engineering capabilities, which will be vital if it is to compete overseas. “Chery looks, feels and has the DNA of a private company,” says Michael Dunne, managing director of consultants JD Power in Shanghai.



State-owned enterprises – often known by the initials SOE – are making their mark in a string of other industries where there is plenty of competition and companies need both capital and a technological edge.



China is awash with private investment in steel, but the industry leader and most technologically advanced steelmaker in the country is the state-owned Baosteel. Chinalco, another SOE, has rapidly become one of the world’s leading producers of aluminium and alumina and is developing plans to become a diversified metals multinational.



Shanghai Electric, meanwhile, is increasingly taking on Japan’s Mitsubishi and Marubeni in bidding to build new coal-fired power plants around Asia. China’s two state-owned shipbuilding giants, China Shipbuilding Industry Corporation and China State Shipbuilding Corporation, are expanding rapidly and beginning to catch up with their Korean and Japanese competitors in terms of technology.



Some of the sector’s improvements reflect reforms the government has pushed on the state sector. Many SOEs have listed at least part of their shares, exposing them to at least some shareholder influence. Executives’ compensation is linked ever more to performance rather than bureaucratic formulas.



“SOEs are increasingly competitive in attracting top executive talent,” says David Michael, head of Boston Consulting Group’s China office. “There are a number of local Chinese managers of multinationals or private sector companies who have gone to work in the state sector.”



Several SOEs have taken on foreign strategic investors in recent years and some have multinational executives on their boards. These relationships have not been without tensions, but they have helped to sharpen performance.



The government has attempted to ensure that those state-owned companies competing globally are competitive at home. Chinalco’s acquisition of shares in Rio was approved by a government agency only after it had pitched its case against other SOEs, including Baosteel and Shenhua, China’s biggest coal company and the world’s second-largest.



There also have been increasing signs that China’s SOEs are learning the skills of corporate finance. Chinalco’s snap purchase of Rio Tinto stock was one example; another has been the ongoing tussle between China’s two biggest airlines, Air China and China Eastern, which could turn out to be the first public takeover battle between SOEs.



Last year, Singapore Airlines agreed to buy a 15.7 per cent stake in China Eastern, which is still controlled by the government but has listed minority stakes in both Shanghai and Hong Kong. The Chinese government gave its approval.



Yet Air China had other ideas, because it wanted to join forces itself with China Eastern to create a national champion. The company started to criticise the deal in public and lobby China Eastern’s shareholders to vote against it. “Everywhere we went, it seemed as if Air China had been there the day before,” says Li Fenghua, chairman of China Eastern. Sure enough, investors rejected the deal after Air China promised to make a higher bid. China Eastern has so far rebuffed Air China’s offer.




Large SOEs in China have always fought tough battles over strategy. But what has been different about the China Eastern situation is that a lot of the debate has been in public – and that Air China has gained an upper hand by offering more money to investors rather than winning a backroom political deal.



Such reforms only explain part of the success of some SOEs. According to Andrew Grant, head of McKinsey’s China practice, many of the successful companies in China have what he calls a “hybrid” structure, mixing features of private and state companies. The best SOEs gain financial firepower from their state parents but have sufficient independence to be managed like private companies. Likewise, some of the most successful privately run groups, such as telecommunications equipment maker Huawei and PC manufacturer Lenovo, have been helped by their close ties to government. “You are starting to see the development of a really interesting dynamic in the state sector,” says Mr Grant. “It is not the case that SOEs are going to dominate the entire economy, but I am very optimistic about some of them.”



The idea of such “hybrid” companies also helps explain the winners in other capital-intensive sectors, including China’s auto industry. “To develop a car company in China, you need to be able to play both sides, running the business with private sector-type discipline but also getting close to local governments for the land and bank contacts that this brings,” says Mr Dunne.



However, the record of SOE reform has not been a uniform success. While there are some outstanding state-owned companies, there are also plenty that demonstrate the well documented pitfalls of political interference and heavy-handed bureaucracy.



Top managers in SOEs are political appointees who can be forced to move jobs regularly between different companies and government departments. In a notorious case in the telecoms sector in late 2004, the government shifted the heads of China Telecom, China Mobile and China Unicom overnight, without giving them any notice.



Older SOEs are often still grappling with outmoded equipment and might be obliged to purchase components and other supplies from affiliated companies, regardless of quality or cost. SOEs can also face more restrictions than other companies when hiring and firing workers.



Although corporate governance has improved, investors regularly complain about lack of transparency in SOE finances, particularly over the transfer of assets between listed companies and their state-owned parent groups.



Moreover, there are several economic downsides to the increasing power of the large SOEs for the Chinese authorities. Although China’s private sector has grown sharply in recent years, the state sector still manages to command the lion’s share of formal financing. The commercial banking market is still dominated by the large state-owned banks and analysts say that these banks still prefer to lend to other large SOEs. Indeed, this close relationship is one reason that the Chinese economy is still vulnerable to periods of over-investment.



The massive boom in the local stock market, which saw companies raise more money in mainland China last year than in any other market, has also largely benefited SOEs. The 12 biggest initial public offerings last year in Shanghai were all by SOEs and accounted for 85 per cent of the capital raised.



Shen Minggao, an economist at Citigroup in Beijing, argues that the recent boom has affected the economy in other ways, by delivering most of the benefits of economic growth to state-owned companies in the form of higher profits, with relatively little going into the pockets of ordinary wage-earners. The massive reorganisation of the state sector in the late 1990s pushed responsibility for a lot of health and education spending on to families.



Meanwhile, the state has been the main beneficiary of the recent surge in SOE share prices, given that in most of these companies only a small proportion of the shares are actually traded – 4 per cent in the case of Industrial and Commercial Bank of China. “It is the state and not households that became wealthier during the blossoming of the SOEs,” says Mr Shen. “Households actually enjoyed only a small portion of the expanding wealth cake.”



Greater independence is good for corporate performance, but there are also signs that China’s more powerful SOEs are outstretching the ability of the country’s regulators to control them. The most remarkable incident occurred last summer, when the large state-owned oil companies forced the authorities to raise fuel prices by helping to create an artificial shortage.



The Chinese government sets prices for oil sold domestically, which puts pressure on the large oil companies – PetroChina, Sinopec and CNOOC – when international prices rise. The response from the large oil companies was a high-stakes game of bluff with the authorities: the amount of oil sold in China was reduced and several large refineries were put on “scheduled maintenance”. When many smaller, private refineries also refused to sell oil at the government-set price, creating an even bigger shortage, the authorities had no option but to increase prices.




The SOEs are also facing a backlash in some Beijing policy circles over their overseas investments. PetroChina has been operating in Sudan for over a decade, during which time Beijing has forged a close relationship with Khartoum. While these ties have prompted criticism that China has weakened international efforts to halt the violence in Darfur, PetroChina has at times sold more of the oil from Sudan to Japan than it has at home – prompting some experts to ask if the controversial Sudan policy actually brings real benefits.



Zhu Feng, of Peking University, says that the oil companies have “hijacked” the country’s foreign policy on Sudan. “Chinese oil companies and a lot of other oil companies in Sudan have made the money. It is not the people or the country [that have made money],” he says.



According to Zhang Yunling, at the Chinese Academy of Social Sciences: “It is not the government deciding to go to Sudan. It is the oil company. They have gradually developed their business and asked the government for support.”



Erica Downs, of the Brookings Institution in Washington, says Sudan is the “crown jewel” of PetroChina’s international business, but that “the company’s domination of the Sudanese oil industry arguably has done more damage to China’s reputation abroad than the activities of any other Chinese SOE”.



“The case demonstrates how the overseas activities of a Chinese SOE can simultaneously harm one Chinese foreign policy objective – to be and be perceived as a responsible rising power – and help another – to enhance energy security,” she says.



The Chinese government has attempted to improve its public relations in recent years, ordering ministries, with varying success, to explain decisions to the foreign and local media. Petro-China, however, one of the country’s most powerful companies, has shown no inclination to fashion a public message.



Elsewhere, in countries as diverse as the Philippines, Zambia and Peru, Chinese investments have provoked a political backlash. “In the future, this issue will become more and more serious,” says Mr Zhang.



For the ruling communist party the political benefits of the SOEs’ new wealth far outweighs any financial costs incurred in keeping them at the “commanding heights” of the economy. To maintain its grip, the party needs a strong state sector with the power to balance a rising entrepreneurial class. The risk for the authorities, however, is that over-mighty companies end up dictating policy themselves.

SAFE gets into foreign investments

From the FT:

Chinese funds jostle to invest abroad
By Henny Sender in Hong Kong and Richard McGregor in Beijing

Published: April 4 2008 23:28 | Last updated: April 4 2008 23:28

Since its formation last September, China’s sovereign wealth fund, China Investment Corp (CIC), has been beset by suspicion and criticism abroad, and recriminations from officials and the public at home, over its investment decisions.



Suddenly, as it battles to establish itself as a credible global investor, CIC has found itself running into another, unforeseen, obstacle – a second Chinese state investment agency with even deeper pockets.



The State Administration of Foreign Exchange (SAFE) is both competing with CIC for investments and complicating the sovereign fund’s attempts to defuse criticism of the way it operates and makes investment decisions.



SAFE, which is under the central bank, has long conservatively managed China’s rapidly swelling foreign reserves, which stood at about $1,650bn (€1,050bn, £828bn) at the end of February.



For a long time, that meant investing largely in US Treasuries. Even now, about 70 per cent of its assets are in dollar bonds, say bankers.



But in recent months, SAFE has emerged as a powerful and more aggressive investor, chasing the kind of returns offshore that CIC was mandated to go after.



SAFE has built up a 1.6 per cent stake in the French oil firm, Total, worth about €1.8bn ($2.8bn, £1.4bn), the Financial Times revealed this week. It has bought stakes in Australian banks and considered investing in private equity funds.



Bankers familiar with its operations believe that it is also considering investing in international real estate.



The decision to make such investments is partly linked to concern over the declining value of the dollar, which reduces the domestic purchasing power of its Treasury holdings.



But increasingly, it raises the possibility of head-on competition between the two pools of sovereign funds, only one of which – CIC’s – is under any pressure to disclose its dealings.



SAFE has potentially far deeper pockets than CIC, which has only about $70bn to $80bn to invest directly at the moment. Moreover, the head of SAFE sits on the CIC board, with access to sensitive information about its planned investments.



For example, when the private equity firm TPG was marketing a multi-billion-dollar fund to invest in troubled US financial institutions, it first approached CIC. But CIC baulked at the terms and it decided to partner with JC Flowers instead, ultimately putting about $4bn into a fund developed by the financial investor. TPG then courted SAFE.



CIC has sought to tackle its critics head-on, conducting its business in a frank and straightforward manner. Lou Jiwei, its head, has toured global investment capitals to make his case.



By contrast, SAFE has a reputation for secrecy, whether its investments originate out of a Hong Kong subsidiary or a newly established office for alternative investments out of Beijing. Its secrecy complicates life for CIC, which is trying to be more transparent in response to concerns from governments that are suspicious of sovereign funds.



The sparring between the two comes at a time when many governments are debating whether it makes sense to have rival domestic investment bodies – a model that Dubai and Singapore have adopted – to spur better performance and impose more checks and balances.



The alternative is to have a single agency, as is the case with the Kuwait Investment Authority, currently a role model for best practice among sovereign funds.



Part of the jockeying between the two Chinese pools of money reflects institutional rivalry. SAFE is controlled by the People’s Bank of China, while the CIC has ministry status and is closer to the finance ministry.

China to build passenger jets

From the WSJ:

China has confirmed plans to set up a company to make large passenger airplanes, taking another small step toward a grand goal but with a long haul yet ahead.



The new company will aim to design, produce and sell jetliners big enough to carry more than 150 passengers. If successful, it could eventually pose a threat -- at least in mainland China -- to Boeing Co. and Airbus, which now dominate the Chinese and global markets for passenger aircraft.



Although China had earlier flagged its intentions to produce big planes, the creation of a company specifically for this task would be new. The venture's shareholders are to include China's two biggest plane manufacturers and the Shanghai city government, Xinhua said, in comments it attributed to Jin Xingming, the director of Shanghai's aviation administration. Xinhua reported in January that the planned company would be capitalized at five billion yuan ($700 million).




AVIC I is making some progress toward this goal, with a 90-seat regional jet called the ARJ21 that it rolled out in December. AVIC I plans to produce 30 of the jets each year by 2011. It also produces aircraft components for both Boeing and Airbus. Starting in August, AVIC I plans to begin assembling entire single-aisle Airbus A320 jets at a plant under construction in the northern city of Tianjin.



Air travel within China is booming. Chinese airlines operated 1,150 commercial aircraft last year, and Boeing forecasts they will need 3,310 additional jetliners by 2026 to satisfy the surging demand.

Intel Launches New China VC Fund

From today's WSJ:

Intel Corp.'s venture-capital arm has completed its first round of investment in China and plans to invest another $500 million in the country over the next several years, executives said.



Intel Capital, the Santa Clara, Calif., chip maker's investment unit, has created the new $500 million fund to focus on technology startups at varying stages, including companies working with wireless broadband, technology media and telecommunications, Arvind Sodhani, the unit's president, said in an interview Tuesday. It is the largest country-focused fund for Intel Capital globally.



Intel plans to fully invest the new fund in three to five years, and is betting China will continue to grow even as other economies slow. When the economy takes a downturn "the natural reaction of investors is not to invest in technology or entrepreneurship," Mr. Sodhani said. But "technology is not really driven by what the state of the markets are at any point in time," he said, adding that "China is on a track all its own. Its economy is growing at a spectacular rate."



Intel Capital has been investing in China for 10 years, and established its first China-focused fund, with $200 million, in 2005. The announcement of its new fund comes as China's technology market is rapidly expanding. The country is the world's largest cellphone market by number of accounts and, by some estimates, surpassed the U.S. this year as the largest Internet population. Personal computer sales are growing at double-digit rates annually, and online services like video-gaming are booming.

What's driving FDI in the US

From the NY Times:

Several factors have propelled the surge of foreign money reaching the United States. The dollar’s weakness against the Japanese yen and European currencies makes American companies cheap for many foreigners looking to invest. The United States remains the world’s largest market, and buying an American company is typically the swiftest way in. And in the wake of the mortgage crisis, American companies are finding credit scarce, making many willing to sell assets to raise cash.




Not least, the United States is living on borrowed money, with the value of imports exceeding exports by more than $700 billion last year. Selling companies to foreigners is one step toward squaring the accounts.




Between 1998 and 2007, foreign companies paid more than $1.7 trillion for major stakes in American firms or to set up operations in the United States, according to the Commerce Department. More than five million Americans work for domestic affiliates of foreign companies.




In 2006, affiliates of foreign companies reinvested $65.4 billion of what they earned in the United States, according to a study by Professor Slaughter underwritten by the Organization for International Investment, a Washington lobbying firm financed by foreign companies. They paid more than $335 billion in wages and salaries, for an average annual compensation of $66,042, nearly a third higher than the average private-sector job.