AUSTRALIAN company Nufarm has been targeted for takeover by a consortium that includes an American private-equity firm part-owned by the Chinese Government, with the China state-owned giant ChemChina also joined in the bid.

The investors will bid to buy the Melbourne-based farm chemical producer for a reported $A3 billion, offering a 27 per cent premium on the listed share price.

In this era of globalization with its amalgamations, buyouts and takeovers by multinational firms through various tactics this does not seem surprising, although the target here is an Australian firm. What was not transparent in the announcement of the bid however was the identity of one of the shareholders in the New York-based private equity firm Blackstone, one of two other investment partners in the bid for Nufarm.

The surprise is that earlier this year the Chinese Government announced it would invest $US3 billion to take a share in Blackstone, drawing upon the country’s then foreign reserves of $US1.4 trillion to make the purchase. It said its role in Blackstone would enable it to make bids abroad to expand its growing portfolio of offshore investments. This proposed Australian purchase, if approved by shareholders, would be the first by a China state-owned enterprise in collaboration with overseas partners, but ChemChina alone in 2005 bought a silicone company from a French firm, according to reports.

Recently the Chinese Government announced that one of its state banks would make an initial investment in a large USA bank which provides services to the Asian community in the USA. However, its plan is to secure a controlling interest of 20 per cent of the firm. In addition, the Chinese Government has taken a 2 per cent stake in the British bank Barclays.

Private equity firms tend to target for purchase companies that are undervalued, or operating below potential, and then overhaul the firms, typically trimming the workforce and then selling off at profit (an interesting exercise in capitalism for China which at its just-completed 17 th National People’s Congress reconfirmed its commitment to Marxism and socialism on the path to an “harmonious society”). Private equity firms are tainted predatory.

Blackstone in September was reported to confirm it would invest $US600 million in the Chinese company China National Bluestar Corp, a subsidiary of ChemChina, making this a cross investment.

China, through its huge trade surpluses (it has run a 75 per cent surplus with the United States), now has enormous financial clout to join in purchase of, or fully fund, investments overseas. Last November at a pan Africa-China conference in Beijing the government’s Metallurgical and Construction Corporation announced it had fully funded a $US700 million nickel mine in Papua New Guinea, with production to be repatriated to China to meet its soaring demand for stainless steel. The PNG Government welcomed the investment. PNG’s Prime Minister Sir Michael Somare was in Beijing in 2004 to foster trade ties (China’s demand for forestry products may strike a bell here) and the nickel project’s contract was signed in 2006. Construction has started and PNG’s labor movement has claimed that the Chinese were paying indigenous workers $A4 a day The Chinese Government secured a 10-year tax holiday and import-export tax exemptions. As also recently reported in The Tasmanian Times China has built a large pulp-mill in Myanmar (Burma) to help meet domestic demand.

At the conference, attended by executives from most countries, the agenda was strictly business and environmental issues rated lowly with sole representation only in the World Wildlife Fund. There was scant Press coverage of the environment.

The conference one year on has yielded good results for China because it encouraged “bilateral cooperation” and investment with all African states regardless of domestic circumstances. It has been criticized for its involvement in Sudan for oil interests when the country has the humanitarian crisis of Darfur, but China says its presence in Sudan pre-dated the crisis and it cannot be accused of engagement with Sudan for own interest. However, China’s importation of crude oil from Africa has increased substantially in recent years, the country acknowledged. At the conference China announced various humanitarian aid packages to the poorer states, delivered in the context of bilateral trade, cooperation and investment. The aid was viewed by foreign observers as goodwill sweeteners for trade.

China has been accused of a neo-colonialist policy in its high profile in Africa, with critics claiming it is using goodwill through funding various aid projects such as roads, schools and medical facilities in order to gain access for development and to plunder Africa’s resources. China denies this claim. It has also been accused of using soft loans to African nations to assist their economic development as a way of marginalizing debt relief efforts by western countries and thus excluding other nations from competing for resources due to China’s favored status with those countries.

For a socialist country which describes its economy as a “market economy with Chinese characteristics”, a euphemism for capitalism which is a term eschewed in China, it has an ambitious global business strategy to shore up access to resources, energy and products, in the Australian case agricultural chemicals, in areas it considers vital to its interests. It views global agriculture as a growth area and is keen to enter a market estimated at $US36 billion.

Energy, oil in particular, is high on China’s agenda for investment or securing of supply (last year the country imported 100 million tonnes of crude and demand is forecast to increase, putting more pressure on price and supply) and a few years ago it signed a multi-billion-dollar contract with Woodside in Australia for liquid natural gas supply over many years.  The motor-vehicle industry is buoyant and China will have an annual production capacity of 8,000,000 cars by 2008, with some of this production for export. Vehicle manufacturers abroad are concerned about the implications for their domestic industries in any free trade agreement (Australia is currently negotiating an FTA with China. The domestic vehicle industry in Australia is vulnerable, particularly South Australia’s Mitsubishi which has stayed afloat on government goodwill). China’s aviation industry forecasts some 5000 aircraft on domestic and international routes and Airbus is now manufacturing in the port city of Tianjin, near Beijing, in a deal on investment in return for aircraft orders. Other aircraft manufacturers are jockeying for position.

How has China acquired such phenomenal wealth for such investments abroad? First, its key advantage is the huge labor force and since the so-called “opening” in the early 1980s, urged by Premier Deng Xiaoping, the country has attracted foreign investors by the score, capital, technology and know-how to harness this workforce into not simply a factory for the planet but an industrial juggernaut. The scale of the development here is staggering, seemingly unlimited, and it is viewed as the planet’s second wave of industrialization, with China’s low-cost production enabling millions worldwide to lift their living standards through access to relatively cheap products. But this growth is applying great strain on the global environment. China this week said the country was the world’s greatest producer and consumer of seafood with consumption forecast to increase by 40 per cent by 2020, in an environment of declining wild fisheries. Demand for wood fibre is huge because packaging of many products is extravagant and wasteful but China cannot fulfill its supply so has gone abroad for product, most recently into Myanmar. Air and water pollution are serious throughout the country.

Secondly, there is the discipline of a one-party system, the Communist Party, which applies this discipline through the State Council to the provinces. The central government is involved in law-making and significant changes recently include the Lawyers Law, permitting accused to be interviewed in criminal cases, and plans to expand laws to combat corruption,  the appeal process in death sentences and commercial law. In addition, the central government decides on projects of national importance but has divested itself of involvement directly in the provinces, which make their own decisions on development. This has lead to astonishing development, uncontrolled at times, but with attendant corruption and poor decision-making that has had an impact on the lives of citizens and the environment. Statements from the central government’s bureaucracy are always couched in terms of business and development and senior party members are frequently abroad to promote “friendly, bilateral relationships” (Premier Wen Jiabao has just completed a tour of former Soviet-bloc states to promote trade and this week signed off with Russia on gas and nuclear-energy projects, with trade now at $US40 billion) or meeting visiting heads of state.

Thirdly, in what is a spiritual vacuum, for most of the 92 per cent Han population the ethos is materialism, and hedonistic at that, and there is an insatiable demand for consumables, particularly western-style products. McDonald’s reportedly has some 70 outlets in Beijing alone and they, and Kentucky Fried Chicken, are well patronized. Advertising on satellite TV networks seductively promotes middle-class lifestyles, unachievable for most, but in Beijing and elsewhere wealth is being flaunted in luxury brands such as Rolls-Royce, Ferrari and Rolex. The one-child policy has given rise to a generation now at marriageable age, many raised in an urban environment, pampered and knowing little of natural environments. The population of 1.3 billion continues to grow at 19 million a year and will not peak until about 2040 and then slowly decline.

China’s five-year development cycles ensure targeted outcomes and growth to meet the demand of this rising middle-class and to strengthen national security. It has laid down a huge plan for infrastructure such as freeways, high-speed rail, nuclear power-stations (35 are planned for production by 2030), coal-fired power stations, hydro-electric stations, a high-tech military and blue-water navy, a space program, including a bold plan to explore the moon for resources and to establish a space station by 2020, and effectively the rebuilding of many cities such as Beijing. The current five-year plan endorsed “scientific development by putting people first” and to “concentrate on construction and development” to achieve a “harmonious society” through “socialist democracy”. The pace of development is frenetic.

This domestic growth and its export industries are being enabled by the enormous labor force. At any one time China has an estimated 100 million itinerant workers whose labors are bought cheaply in construction and manufacturing (a laborer in Beijing in construction earns about $A20 a day). The demographics have seen a shift from around 80 per cent rural population to about 60 per cent with the drift to cities and emerging, new regional towns and small cities. This drift has provided the workforce for the manufacturers and developers, which in turn has fuelled demand for consumer goods. Rural decline is expected to continue as China moves into broad-acre agriculture.

China in the late 1970s was poor. It had barely recovered from the failure of Mao Zedong’s attempt at industrialization, the famine that followed and then the turmoil of the Cultural Revolution. Clearly the leaders, in particular then Premier Deng Xiaoping (who said “the color of the cat doesn’t matter, providing it catches mice”; and, “to be rich is glorious”) looked at China, saw the economic success of Japan’s rise in the 1950s and realized the latent potential in China’s huge population. They set out to tap this in what is now regarded by observers inside China as a master plan which has not only lifted the country out of poverty, delivering a near miracle in living standards, but also has secured a chest of treasure which is now being invested abroad.

Some of the wealth is of dubious origin.  Chinese in business have been very clever and adaptive in manufacturing and trade but known to be unethical in the areas of intellectual property (IP) and its dealing with some foreign joint ventures, including copying foreign products brought into China for manufacture (vehicles provided for inspection for importation as models for production by offshore companies have been disassembled, copied, and reassembled. Foreign companies carefully guard their keys to technology when manufacturing in China; for years Windows ‘95 was on every PC). The stealing of ideas or copying of products, including forging currency, is rampant, despite the government’s frequently reaffirmed commitment to international obligations on IP and its sweep for fraudulent products. In Beijing last week a mainstream silk market was heavily fined for copying the North Face label, but this writer could visit several locations in Beijing at anytime to buy pirated products (these sites are seemingly never policed, despite these retailers known for selling bogus products).

The icon Hills Hoist manufactured in South Australia found its product copied by China and sold into the chain stores in Australia cheaper than the locally-made product and Hills had to close its factory and manufacture in China in order to survive.

With local products there was a case two years ago of production of fraudulent milk powder. Bogus products, including liquor, are common. Bribery is common in business and the Supreme People’s Court said that cases were up over 8 per cent this year and it had amended law to embrace business and other areas.  Cases reported included school principals receiving bribes for enrolments and officials of sports club managers being bribed by potential contractors. The judiciary has been offered bribes to secure lenient sentencing.

Examples of China’s ambiguous definition of business ethics are seen in the New Zealand diversified company Fletcher Challenge’s foray some years ago in   joint-venture steel production in Datong, Shanxi Province. The company found that a subsidiary steel mill of the Chinese joint-venture partner was privy to Fletcher Challenge’s financial information and was undercutting the principal’s pricing. Further adding to the company’s burden, police would sometimes check the residential status of the steel mill’s employees and the company would need to offer inducements to hold its workforce if persons were found to be living illegally in Datong (China has a residential permit system). China International Trade and Investment Corporation has taken a 35 per cent stake in Fletcher Challenge Forests.

More recently a major French bottler of mineral water, in a joint venture with a leading Chinese beverage company and enjoying good growth, was baffled by a decline in sales. The Chinese company coveted the entire business and established a subsidiary through which sales were covertly redirected from the joint venture, causing a slump in revenue for the parent. The French company apparently has ceased in the partnership.

In another case, three years ago a Japanese electronics firm, believed to be Panasonic, discovered that a Chinese firm in Guangdong Province had cloned its business entirely, including business cards and office presence, and was selling copied products in the mainland. It was an unsatisfactory response to a warranty claim in China that caused the consumer to contact the head office in Japan and thus expose the scam.

And an Australian importer of various products had on order by contract, and correctly specified, 5000 wooden toilet seats which when delivered were found to have mounting holes offset. The Chinese manufacturer refused to acknowledge error for nearly two years but when finally accepting liability agreed on compensation as re-manufacture at a price double the original contract, with the agent having to pay the original bill and the manufacturer accepting half of the total cost as compensation. Chinese-Australians from Sydney who invested in a toll way found their investment was lucrative, too good in fact because the government joint-venture partner offered to buy them out. They refused and a side-road was built to divert traffic past the revenue-earning section, in order to force a sale. The matter went to litigation.

China’s emerging wine industry is due in no short measure to the skill of foreign experts, who came to China with high hopes some 15 years ago. Having gleaned enough the Chinese now have an independent, viable domestic industry that produces cheap wine but imported wine attracts a substantial tariff (Australia’s Wolf Blass Eaglehawk costs $A27 a bottle in Beijing, with a comparative Chinese Great Wall brand at $A6). Outside the regional city of Miyun in a county of Beijing there is an astonishing, exact scale replica of the Governor of Tasmania’s residence in Hobart, ordered built in sandstone hue by a Chinese entrepreneur after a visit to Tasmania to engage in wine joint venture. The success of any winery, and of its financing, is unknown but there is a large, impressive wooden vat, presumably empty, outside the palatial residence.

Since China’s elevation to the World Trade Organisation in 2001, with conditions on tariffs and a range of other matters resolved with the WTO, there has been strife. In expectation of membership China earlier expanded its textile and footware manufacturing capacity, in particular, and in order at least to justify the investment it began producing but selling at cost, and dumping. In Europe there was a backlash in the torching of a footware warehouse in Spain, and the European Union imposed anti-dumping duties, including on other products the most recent being energy-efficient light bulbs (this drew the wrath of the environmental movement). Recently, China has been accused of dumping steel because of over-production. It has substantial excess capacity in many products.

Currently China is in negotiations with ASEAN nations on free trade agreements. But this will be a rocky road, despite China’s optimism: vehicle parts have been denied entry into Thailand and Indonesia will not permit importation of Chinese-made clothing, according to reports. With Australia any free-trade agreement is not without risk. Australia’s manufacturers are becoming thin on the ground with many having departed years ago to manufacture abroad. Niche agriculture offers opportunity but China has a policy to protect the incomes of its some 700 million farmers and there are tariff barriers. Agreements from China’s perspective offer further opportunity to expand its manufacturing and to access on favorable terms the resources it needs for that production. Any sign-off by China on an FTA almost certainly would need to be seen by China in its long-term favor.

From China’s first master plan, to harness its workforce, there is potentially a new plan for the 21 st Century. Ranked fourth below the United States, Japan and Germany in gross domestic product (China is expected to replace Germany next year, with trade growth up 23 per cent this year on 2006) a plan will foreshadow seeing China as the world’s greatest economic power, replacing the United States, given its manufacturing capacity, its consistent trade surpluses,  control of its currency and, more importantly, the now demonstrated ability to invest abroad and to own, or have some control of, the domestic industries of its trading partners.

China is building impressive military capability: the People’s Liberation Army, comprising the army, navy and air force (until recently it had substantial business interests, and probably still does), has been modernized and is high-tech with a standing army of 1,000,000. It would be a formidable force but the military may never need to show hostility abroad, excluding the issue of Taiwan. Any war waged will be on the economic front and if China continues in its global shopping spree unrestrained by external forces, or does not face resistance from foreign shareholders, then it is not too fanciful to forecast China’s controlling much of the global economy.

The global business community has beaten a path to China’s door, no nation reluctant should they lose an opportunity to join this bonanza. None is prepared to question or criticize too harshly for fear of offending Beijing and losing favor.

So, the questions that arise are these: should the global community trust the leaders of a country whom at the recently-concluded 17 th National People’s Congress in Beijing showed no shame in parading and lauding at the congress two now-retired leaders one of whom, former Premier Li Peng, ordered the People’s Liberation Army in 1989 to turn its guns on its people and murder thousands of democracy protestors in Tiananmen Square; or trust a country that spurns democracy and denies not only involvement of its citizens in decision making through national elections but also does not permit other states to comment on its internal affairs, including that of Tibet; or trust a country purporting to be socialist in ideology but which is cutting its cloth with capitalist private-equity firms, known to cause potential dislocation of workforces,  and investing in those firms primarily to buy foreign-owned companies to bolster its global business power; or trust those businesspeople who use ambiguous ethics in business dealings, stealing ideas and other intellectual property, defaulting on contracts and causing redundancy of foreign workers, including those in Australia,  when factories are forced to close through unfair competition?

Answers and response to those questions may decide the outcome of the planet.

 

 

From a correspondent in Beijing A communist partner in capitalism’s most predatory business

So, the questions that arise are these: should the global community trust the leaders of a country whom at the recently-concluded 17 th National People’s Congress in Beijing showed no shame in parading and lauding at the congress two now-retired leaders one of whom, former Premier Li Peng, ordered the People’s Liberation Army in 1989 to turn its guns on its people and murder thousands of democracy protestors in Tiananmen Square; or trust a country that spurns democracy and denies not only involvement of its citizens in decision making through national elections but also does not permit other states to comment on its internal affairs, including that of Tibet; or trust a country purporting to be socialist in ideology but which is cutting its cloth with capitalist private-equity firms, known to cause potential dislocation of workforces,  and investing in those firms primarily to buy foreign-owned companies to bolster its global business power; or trust those businesspeople who use ambiguous ethics in business dealings, stealing ideas and other intellectual property, defaulting on contracts and causing redundancy of foreign workers, including those in Australia,  when factories are forced to close through unfair competition?