Chinese build US factories, bring tensions along with jobs

AUG 31, 201511:34 PM

[NEW YORK] When Chen Mingxu was a boy, US businessmen poured into rural China, welcomed with tax breaks and steamed turtle. Thirty years later, in a kind of reverse migration, Mr Chen finds himself in southwestern Alabama smiling wanly over bacon- wrapped meatloaf and banana pudding.

Mr Chen, who employs about 200 locals, manages the first US factory built by Golden Dragon Precise Copper Tube Group Inc with a US$120-million investment in Wilcox, one of the poorest counties in Alabama. The state coughed up around US$20 million, outbidding dozens of other cities and states hoping for the jobs and investments.

Last year, Chinese companies plowed US$12 billion into the US, up from zero in the early 2000s, making it the fastest growing source of foreign direct investment in the country. Chinese-affiliated companies now employ more than 80,000 Americans, according to New York-based Rhodium Group, which tracks cross-border investment.

As the US prepares for a state visit by Chinese President Xi Jinping at the end of September, the countries' economic relations are undergoing a profound shift. With China facing rising wages, a falling labor supply and excess capacity, its companies are crossing the seas to sink roots in neglected corners of the US heartland.

"Like the Japanese and Koreans before them, Chinese companies want to invest in their export market," said David Loevinger, a former China specialist at the US Treasury who is now an analyst at fund manager TCW Group Inc in Los Angeles. "As exporters move up the value chain, you increasingly want to get closer to your customers."

One of the goals of Mr Xi's visit is to make progress on a treaty aimed at spurring Chinese ventures in the US and opening up China to areas where foreign investment is barred or restricted. Under the treaty, US banks would be permitted to own Chinese subsidiaries outright, retailers could run their own distribution networks there and manufacturers could build without a local partner.

Even if all that gets agreed to, tensions will hardly dissipate. The US accuses China of vast industrial and governmental spying, and the spread of Chinese money is bound to come with increased concerns. China's yuan devaluation this month seeped into the election debate, with Republicans accusing Beijing of manipulating its currency to the detriment of American workers.

Front-runner Donald Trump has said that China's leaders have out-maneuvered the US on trade, adding that he'd serve Mr Xi a Big Mac rather than a state dinner.

As Gene Poteat, past president of the Association of Former Intelligence Officers in Falls Church, Virginia, put it, "China's belligerent expansion into geographical areas claimed by others, their harassment of international flights and their continuous hacking into American cyber networks has not gone unnoticed."

The Chinese have their own set of worries.

Golden Dragon chose Alabama to bring it closer to clients in the South and avoid anti-dumping tariffs on copper products. But it was caught unawares by the attitudes of some of the workers and the demands of the trade union.

"Individualism is strong among US workers," Qiao Gaopan, a 37-year-old Golden Dragon engineer, said pointedly. "They don't listen to you but have lots of opinions." And although tens of millions of China's workers belong to trade unions, those groups have no say on pay or conditions. The inverse is true in Alabama, a right-to-work state where barely a 10th of workers belong to unions that nonetheless wield real power. That created some tensions for Golden Dragon.

When it set up shop a year ago, the company offered workers US$11 an hour, less than the US$18 paid by a similar factory in Mississippi, according to Daniel Flippo of United Steelworkers. There were also complaints about safety and lack of training and promotion, Mr Flippo said.

As a result, and despite pressure from state and company officials, the workers voted to unionize.

Mr Chen, 33, argued that US$11 was only a starting salary for workers with no experience. Either way, Golden Dragon ended up increasing its wages and changing earlier restrictive rules, including a badge-in system and limited sick leave. It also dealt with a complaint over safety.

Mr Chen, who studied in Britain and led the company's factory in Mexico before coming to Wilcox, took over in May.

It hasn't been easy for the company's Chinese engineers, who speak limited English and live in trailers onsite about 10 miles from Thomasville, with some 4,000 inhabitants. The only cinema in town was closed several months ago. They spend nights online chatting with relatives in China.

James Deshler, a 29-year-old machinist working at the plant since March 2014, blames cultural differences and language barriers for most of the problems at the company. He said he gets into constant arguments with Chinese colleagues over the lengths of smoking breaks, cleanliness in the restrooms, even the right way to fix a leaking pipe.

There are bright spots. Sue Thomas, for one, is grateful that Golden Dragon came. Ms Thomas, 50, lost her security guard job at the neighboring oil pipe company Energex Tube, as did her husband. She gets along with her Chinese coworkers and said she sometimes brings them home for dinner or takes them to local casinos.

Apart from Golden Dragon's Wilcox facility, which produces 100 million pounds of copper tubing annually, Alabama is also home to two other Chinese companies - Continental Motors, which makes piston engines for aircraft in Mobile, and Shandong Swan USA Inc, which makes saws for cotton gins in Montgomery.

Elsewhere, Sany Group Co, China's largest heavy equipment maker, has invested US$60 million in a factory in Peachtree City, Georgia, pledging 500 jobs. And Wanxiang Group Corp, China's biggest autoparts maker, has 28 factories in 14 states.

Major merger and acquisitions include Anbang Insurance Group Co's US$1.95 billion purchase of New York's Waldorf Astoria hotel and the sale of One Chase Manhattan Plaza to Fosun International Ltd for US$750 million.

Derek Scissors of the American Enterprise Institute in Washington, said Chinese investment in the US could increase to US$100 billion in the next five years.

Chinese remember with mixed emotions the invasion of foreign business three decades ago, when assurances on both sides often went unmet, and note the irony and parallels now that roles are reversed. Observers add that while Chinese companies are entering a steadier market with more established legal systems, they too face confusion and unkept promises.

"This is a market not easy for them to understand immediately and know how to navigate and negotiate into," said Orville Schell, director of the Center on US-China Relations at the Asia Society in New York. "There's a very big learning curve for both US and Chinese companies."

Alabama did live up to its offers to Golden Dragon, building GD Copper Drive in front of the factory and setting up training programs. But other states have failed to deliver the incentives they pledged to other companies, Chen said, declining to give names.

"States and cities don't have foreign policy concerns," said Mr Scissors, the Washington-based analyst, who focuses on China.

On the other hand, Chinese companies just may.

"The best way to beat the enemy is probably to go to their homeland," Mr Chen said of his factory in Alabama. "As our former leader Deng Xiaoping put it, we'll cross the river by touching the stones."

BLOOMBERG