Dec. 11, 2012 at 7:17 AM ET
U.S. manufacturing is getting a dose of medicine – Chinese medicine, that is. And while, like much Chinese medicine, it’s unpalatable to Americans, experts say it’s a salve the economy needs.
Chinese investors will sink as much as $7 billion into American companies this year, and there’s more where that came from. “I think there’s a good case to be made that the number’s going to be higher next year,” said Thilo Hanemann, director of research at Rhodium Group, a consulting firm. “In general, we are at the beginning of a structural trend. If you look forward to 2103, there’s quite a few deals in the pipeline we already know of.”
Rhodium’s $7 billion figure goes beyond manufacturing to cover all Chinese investment, like the pending deal between AIG, which is selling just over 80 percent of its airplane-leasing unit, and a consortium of Chinese investors.
Chinese investment in European companies has surpassed the $10 billion mark, Hanemann said, as the country flexes its growing economic muscle. A new report by the National Intelligence Council says China will surpass the United States as the world’s top economy before 2030. Predictions like this provoke worry among some people in the U.S., especially since the ambitions of its industry and state often are intertwined in China, but Hanemann said the concern is overblown.
Contrary to the belief that Chinese buyers will gut a company’s intellectual property and then move production to China, a Rhodium analysis of hundreds of deals over the past decade showed that Chinese involvement was more likely to preserve or grow rather than erode the local job market.
Manufacturing is especially good at this. “There’s a big ripple effect,” said manufacturing consultant Bill Waddell. “Manufacturing, more than any other industry, drags a big tail. It creates a lot of jobs outside the factory.” China’s interest in American manufacturing is concentrated in alternative energy, electronics, aviation and other high-skill industries. “Fairly expensive manufacturing are the things that are going to come back here,” he said.
And jobs in those industries tend to be good ones, said Jeff Strohl, director of research at Georgetown University’s Center on Education and the Workforce.
According to the Bureau of Labor Statistics, median pay for a tool-and-die machinist is roughly twice what a child care worker earns, and 25 percent higher than what an unskilled assembly line worker makes.
Chinese firms (as well as American ones) seek out lower labor costs by building facilities in Southern states, where right-to-work rules translate to lower wages, especially for unskilled labor, where the pool of workers is larger than the demand. “There’s been a growing duality in the labor market, even in manufacturing,” Strohl said.
In a handful of cases, Chinese manufacturers are investing to build factories on American soil. In October, computer maker Lenovo announced plans to open a factory in North Carolina next year that will crank out laptops, tablets and desktop computers.
Analysts speculate that Apple will turn to long-time manufacturing partner Foxconn Technology Group — which recently expressed a desire to expand its U.S. footprint — when it comes to making computers in America, as CEO Tim Cook announced the company will begin doing next year. Tianjin Pipe Co. broke ground on a $1 billion plant in Texas last year, and Golden Dragon Precise Copper Tube Group is building a $100 million factory in Alabama scheduled to open in 2014.
Hanemann said Chinese companies more commonly enter the American manufacturing sector through acquisitions. “Chinese companies are highly interested in moving up the value chain,” he said. It’s quicker to buy than to build.
Wanxiang Group Co., a Chinese maker of car parts, just placed the winning bid in a bankruptcy auction for A123 Inc., a Massachusetts-based company that makes batteries for electric cars. Earlier this fall, Silicon Valley solar cell maker MiaSolé was bought by Hanergy Holding Group for $30 million after reportedly burning through $500 million in venture capital.
Purchasing a company, even a troubled one, gives Chinese buyers access to human talent and know-how. “Oftentimes, when we talk about technology and manufacturing, it’s not so much about patents or the physical assets but the human knowledge that exists on the ground in those operations,” Hanemann said.
Chinese companies want to build here for a few reasons. As China’s economy has boomed and its people have become more affluent, the cost of producing goods there has risen steadily. Also, rising fuel costs have pushed up the price of shipping items across the Pacific Ocean.
It’s an economic shift that big American manufacturers are responding to, as well; research published earlier this year by the Boston Consulting Group said that more than a third are considering or planning to relocate production back to the United States.
Then there’s the tariff issue. Manufacturing in the United States keeps Chinese firms from running afoul of regulators. Missouri Senator Claire McCaskill sent a letter to the acting director of U.S. Customs & Border patrol earlier this year, pointing out that much of the Chinese-led manufacturing coming to the U.S. is in industries where Chinese firms have faced anti-dumping penalties. She urged the agency to step up enforcement against attempts by importers to evade tariffs.
Finally, there’s the marketing aspect. A “Made in USA” label reassures buyers here. In some cases, it confers cachet on items exported to be sold to China’s growing consumer class. Appliance maker Haier, a pioneer when it opened a refrigerator plant in South Carolina more than a decade ago, ships high-end refrigerators made in the U.S. back home for sale in China.