When Seattle-area technology consulting company Akona Consulting went looking for partners in 2007, it soon found an obvious fit — but it may not have been so obvious to an outsider. Akona’s founders sold the firm, which had fewer than 100 employees, to iSoftStone, a privately held information services company seeking to build a global footprint. The business is based in Beijing.
The differences in culture, time zones, and language between Akona and iSoftStone turned out to mean little to each company’s leaders. “It was clear this was the right fit,” says Seth Pinegar, senior vice president for corporate development at iSoftStone. Several Akona founders are now executives at iSoftStone and help manage its U.S. business. Says Pinegar, “We had common clients, and [Akona’s] skills on the ground in the Seattle area complemented our broader reach.”
Akona’s story is hardly unique. For nearly three decades, the business relationship between the United States and China flowed in one direction: U.S. companies big and small poured money into the People’s Republic, setting up factories, sourcing products, and selling goods and services. But that one-way street has started to change.
The recent financial crisis hit the United States far harder than it did China. China’s economy expanded by more than 7 percent in 2009, and it has over $2 trillion in currency reserves. Add to that a weak dollar, and it’s no wonder that cash-rich Chinese firms have begun searching for investment opportunities in the United States. From virtually no Chinese direct investment in the country a decade ago, today Chinese investment in the United States totals more than $15 billion, according to a study by the Heritage Foundation, a conservative Washington think tank.
With China’s economy likely to grow by 8 percent to 10 percent annually for at least the next 10 years, China experts say its investment in the United States will likely increase fivefold over the next decade. “American companies are going to have to get used to this new reality, that China is going to be a major investor here for a long time,” says Karl Sauvant, author of the forthcoming book Chinese Direct Investment in the United States: The Challenges Ahead.
While a few large deals, like China’s stake in Merrill Lynch, have attracted media attention, China clearly hungers for deals with small U.S. companies as well. Indeed, Chinese investment now comes from a much wider variety of sources than it did just five years ago: Sauvant says that the percentage of investment in the United States made by large, state-linked Chinese companies has declined over the past five years, giving way to more investment from smaller Chinese firms and occasional angel investors.
Chinese companies like iSoftStone have several goals when they come to the United States. “[They] are looking to upgrade their management by learning from managers in the United States,” says Sauvant. In addition, by investing in the United States, Chinese firms can find distribution outlets, new sources of capital to help them expand faster, and beachheads for retailing directly to the population.
Chinese investment is already transforming many small U.S. companies. One conference for potential Chinese investors, held in the Los Angeles area, drew executives from 45 Chinese companies looking to partner with small U.S. firms. In Atlanta, China has opened a trade/investment office, which has attracted some 100 Chinese companies seeking U.S. partners.
Chinese investors helped launch Callisyn, a medical device startup originally based in the Boston area; supplied $60 million to a Silicon Valley firm that makes imaging devices; and bought up many of the small auto parts suppliers now struggling as Detroit’s giants retrench. In South Carolina alone, one of the most aggressive states in wooing Chinese investment, Chinese companies have poured more than $280 million into the state.
“At first, many Chinese companies thought America was too expensive to invest in and too foreign,” says John Ling of the South Carolina Chamber of Commerce. “But then they see that electricity and land are actually cheaper in the United States than in China, and they realize that they’ll need to come to the United States eventually if they want to get into this market.”
Still, working with Chinese investors isn’t necessarily easy. Many Chinese entrepreneurs, raised in the Wild West business climate of the People’s Republic, have little experience operating in an environment with clear rules, laws, and contracts. And U.S. entrepreneurs who work with Chinese investors run a risk of alienating their customer base. “The U.S. public is still very suspicious of Chinese investment, because they see China as a future competitor,” says Sauvant.
Yet savvy entrepreneurs can overcome these challenges and successfully attract Chinese investment. U.S. firms may have to seek out investment offices, like the one in Atlanta, since many Chinese firms are reluctant to plunge directly into the United States.
But other obstacles aren’t so serious. Unlike investments from large, state-linked Chinese firms, which are scrutinized — and sometimes rejected — by U.S. government agencies, investments from private Chinese firms don’t receive such scrutiny. Though language might seem like an obstacle, most Chinese companies seeking to go global understand that they’ll have to become experts in English. And despite negative sentiment toward China among the U.S. public, Chinese companies and their potential U.S. partners can easily take steps to improve their images.
“Chinese companies and their partners are going to have to learn what Japanese companies learned in the 1980s and 1990s: how to position themselves as good corporate citizens in the United States by showing how they are bringing jobs to America,” says Sauvant. “Remember how everyone once was afraid of Japan buying Rockefeller Center and other landmarks? Now Japanese investment is normal here.”
Eventually, the same acceptance will happen with Chinese investment, says Sauvant — and when it does, small U.S. companies stand to benefit.
Joshua Kurlantzick is the author of Charm Offensive: How China’s Soft Power Is Transforming the World.