Chinese Investment in the US - Chicago Booth Emerging Markets Summit

As a second installment from the Chicago Booth Emerging Markets Summit which took place on April 27, one of the sessions focused on Chinese investment in the US. Many had anticipated a greater flow of investment flow into the US during the recession, and Chicago has been very interested in serving as a headquarters location for Chinese manufacturing and distribution with access to the entire country.

Zhao Weiping, Consul General of China in Chicago, offered a nice summary of the state of Chinese investment in the US, though expressed the concern that Chinese investors may be reluctant to act in greater numbers due to a perception that their increased investment may be politically unwelcome.

In his presentation, Consul General Zhao indicated that Chinese investment in the US has a short history - up from $2.7 billion in 2002 to $77.2 billion in 2012, for an increase of some 28 times. Here are some notable examples.

While Chinese officials are making a strong case to Corporate China that investment into the US should be increased, there is a perception among Chinese investors that the US is not open to Chinese investment, and Consul General Zhao provided several examples of investments that have been blocked.

I countered at the session and personally to Consul General Zhao that the US is actually very open to Chinese investors, that those investments that have been blocked are some of the small numbers of inbound US investments that allegedly raise national security concerns, and that the vast majority of investments coming to the US from China are of a kind and size that will encounter no resistance at the US national level and will be welcomed with open arms at the state and local level.

Moreover, I suggested that viewing US-bound investment through a lens of "government regulation/governmental review" may be understandable coming from an economy such as China with much more governmental involvement in regulating foreign investment. However, such a lens suggests much more governmental involvement in inbound investment in the US than is actually the case and may unnecessarily alarm potential foreign investors whose manufacturing, distribution and other activities are subject to absolutely no governmental regulation or interference.

Private Equity in India - Chicago Booth Emerging Markets Summit

I will be offering a few blog entries from the Chicago Booth Emerging Markets Summit, which took place on April 27.  Let's start with India, and something of a personal and subjective synopsis of the views presented by Jahangir Aziz (Chief Economist, JP Morgan India), Jai Das (Managing Director, SAP Ventures) and Archana Hingorani (CEO and Executive Director, IL&FS Investment Managers)

New investment dollars into Indian PE funds were down by 73% from 2010 ($7.7 billion) to 2012 ($2.1 billion). Over the same period, this compares with a decrease of 25% for China (from $14.5 billion to $10.8 billion) and a decrease of 6% overall for Latin America (from $4.5 billion to $4.2 billion).

For India, there is still significant dry powder for new investments and capital is still being deployed, though it is the raising of fresh funds that is down. Why? Growth in India has declined from the range of 8 - 9% to about 5%.  The Rupee has decreased in value, making dollar investments worth less than they were a few years ago. Inflation is up to about 10%.

PE's reliance on debt to help finance deals has limitations in India (though India just announced some liberalization on debt that can be raised). Exits are hard - there are few IPOs and strategic investors are selective. Private equity continues to be a challenge since most businesses are run by families that do not like to relinquish control and don't want to submit to the outside influence as the cost of taking equity. Private equity in India dates only to 1991/1992 and many are still not used to the concept of capital in exchange for ceding part control.

What about the next few years?  Some promising trends: (1) a new Indian economic team is taking growth seriously and is rapidly gaining respect, and (2) the Rupee shows signs of strengthening and could be up significantly in the next 5 years. With growth potentially on the rise and the Rupee strengthening, this puts a tail wind behind all sectors. Even without this, here is an economy still in the early stages of potential, a bit overlooked compared to China and which even now is offering a respectable 5% growth. Moreover, even the present consumer class is in the range of 250 million people, and growing.

Overseas Operations Driving Profitability. The Largest US Companies Are Benefiting - What About the Rest?

Today's New York Times offers yet another summary of how earnings growth outside of the US can be an important contributor to company performance, yet can be harder to achieve for the under-resourced next tier of companies outside of the very largest. 

Similarly, our largest clients and contacts remained committed to their global operations over the course of the recession, though the middle market and smaller companies tended to pull in their ambitions and stick closer to their home markets. While we are seeing evidence of a thaw, it is just these fast-growth markets that are ever more important in offsetting slower-growth US and European economies. 

As the New York Times article observed: 

"In fact, the case of General Electric, which reports first-quarter earnings on Friday, neatly illustrates how overseas operations at many of the most familiar American companies have grown rapidly in recent years even as domestic activity has lagged. Total employment at the company dipped slightly to 305,000 in 2012 from 316,000 in 2005, but the number of workers it employs in the United States fell more sharply, to 134,000 from 161,000 in 2005. Over the same period, the proportion of sales that came from the United States fell to 47 percent from 55 percent."

Update: Foreign Investment in Retail - OK, Perhaps a Bit Less Than Half Full

I noted the other day that the Indian government is going ahead with the further liberalization of "single brand" retailing - to 100% foreign equity from the current 51% limit - despite backtracking on efforts to allow any amount of foreign equity in "multi-brand" retailing.

With a catch. Foreign retailers that opt for 100% equity in single brand retailing must source 30% of the goods sold in the retail outlets from Indian small-scale producers.

Here are some quotes from the Economic Times:

"'It is going to be a challenge for most brands. I don't know if brands will change their global manufacturing processes for India,' said Sanjay Kapoor, managing director of Genesis Luxury, the joint venture partner of Burberry in India, which also represents other luxury brands like Canali, Jimmy Choo and Bottega Veneta." .  .  .

and also:

"'The scale of the Indian market is small at the moment for it to make sense of the luxury brands to start manufacturing in India, only for India,' said Neelesh Hundekari, principal at consulting firm AT Kearney."

As cross-border lawyers representing companies entering India and many other countries, we have found that foreign equity liberalization is often only part of the story - other restrictions can impede investment opportunities. For example, some years ago in Japan a liberalization to foreign retailers was in effect blocked by the ability of local Japanese retailers to veto a foreign retailer's entry on a number of very broad grounds.

Foreign Investment in India - Half Empty for Retail, But More than Half Full Overall

Our clients and contacts have been expressing concern over some backtracking on the Indian cabinet's announcement of a further expected opening to foreign investors in the retail sector. Our view is that the spat over retailing should in no way overshadow the fact that foreign investors can hold up to 100% equity in the vast majority of industry sectors, and that many of these sectors are open through a streamlined automatic approval process.


The current retail status: 51% foreign equity is allowed in "single brand" retailing (think Armani) but no foreign equity allowed in "multi-brand" retailing (think Walmart). Walmart was still able to enter India through a joint venture in back-end operations and distribution even though its Indian partner, Bharti, owns 100% of the front-end retailing.

The November announcement was that 51% foreign equity would soon be allowed in multi-brand retailing and that the 51% in single-brand would be increased to 100%.

As with many countries, retail raises sensitive political issues due to the large numbers of small local retailers (and their bigger counterparts) that feel threatened by a foreign influx of retail sales. An outcry in India after the announced liberalization caused the Indian cabinet to put the multi-brand change on hold, and the foreign and local press have been spilling a lot of ink over this.

Not ideal, though we heard today that the Indian government is still moving ahead with the change to allow 100 per cent foreign direct investment in single brand retail.

Audit 4: Take a Second Look at Arbitration for Contract Dispute Resolution

Whatever the type of your cross-border agreements, it is dangerous to assume that a court judgment from a convenient and familiar local court would be enforceable against a foreign party with assets in another country. 

It is one thing if the foreign party has in-country assets (say in the US) that can be attached locally (such as in domestically enforcing a US court judgment against assets in the US). If is another matter if one needs to rely on the generosity of foreign courts to enforce a judgment.

There are generally no treaties that will require the enforcement of a foreign court judgment (except among certain groups of countries), and local courts may look to uncertain concepts such as whether the foreign court offers reciprocal enforcement and may require a re-litigation of the underlying issues.

Audit 3: Online Business: Terms and Conditions, Privacy Policies and Marketing Practices

Sales terms and conditions are also embedded in web sites, whether or not your company’s site is e-commerce enabled. Many companies do not focus on the fact that these terms need to comply with cross-border laws and regulations. 

Opt-in and opt-out rules and a maze of privacy and data protection requirements in Europe and elsewhere also present lurking enforcement and liability problems if local-country rules have been ignored. Marketing rules in many countries also need some attention.

We suggest pulling your company further out its “home country centric” approach, especially if you have an important customer or supplier base in multiple countries. Your counterparts will also appreciate your international savvy and professionalism as a result.

Audit 2: "Internationalizing" Your Sales Terms and Conditions

We see too many companies depend on inadequate sales terms and conditions for their international sales. Do you really think that a judgment in a Chicago court can be readily enforced in China or India, and what about those warranty and limitation of liability provisions – are these unenforceable or do they otherwise fail to take into account local law requirements?

If distributors are also involved, these terms can also be inconsistent with the distributor agreement terms, leading to confusion and heightened liability. 


As a first step, and for a low fixed price, we assist clients by gathering together their purchase order or sales terms, analyzing them, and then offering options for implementing best-practice changes (with foreign local law adjustments) along with clear budgets.

Audit 1: Optimizing International Agency and Distribution Agreements

Businesses large and small appoint international agents and distributors to get their products to market. We often see that these relationships may be based on a US form agreement, on agreements that may be out-of-date or – even riskier – relationships based on a handshake. This is dangerous territory in Europe, parts of Latin America, the Mideast and parts of Asia that protect local dealers and can make termination very expensive.

Far better to keep your company out of local courts and help limit the impact of local dealer protections, such as by creating a best-practice cross-border distribution and agency agreement templates with adjustments for key international markets. Laws may also limit your ability to set prices and designate territories, as well as require unexpected taxation on revenues. The small amounts invested in agreement optimization can be repaid many times over in improving your dealer relationships, avoiding disputes and allowing early termination if necessary.

Asia's Largest Law Firm - Announced Today

King & Wood, the well-regarded Chinese law firm, is "merging" with Australia's Mallesons Stephens Jacques to create what is being called Asia’s largest law firm.

The name:  King & Wood Mallesons.

A sign of the times that a significant Chinese law firm would help to lead such expansion.

Note that foreign and Chinese law firms are not allowed to share revenues and must be operated as separate law firms - hence the structure as alliances for McDermott's foray into China with MWE China Law Offices, a separate Chinese law firm.


How will the Chinese legal community react to this one?

Cross-Border Joint Ventures - A Word From Benjamin Franklin, Circa 1791

Yes, that Benjamin Franklin, United States founding figure and printer, writer, inventor, diplomat and scientist - the guy on the US $100 dollar note. While his observations were on partnership, they apply equally well to joint ventures, which after all are a form of partnership. Clients often observe, correctly, that good relationships are built on trust, but I counter that without something more to document and support the intention of the parties, those relationships are at great risk of dissolution, and especially so given the complexities and cultural disconnects in a cross-border venture. On to Mr. Franklin, from his Autobiography:

"Partnerships often finish in quarrels; but I was happy in this, that mine were all carried on and ended amicably, owing, I think, a good deal to the precaution of having very explicitly settled, in our articles, every thing to be done by or expected from each partner, so that there was nothing to dispute, which precaution I would therefore recommend to all who enter into partnerships; for, whatever esteem partners may have for, and confidence in each other at the time of the contract, little jealousies and disgusts may arise, with ideas of inequality in the care and burden of the business, etc., which are attended often with breach of friendship and of the connection, perhaps with lawsuits and other disagreeable consequences."

Why "Local" [Law and Practice] Matters in the Age of Globalization

After attending our November 8th event on challenges in doing business with India (see below), we thought we would put in a plug for our friends at the Chicago Council on Global Affairs for their November 9th event in Chicago:

WHY “LOCAL” MATTERS IN THE AGE OF GLOBALIZATION

The following quote caught my attention - it is exactly our role as a cross-border law practice to help businesses to understand the local dynamics of different countries - with a focus on foreign market entry, legal systems and taxation (hence my slightly modified title above):

"Marvin Zonis and Joseph Yackley argue that as global interconnectivity grows, understanding the local political, social, and cultural dynamics of different countries is critically important to the success of foreign policy and international business."

Here is a link to the registration

Open Invitation to a November 8th India Gathering - Chicago

We are again hosting an event to help promote the Inter-Pacific Bar Association’s annual conference – November 8th in Chicago, and surrounding dates for Toronto, Los Angeles and New York. 

We are trying to gather as many interested lawyers and business people as possible for this substantive panel and a discussion of the IPBA annual conference to take place in New Delhi from February 29th to March 3rd.

Please pass this along to whomever you think would have an interest. 


Nov. 8  CHALLENGES IN DOING BUSINESS WITH INDIA

Panel discussion, sponsored by the Inter-Pacific Bar Association, will address challenges facing U.S. companies doing business with India, including: Dispute Resolution from a Foreign Investor’s Perspective; India’s Progress with Corruption and Ways to Handle It; Perspectives on Working with Regulators and Bureaucracy; and Intellectual Property and Non-Competition Issues in Working with Employees and Partners. 5:45 – 8:00 p.m., 200 South Wacker Drive, Suite 3000, Chicago. No charge; advance registration required by November 4. For information & registration, please e-mail:laverty@internationalcounsel.com.

PANELISTS
Lalit Bhasin
Bhasin & Co., New Delhi
Incoming IPBA President

David Laverty and Chandini Prakash
InternationalCounsel, Chicago

Suhas Srinivasiah
Kochhar & Co., Bangalore

Praveen Agarwal 
Agarwal Jetley, New Delhi

"Right-Sizing" Legal Services and Our Approach to Cross-Border Legal Practice

The legal profession in the US continues to struggle to find its way in the face of companies and capable in-house counsel who are taking firmer control of their legal needs and destinies.

The legal press has been abuzz in the last several months over the continued progress in "right-sizing" legal work, recognizing that fixed and alternative fee arrangements (no, not new, but now pursued with new-found urgency), legal process outsourcing form India (Thompson-Reuter's acquisition of Pangea3 is causing many skeptics to finally take serious notice), temporary lawyer services (in some cases delivered with increasing sophistication and marketing polish) and alternative law practices are part of a movement away from the traditional ways of doing legal business.

Welcome to our world, in our case by re-imagining how cross-border legal services can be delivered more effectively and efficiently. Not just since the beginning of this particular recession, but since our founding back in the mid-1990s.

In October, Hildebrandt Baker Robbins released a Law Department Survey of 252 companies in 23 industries that, as a Hildebrandt blogger describes it, "provides strong evidence of the economic drivers for the transformational changes rippling through the legal industry."

For example, favored in-house cost management techniques now include implementing alternative fee arrangements (by 76% of those surveyed), keeping more work in-house (by 69%), and using regional or boutique law firms (by 68% of those surveyed).

We have been strong believers in the need for change in the legal profession, and while our true secret sauce lies in our methodologies for delivering our senior, hands-on, more streamlined approach to solving cross-border legal issues, cost-effectiveness is an important outcome of our services.

And of course we hope to continue to be just that sort of "boutique" practice that is in increasing use by internationalizing companies!

Global Foreign Direct Investment on the Rise

Our November newsletter offered both statistics on the rise of global foreign direct investment from the lows of last year, as well as a link to our article on the use of the Netherlands as a holding company for foreign investors.

Click here for this and a few other newsletters in our archive

Mumbai Rises

I just returned from Mumbai (and Singapore), where I was joined by our Netherlands-based colleague for presentations to corporate audiences and individual meetings with clients and contacts.

The mood is optimistic. The Oberoi Hotel just re-opened. Breakfast at the Taj Hotel is a gracious as ever. Private equity is moving ahead with fresh rounds of investment.

My lost iPhone was rescued by a taxi driver and returned to the Four Seasons, where I was able to retrieve it. OK, all is not perfect - I missed my flight out of Mumbai.

Stay tuned for further updates.

Think Again Before Specifying US Courts in a Cross-Border Agreement

As I have written in the past, we seldom recommend that clients specify US courts as the choice for dispute resolution in cross-border agreements that may need to be enforced in another country. Not to single out China, but the China research below confirms an enforcement issue that US parties face in most countries.

Arbitral awards are simply a better enforcement bet among the many signatory countries to the New York Convention – enforcement is required by the Convention in the absence of fraud and other specified instances. By contrast, the enforcement of US court judgments is discretionary and usually based in part on whether the US has enforced judgments from the other country on a reciprocal basis.

Back in June, 2007, I posted a blog entry referring to a search for even a single example of a US court judgment that has been enforced in China. The search was posted by Don Clarke, a George Washington Law School professor who moderates an excellent China law discussion group. As far as I know, nobody in the discussion group was able to produce a single example.

A member of the China discussion group just posted (on March 1) his own preliminary review of the 26 foreign court judgments and 16 arbitral awards that he could locate that requested enforcement in China through Chinese courts. The member is Wei Luo, Director of Technical Services and Lecturer in Law, Washington University School of Law Library.

Mr. Luo found that almost all of the Chinese courts agreed to enforce the foreign court judgments if requested by a Chinese applicant. Yet, he did not find a single instance of enforcement if the applicant was a foreign party and the Chinese party did not agree with the enforcement.

In contrast, Mr. Luo found that most of the Chinese courts granted the applications to enforce a foreign arbitral award.

Many are finding that Chinese courts are improving and are becoming more open to arguments presented by foreign parties, and the uncertainty over the enforcement of foreign court judgments is an issue in most countries, not just China.

"De-Globalization" vs. "The Wal-Mart Effect" in India and Beyond

A few weeks ago, Jim Valderrama from Grant Thornton and I presented at an international roundtable event at the University of Chicago Booth School of Business - our theme was whether we have been seeing a "de-globalization" of US mid-market companies that will extend beyond the recession. (Thus, the tie-in to the photo caption - "Robinson (American) falling into sea near Nice")

We looked at data on US direct foreign investment and cross-border acquisitions into many parts of the world, and there has clearly been a major drop in activity over the past 18 months. Yet, more of a drop in cross-border activity than in overall economic activity? Hard to tell, though I referred to evidence from some of our own clients and contacts that there has been a scaling back in ambitions among mid-market companies. For example, many have found that China has been more expensive and a greater drain on senior management than expected, and mid-market companies do not have the same level of resources to handle such far-flung expansion as do larger companies.

Surely much of the cross-border expansion among mid-market companies and otherwise will be returning in strength as the US economy thaws. Many of course are more motivated than ever to take advantage of higher growth rates in BRIC economies and elsewhere and the "portfolio effect" of multiple bets in multiple countries.

Wal-Mart is one of the many examples of companies placing great faith in international expansion, as is evidenced by recent moves in India. We have reported in the past on Wal-Mart's tie-up with Bharti in India to establish retail stores, though foreign retailers remain restricted in India from owning equity in "multi-brand" retailing (I was formerly the legal head of Kmart's international expansion in China and many other countries, and our blog entries have noted that market openings for retailing often lag behind other sectors - India's economy is otherwise quite open for most sectors).

As reported in the November 6th issue of the Economic Times of India, Wal-Mart's chairman recently met with Prime Minister Manmohan Singh in New Delhi to lobby for more access to the Indian market, the company's CFO recently noted that Wal-Mart is stepping up growth in its international operations to take advantage of growing economies and opportunities in emerging markets such as China and Brazil, and the head of its international operations referred to a US$5 billion fund set aside for its international expansion and "India can use as much as it wants."

We hope that the next tier of companies is paying attention to such aggressive faith in global markets and will not sit out the next round of revenue and profit opportunities outside of the US.

Largest Indian Outbound Deal Ever - Will it Happen?

Bharti Airtel had bid US$23 billion to take over MTN of South Africa, a major telecommunications company. If completed, the deal would become India's largest outbound deal to date, double the size of Tata Steel's $13 billion acquisition of Corus, the UK steel company, in 2006.

However, the deal talks have been extended until the end of August and there is a cloud of uncertainty over the price and terms of the deal.

The talks come at a time of a substantial decrease in India's cross border M&A activity - it was reported that as of May, India's outbound deal flow had decreased by 95 per cent as compared with the same period in 2008, falling from $7.4 billion to $370.8 million. We have been taking a periodic look at India's outbound investments and will offer an update shortly.

Photo credit to Swamysk, whose photos are posted on Flickr

Korean M&A Deals: Shedding Core Assets + Weak Won = Value

A May 20th Financial Times Article on Korean M&A is reasonably upbeat on the potential for further Korean deals and quotes a friend, Paul Kang, an investment banker who focuses on Korean M&A deals. Among the article’s observations (click the blog title above for the article and broader Korea report) are the following:

• Korean Companies Shed Non-Core Assets. As is true in the US and elsewhere, until a recovery gathers strength, some Korean companies are exploring the potential sale of non-core assets to further finance and strengthen their core businesses. Goldman’s head of Korean investment banking indicates that this will help drive both domestic as well as cross-border Korean deals, and the article reports that many expect Korean M&A to become more active in the second half of 2009 as the push for disposal of non-core assets gathers momentum.

• Actual Increase in Numbers of 2009 Deals. What do the numbers show? Korean M&A deals increased from 333 in the first quarter of 2008 to 406 in the first quarter of 2009, although their combined value fell from $14.1bn to $12.4bn. Not bad in a rough environment.

• Purchase of Prominent Korean Beer Company - An Example. As a recent cross-border deal example, Kohlberg Kravis Roberts agreed to buy Oriental Brewery from Anheuser-Busch InBev for $1.8bn. This will be the largest leveraged buy-out in Asia in the past two years. Who hasn’t enjoyed a cold “OB” during a visit to Seoul?

• A Weak Won Enhances Value to Foreign Investors. The Korean won has fallen about 18 per cent against the dollar in the past year, making Korean assets cheaper for foreign investors, and the currency play alone is creating deal opportunities as it did during the 1997 – 1998 Asian financial crisis.
  

However, Paul Kang, a former Goldman banker and something of a realist, is skeptical that the outstanding Korean opportunities will generate significant foreign buying given the global uncertainties impacting potential buyers.

That may be true, and too bad for the hesitant who are still kicking themselves for missing out on Asian financial crisis opportunities.

The image is of Namdaemun gate in Seoul, Korea's National Treasure #1, photo credit to Charles Chan.