There are those that argue that the lower dollar is a blessing, making U.S. goods cheaper, and lowering our enormous balance of trade deficit. While it is a truism that every cloud has a silver lining, this one is a bit tarnished. For one thing, not only does the weak dollar make our exports cheaper, it makes everything denominated in dollars cheaper for foreigners to buy, including what manufacturing capacity we still have here at home. Those who are old enough to remember may recall back in the day when the Japanese yen was strong, and the big concern was Japan literally buying the United States.
Well, we are having a fire sale again, and American companies are once more in the store front window. Leading the pack? Mubadala Development Co., of Abu Dhabi who recently purchased an 8% stake in chip maker Advanced Micro Devices (AMD). AMD is Intel Corp’s principal competitor; both companies make the microprocessor at the heart of the majority of the personal computers used world-wide. As it is not a controlling interest in the company, the deal does not need approval by U.S. regulators, despite the fact that Mubadala is owned by the government of Abu Dhabi. Not to worry, we are told; even though AMD is a company that could be considered critical to our national security (AMD processors are present in a large number of computer systems within the federal government), and even though Mubadala is now AMD’s third largest shareholder, there is no plan for them to take a seat on the board of directors, or exert any influence over the business.
Of course not. They just had an extra $600 million lying around and didn’t know what to do with it, so they just figured “what the heck? Why not just purchase a stake in the second largest CPU maker on the planet?” The dollar is cheap after all, and it fits in well with their other recent purchases; like the $1.35 billion it recently paid for a 7.5% share of the private equity firm Carlyle Group, and the intended purchase, announced in September, of 20% of the Nasdaq Stock Market by the stock exchange owned by the Dubai government.
And then there’s the recently announced 4.9% stake they just purchased for $7.5 billion in troubled Citigroup, the largest asset holding bank in the U.S., making Abu Dhabi the largest Citigroup shareholder. Citigroup has been reeling lately because of large losses due to defaults on home loans triggered by the meltdown in the sub-prime mortgage market, in which Citigroup was heavily invested.
Citigroup is not the only bank to have benefited from bailouts by foreigners. Merrill Lynch and Morgan Stanley have as well. In December, Merrill Lynch announced it would receive “a cash infusion” of up to $6.2 billion from Singapore’s Temasek Holdings. Temasek is a government-sponsored investment funds; the “infusion” involves the purchase of $4.4 billion in Merrill Lynch common stock with the option to purchase another $600 million by 28 March 2008. In total, Merrill Lynch will be selling less than 10 percent of their stock to Temasek, and the deal does not include a seat on Merrill’s board.
Morgan Stanley, one of Wall Street’s biggest investment banks, has chosen China to help bail itself out of the mess caused by investment in risky mortgage-related investments and corporate loans. In December, Morgan Stanley announced a $5 billion investment from China’s government-controlled China Investment Corp., amounting to a 9.9% stake in that firm. Again, the stake is said to be “passive”, that is, the firm has “no special rights to name directors” according to the Morgan Stanley press release.
Bear Stearns, another large U.S. investment bank, bleeding red ink due to the slumping mortgage market, received a $1 billion investment from China’s government-controlled Citic Securities Co in October, giving Citic a 6% interest in Bear Stearns, with the option to increase the holdings to 9.9% if desired. Citic Group, the parent company of Citic Securities, is a state-owned investment firm started under the enlightened leadership of Deng Xiaoping, and is China’s largest brokerage.
Not to be outdone, in a move closer to home Canada’s Toronto-Dominion Bank is purchasing an $8.5 billion share of Commerce Bancorp. Oh excuse me; did I say “share”? Actually, it is purchasing all of it; lock, stock, and barrel. With the Canadian dollar now actually worth more than the U.S. Dollar, and some bad moves by the head of Commerce Bancorp, the way is paved for Toronto-Dominion to expand it’s U.S. market in a big way. This acquisition will double Toronto-Dominion’s presence in the United States outside the east coast, adding around 460 outlets, and $48 billion in assets in nine states.
Foreign investments have always been important to the United States. However typically, foreign governments have limited their investment to low-risk US securities, such as U.S. Treasury bills. Indeed, we rely on such investment to prop up the overspending we tend to indulge in. Interest by foreign governments in other types of investment here, particularly in companies which may have a national security implications is potentially worrisome. Foreign governments make investment decisions differently from private foreign investors.
This has not gone unnoticed; concern has been raised by Senator Jim Webb (D-VA), as well as Senators Dodd (D-CT), Shelby (R-AL), and Bayh (D-IN), who have been urging the Treasury department to develop regulations to ensure proper assessments of the national security implications of such investments.
Then again, there are those who don’t see any of this as a problem, but rather as “an unusual source” of economic relief for our problems. Isn’t it lucky for us that our overspending and other problems have spiked oil prices so high that Arab-petro dollars can bail us out of our problems by buying up all our companies? That’s sort of like saying gee, isn’t it lucky that your house has appreciated enough in value that you can finance your overspending by letting me buy the equity in it?
But wait. We already do that, don’t we? It’s called a home equity loan. Sure is good that our creditor lets us go on living there, isn’t it? But what happens if we can’t make the payment? Then we find out who really owns the home.
But, you say, we have been here before. As I mentioned in the first paragraph, once upon a time it was the Japanese we were worried about buying America. Nothing came of it. The United States are still here and we aren’t all speaking Japanese.
True. But it is one thing when the foreigners doing the buying are private businessmen, fellow capitalists if you will, and quite another when those doing the buying are foreign governments. The two are not equivalent.
Business people make business decisions. Governments make political decisions. There are those, myself included, that seriously doubt the wisdom of allowing foreign governments to purchase interests in U.S. companies. It’s bad enough that the “traditional” purchases of U.S. Treasury bills give foreign governments who hold them influence over growth and inflation rates in this country, not to mention leverage when it comes to political issues concerning U.S. policy and trade. Investments by foreign governments in our business “create even more valuable benefits - access to and possible control over the world-class factories and laboratories that directly create the nation’s wealth and undergird its defenses, and to a financial system unrivaled at raising capital and transferring it to practically anyone anywhere instantaneously.”
Such holdings are by no means limited to the Gulf States. Huawei Technologies, a company related to the government of China, is currently in negotiations for a 16.5 percent share of 3Com, a U.S. company that, among other things, produces network security hardware and software for the U.S. military. How related is “related”? Wikipedia lists Huawei Technologies as “a private high-tech enterprise”, and “one of the world’s leading networking and telecommunications equipment suppliers.” Private company. Hmmm. Sounds pretty innocuous, doesn’t it? The article goes on to state however that
“Huawei was founded in 1988 by Ren Zhengfei, a former director of the PLA General Staff Department’s Information Engineering Academy, which is responsible for telecom research for the Chinese military. Huawei maintains deep ties with the Chinese military, which serves a multi-faceted role as an important customer, as well as Huawei’s political patron and research and development partner. Both the government and the military tout Huawei as a national champion, and the company is currently China’s largest, fastest-growing, and most impressive telecommunications-equipment manufacturer.”For those out there not up on acronyms, PLA stands for People’s Liberation Army. That would be the Chinese Army. You know, they guys with the tanks and guns. Like those we saw on TV a number of years ago, running over Chinese protesters in Tiananmen Square.
Does anyone here doubt that China is a competitor with the United States on many fronts, including politically, economically, and militarily? Does anyone think that a backdoor into network security hardware and software related to our military would not be of interest to the People’s Republic of China? Should such business deals not raise national security concerns here in the United States? Some say yes, some say no.
The 3Com buyout was orchestrated by Bain Capitol, who is paying $2.2 billion for the company, and offering the 16.5% stake to Huawei to help finance the deal and open markets for 3Com products in China. Bain Capitol is a private equity firm founded in 1984 by Mitt Romney, former Governor of Massachusetts and late Republican Party presidential hopeful.
When asked about this, the response from Mitt’s campaign was “Governor Romney is no longer involved in Bain Capital and their investment decisions.” A perfectly appropriate response, as he has not been affiliated with the company since he left it in 2001 to bail out the troubled Winter Olympic games in Salt Lake City. It doesn’t answer the larger question however of what his stance would have been, as President, regarding investment in private U.S. firms by foreign governments or foreign companies tied to such governments.
Although investment in America by so-called “Sovereign wealth funds”, pools of money owned by foreign governments like those mentioned at the beginning of this article, which invested $21.5 billion in American companies in 2007, are particularly troublesome, good old ordinary capitalist foreign investments are on the rise as well.
The amount of money being spent buying American assets, companies, factories and other properties is truly staggering; $414 billion in 2007 according to the New York Times. This is up 90% from the previous year; more than double the average for the last decade. In the first two weeks of January 2008 alone, another $22.6 billion was agreed to by foreign businesses.
Canada led the pack in 2007, spending more than $65 billion to buy stakes in American companies. South Korea now has over $10.4 billion invested in U.S. companies, up from $5.4 million in 2000. During the same period, Russian investments have increased from $60 million to %572 million, and India from $364 million to $3.3 billion.
It’s a piece here, a piece there. Seldom, unless it is a very large amount of money, or a high-profile investment such as Citigroup or AMD, does it make national news. For local economies, facing plant shutdowns, or looking for new jobs, it can seem a God-send.
So who notices when a Saudi Arabian conglomerate buys a Massachusetts plastic maker, as it did in May 2007? Or when a French company opens a new factory in Adrian, Michigan, as it did November 2007, bringing 198 new automotive jobs to an area desperate for such work? Or when in December 2007, a British company purchased a maker of cough syrup in New Jersey?
Then there is ThyssenKrupp Stainless, a German company building a $3.7 billion stainless steel plant in Calvert, Alabama, citing the “low cost of production” in the United States.
Or how about the new Toyota plant, here in San Antonio? While there are those who see the overall rash of foreign investment as worrisome, in the local communities, all people see is the jobs these investments have created. San Antonio, for example, is tickled pink over its new Toyota plant and not only the jobs it has created, but the secondary and tertiary jobs created by businesses moving here to feed the plant. We have rolled out the red carpet.
Investment in American subsidiaries of foreign businesses increased to $43.3 billion in 2007, up from $39.2 billion in 2006 and shows no sign of abating.
In South Carolina, nearly 21% of the manufacturing labor force now works for foreign companies, predominately Chinese. Examples include a refrigerator factory owned by Haier, a Chinese appliance maker; a Chinese-owned chemical factory; a printing company, and a general construction company.
Chinese investment in the U.S. totaled $9.6 billion in 2007; while this is not an enormous amount of money, it is up significantly from $66 million invested in 2006.
Some see this as a vote of confidence in the American economy, the American marketplace, and the American worker. Funny thing though, such confidence seems to only be expressed when the dollar is down. And even though these factories provide much needed jobs for Americans, the profits go back to the parent corporations overseas.
Keep in mind too, that were the economy truly doing well, these would not be “needed” jobs as Americans would already be employed working in American factories.
We keep hearing that our manufacturing jobs are being outsourced overseas because “stuff can be made cheaper in India and China”. But nearly a third of the jobs gained by foreign companies building and investing in the U.S. are in the manufacturing sector. If things are so much cheaper in India and China, why are foreigner’s building and investing here?
So, for better or for worse, it seems America is once again for sale. It may be a fire sale, or it may be a liquidation sale. I just hope it isn’t a “going out of business” sale.