What small deals say about Chinese investment in US tech

Landing at a small US airport, a Chinese businessman walks down the short steps from his private jet and is whisked away to a boardroom nearby to negotiate an investment. He could be talking a big oil project in Texas or buying an entire office complex in Manhattan.

Since 2000, Chinese investment in the US has exploded from a mere US$14 million that year to US$14 billion in 2013 as companies expand overseas and wealthy individuals seek greater diversity of assets. Much of it has gone into traditional areas like energy and property.

But our theoretical businessman might also be one of the growing number of investors from China pumping yuan into US high-tech firms. Over the past five years, more and more Chinese capital has been going into technology- and innovation-intensive industries in the US, according to a new report by the Asia Society and Rhodium Group.

Annual investment in high-tech has topped US$1 billion since 2010, and 2014 is “poised to be a breakthrough year,” with transactions of over US$6 billion announced in the first quarter, the report notes. Big deals this year include Lenovo’s purchase of handset maker Motorola Mobility. Yet increasingly the bulk of Chinese tech deals in the US are sought out by small mainland entrepreneurs.

“Investing in technology companies is primarily for access to markets,” Mark Horn, senior managing director at California-based East West Bank, said at a presentation of the report in Shanghai on Tuesday. “It’s not ‘buy a US company and do something with it’ exclusively.”

China’s shift from being a recipient of foreign direct investment to an active overseas investor over the past decade has been well documented. Natural resources were a first target of outbound yuan, in developing economies and more recently into North American shale gas and oil sands. Private companies snapped up manufacturing facilities and the rich piled cash into houses.

A new set of drivers has evolved more recently, the report notes. Chinese firms higher up in the manufacturing and service chains want to open up the US market and acquire technology to create more advanced products. Executives also want to make their companies better suited to competing globally by hiring skilled talents and working within a mature legal and financial environment. Experience gleaned in China can only teach domestic firms so much.

Transactions in IT equipment, software and auto parts accounted for half of total investment in high-tech sectors in the period 2000-2013. Lenovo has been particularly active, snapping up smartphone assets from Google and the server and personal computer units of IBM.

Headline deals can steal attention from emerging investment patterns. Chinese companies have developed a reputation for flashy bids, especially from state-backed enterprises. But the overwhelming majority of high-tech activity comes from small private firms, and is more nuanced and entrepreneurial in nature than many would expect.

“There is an interesting entrepreneurial aspect to what we are starting to see in China investment into US technology [that is] very different to the large transactions and real estate companies,” Horn said. The median value of investments by companies seeking market access is just US$2 million, the report notes.

Chinese firms are taking small stakes in companies to build partnerships to open a conduit to the US that will allow them to sell their products in that market, but also tempt US companies to China. Horn gave the example of a business park developer in Shanghai that is making small investments of US$2-3 million in Silicon Valley firms to bring them over.

Tiny deals are not confined exclusively to smaller firms. Chinese technology and internet giants Alibaba, Tencent and Baidu are also making select investments in promising enterprises, according to Gavin Pathross, a partner at consultancy Monitor Deloitte.

“They are investing into high tech companies in Silicon Valley in the hope that as they grow together with Chinese investors’ money they are able to come to China through another route,” Pathross said at the event on Tuesday. Beijing has blocked foreign technology firms such as Facebook and Twitter on the grounds of censorship and protecting domestic players.

While high-tech deals account for just a small share of overall direct Chinese investment into the US, this sector will gradually become more significant as Chinese businesses grow their international operations and seek more technology to upgrade their offerings. For a lot of companies, however, coming to America will not be without its problems.

Huawei, one of the biggest telecoms equipment suppliers in the world, has been rebuffed on numerous occasions. China’s rise as an economic power means there is careful, sometimes hysterical, scrutiny of inbound yuan into tech. “Concerns in the United States about Chinese high-tech OFDI and existing distrust and calls for de-Westernization of technology in China could contribute to a dangerous turn towards techno-nationalism,” the report warns.

But the way that Chinese firms have conduced tech investments so far means that sentiment could turn positive. Factories are not being dismantled and shipped back to Beijing; quite the reverse. Most of the deals are greenfield, meaning operations are built on the ground, which results in job creation and investment in local communities.

Expect to see more. Tougher competition in the domestic market means Chinese firms will keep looking overseas for opportunities to grow and learn. The US is still a global leader in innovation as well as the world’s largest economy. When asked about his forecast for this trend, Ken Wilcox, chairman of Silicon Valley Bank, put it simply: “There is no turning back.”

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