Last week, I was invited by the Voice of America (VOA) for a remote interview to share my outlook on U.S. - China trade and investment in 2018. The topic is “Will 2018 be a year of war between the U.S. and China in cross-border trade and investment?”
The discussion was triggered by two events, CFIUS’ blocking of Ant Financial’s acquisition of MoneyGram and the failed partnership between Huawei and AT&T.
Yes, CFIUS rejected the acquisition attempt of MoneyGram by Ant Financial, an affiliate of Alibaba, out of national security concern -- MoneyGram is the owner of a large amount of U.S. citizens’ personal information.
Am I shocked to learn of the rejection? Not exactly. CFIUS’ concern is legitimate. Let me put on my hat as a Chinese. Protection of customers’ personal information is not the priority of most Chinese companies, yet.
Will CFIUS block more Chinese acquisition deals down the road? Very likely. However, people forget that the concern over Chinese acquisition activities has been building up for a period of time. Only after Trump took office did both political parties and Congress sit down and take actions. Industries such as semiconductor, aerospace, IT information infrastructure, mobile technology, and consumer data information, fall into the categories of sensitive sectors.
My recommendation to Chinese companies is to stay away from these sectors. There is no lack of good U.S. companies to invest in and/or acquire, i.e., healthcare and biotech.
AT&T bailed out of its potential partnership with Huawei at the last minute, right before the 2018 CES (Consumer Electronic Show in Las Vegas), at which Huawei was expected to announce the partnership. For Huawei, this was most disappointing and frustrating.
Media reported that both AT&T and Verizon had to distance themselves from Huawei under political pressure. I prefer not to read too much into this speculation for lack of data points. Instead, I want to point out a couple of things from a business perspective.
First, Huawei needs to hire a more competent U.S. public relations company, period.
Second, any U.S. carrier has to be bold enough to take on the risk of distributing Huawei’s smartphones. Huawei’s reputation in the U.S. was affected by the congressional investigation in 2011-2012. There is no evidence in the allegation that Huawei had colluded with the Chinese government. Nor did the Congressional report prove Huawei was compromised. Huawei decided to exit the U.S. market. Since then Huawei had been focused on other markets. How does it expect to successfully reenter the U.S. market without sufficiently addressing these prior doubts and concerns from years ago?
Third, Huawei may have to learn from its peer to be more patient and persistent to do well in this new market. ZTE, another state-owned Chinese smartphone company, has made a dent in the U.S. market. It took more than a decade for ZTE to get to where it is in the U.S.
Image credit: Counterpoint research
The political headwinds in the U.S. towards Chinese companies will be getting stronger in 2018 and for years to come. Growing into more than the world’s manufacturing floor in the past decade, China is competing globally for market share with its own brands and technology. If it wants to become a successful global player, Chinese companies like Huawei will have to learn to address regulatory and political hurdles in different countries in addition to others.
The US trade deficit with China will not shrink overnight. Will the U.S. launch a trade war with China? Has the U.S. government lost its mind? There is no point to discuss which country would suffer more.
The VOA also asked what I would recommend to the Chinese government? Sit down and talk. Spewing rhetoric is one thing, solving problems and reaching a consensus is another. The Chinese government has made a gesture to open up its banking market and allow majority foreign ownership in Chinese banks. This is an encouraging development. Also, the U.S. and Chinese governments should identify more products that China wants and the U.S. is willing to sell. For example, recently the U.S. allowed China to start importing LNG from the U.S.
The frenzy of inbound M&A from China may come to an end. Besides stricter scrutiny by CFIUS, the Chinese government will likely be increasingly less tolerant of highly leveraged acquisitions. According to the investment guidelines recently released by the Chinese regulator, the deal size at or below $300 million has a better chance to get approval. Entertainment, sports and real estate investments and acquisitions are restricted by the government.
Taking both governments’ practices into consideration, in 2018, we may see smaller size transactions and hopefully more sophisticated, strategic buyers and investors from China. As I previously mentioned, I am bullish about biotech and healthcare sectors.