Chinese Firms See U.S. as Land of Opportunity

Neither the collapse of the technology bubble, the slowing economy nor even a terrorist attack can dull Li Yuanhao’s enthusiasm for investing in the United States.

Li is one of several investors from China who see an opportunity to buy U.S. technology and management expertise at a discount.

At the moment, the money involved is only a trickle, compared with the flood of higher-profile investments that came from Japan in the boom years of the 1980s or from Europe particularly during the tech bubble of the last five years.

Nevertheless, Chinese firms have money to spend and an incentive to go abroad because their markets will become crowded after China joins the World Trade Organization this week and is forced to open its borders to technologically advanced foreign companies.

“Chinese companies have to decide whether they want to be aggressive and come out of China to get new technologies or sit there passively and be eaten by foreign competition,” said Li, who is overseeing the U.S. expansion for Holley Group, China’s largest producer of electric power meters. He has bought three U.S.-based firms this year and soon will move to larger quarters in Redwood City, Calif.

Hard numbers on Chinese investment in the U.S. aren’t available because government figures lag by several years and much of the mainland Chinese money coming to the U.S. is diverted through Hong Kong or third-party countries. But interviews with government officials and executives such as Li show that Chinese investors are a bright spot in an otherwise bleak U.S. landscape of plant closures and job cutbacks, particularly in the technology arena.

Wei Qun E, a San Jose immigration attorney, said she has received a steady flow of inquiries in recent months from Chinese firms seeking help getting into the U.S. market. The Chinese Enterprise Assn., a mainland China business organization established in northern California four years ago, has 54 members, up from 18 in July. “Every seminar we have is packed,” she said.

So far, the recent round of purchases has failed to spark the kind of opposition that greeted Japanese investments in such American icons as the golf course at Pebble Beach or the Seattle Mariners. But it does represent the beginning of a deeper involvement in the U.S. economy and technology, analysts said.

Chinese firms are finding a much more receptive environment than three years ago, when U.S.-China relations were strained by accusations of espionage and the Chinese business community was accused of harboring spies. E, who has been working to improve the image of Chinese businesses in the U.S., said Chinese investors are cautious but have been pleasantly surprised by the warm welcome they have received.

“Everybody has been very positive,” she said. “I suspect because the economy is not good, any acquisition helps.”

Lon Hatamiya, secretary of the California Technology, Trade and Commerce Agency, said his staff is engaged in confidential talks with several mainland Chinese companies interested in setting up shop in California. Their main focus is food products, manufacturing and environmental technology.

“We’re seeing tremendous continued interest from China with a number of delegations coming over, most of them government-led,” said the state’s chief trade official.

For Chinese pioneers such as Konka Group, a leading television maker, and Haier Group, one of China’s top appliance manufacturers, cracking the competitive U.S. market was a critical step in building a global brand. Haier America, which invested $40 million in a factory in South Carolina, is selling its low-cost refrigerators, air conditioners and freezers in stores like Wal-Mart and Office Depot and already has captured 50% of the U.S. market for compact refrigerators. The company’s most popular refrigerator, a 4.2-cubic-foot model, sells for $180 at Office Depot. Comparable products cost $150 to $200.

Michael Jemal, president of Haier America, said he offers better value than his competitors because he keeps his overhead low in the U.S. and has cheap research and production costs back in China, where most of the appliances are made. Haier recently purchased a historical building in mid-Manhattan for $14 million and will be moving to its new headquarters next month. Jemal said Haier plans to build another factory in the U.S. as early as the end of 2002.

“We are not really experiencing any of the slowdown that has been really documented across the country, in part because we don’t have the infrastructure a lot of other companies have,” he said. “We are a low-cost producer, and we are aggressively expanding within the U.S.”

Lu Xin, an economic officer in the Chinese Consulate in San Francisco, said these large Chinese firms are investing for the long haul and are not deterred by the gloomy outlook.

“Although the economy of the U.S. is now declining, they are very confident because they think it’s still healthy and this kind of downturn is temporary,” he said.

But given the pull of their domestic economy--which is expected to expand at 7% this year even with a slowdown in exports--many Chinese firms are looking to the U.S. not as a market but as a retooling base to improve their competitiveness back home.

“They view this as a matter of survival,” said Sidney Rittenberg, president of Rittenberg & Associates, a China consulting firm.

That was true of Holley Group, which began its expansion into the U.S. late last year. Getting access to cutting-edge technology was critical to maintaining a 40% share of the competitive China market, said Li, who also serves as an advisor to the chairman of Holley Group.

First on Holley’s shopping list was a small California publicly traded company, American Champion Entertainment Inc. After investing $2 million and selling off the entertainment-related assets, Holley renamed the firm Pacific Systems Control Technology and turned it into a research and development arm for meter technology, Li said. Holley, which controls several publicly traded companies in China, used a stock swap to acquire Pacificnet.com Inc., a small Minneapolis-based software firm.

The ambitious Yuhang-based firm also wanted to break into China’s exploding telecommunications market, already the world’s largest for cell phones. Philips Semiconductors Inc. was anxious to sell off the portion of its wireless business based on the CDMA standard, which is used in the U.S. The firm, a subsidiary of the European telecommunications giant, wanted to focus on products based on the competing European wireless standard known as GSM. China recently agreed to adopt the CDMA standard. (CDMA stands for code division multiple access; GSM is global system for mobile communications.)

In September, Holley purchased Philip’s handset design and software operations in Dallas and Vancouver, Canada, for an undisclosed amount. Philips kept the chip operation and will supply the Chinese firm when it starts production in China, said Ivo Rutten, vice president and general manager of Philip’s BL Cellular Americas in San Jose. San Diego’s Qualcomm Inc. dominates the CDMA market, but the Chinese government is supporting Holley’s efforts to break into the field.

“Holley had money and they bought themselves two jet engines to propel themselves into this market,” he said.

The collapse of the technology bubble has created a buyer’s market in America, Chinese executives said. Li would not disclose the price of his latest acquisition but said Holley negotiated a “very good deal.”

Technology isn’t the only attraction for the Chinese. Holley hopes its Chinese executives can learn more about Western management techniques by observing their new U.S. counterparts, who will be relocated to Redwood City next month. Li said most of the 70 employees acquired with the Philips’ deal will be retained. “There could be some Chinese managers but it’s not going to be managed by Chinese management,” he said. “We know we can’t run an American business with Chinese managers.”

Others are hoping to follow Holley’s lead. Hangzhou Reliability Instrument Factory in Zhejiang, China, is shopping for a U.S. producer of the direct current power modules used in telecom and data transmission. The products would be exported back to China, where a construction and communications boom has created a huge demand for these modules.

“The reason we are interested in buying a company in the U.S. is the slowing economy,” said Lu Qian, chief engineer for the 300-employee firm. “We think the price of buying a U.S. company is reasonable now.”

Some Chinese-born Silicon Valley entrepreneurs also are benefiting from this influx of Chinese capital. Shao Xiaofeng and Jun Li, the co-founders of ServGate Technology Inc., returned to the mainland to raise funds for their computer network security firm. Shao, a graduate of China’s famous Tsinghua University and UC San Diego, said his firm wanted an investor that could provide capital and help sell their product in China, their primary market.

Beijing Tsinghua Unisplender Group, a leading Chinese high-tech firm, has invested $500,000 in ServGate and has provided the U.S. start-up with valuable contacts in China, Shao said. He said he knows of at least four or five other Silicon Valley start-ups founded by Chinese entrepreneurs that have pursued a similar strategy.

“People feel we have to have some money from China in order to successfully occupy market share there,” he said.

Ting Zheng, co-founder of LinkAir Communications, a Santa Clara, Calif., firm that has developed a new chip technology for high-speed wireless communications, has raised $33 million from investors in the U.S. and Asia. He said that many mainland Chinese investors are interested, but that the deals are more difficult to close because they are less comfortable investing in high-risk ventures that promise huge payoffs.

“There is tons of money available in China, but they are much more conservative, not like venture capitalists,” he said. “Our firm is at a stage where we have proven our technology so our risk factor is lower. If you’re just a start-up trying to find money in China, it’s difficult.”