The Chinese Are Coming to Pittsburgh!

Thursday, January 15, 2015

And that's a good thing for the economy and community

-- The following is an Op-Ed by David Iwinski Jr., an advisory board member of the International Business Center, which appeared in the Pittsburgh Post-Gazette on Jan. 11, 2015. Mr. Iwinski is managing director of Blue Water Growth, a Pittsburgh-based global business-consulting firm with extensive experience in Asia 

In 2013, Susan Endersbe, president and owner of R.E. Uptegraff Manufacturing Co. in Scottdale, began looking for a buyer for her business. Established in 1926, R.E. Uptegraff was a sound, respected manufacturer of transformers for utility and industrial markets with a strong reputation for quality products and innovative designs. It had been a family business for three generations, but now it was time to find a new owner.

Mrs. Endersbe searched for a U.S. buyer, but all she got were fire-sale price offers that also would have led to the plant closing. Potential U.S. buyers were looking to move production out of the region, shuttering the factory and resulting in job losses. Susan Endersbe wanted to keep the jobs here, if possible, so she began exploring potential foreign buyers.

With the help of local experts with Asian experience and expertise, she found four reputable Chinese firms that wanted to evaluate the opportunity. They sent teams to tour the site and begin negotiations.

After a thorough and patient process that included an assessment of cultural fit and a basic education in U.S. business practices, Mrs. Endersbe narrowed the field to two serious buyers and engaged in a negotiation process to maximize the value for the owners and keep the factory in Scottdale open.

The result? On Sept. 30, Mrs. Endersbe announced that Shenda Electric of Jiangshan, China, had acquired R.E. Uptegraff. Shenda Electric plans to expand both the physical plant and the number of jobs over the next four years and to keep a long-term commitment to the town of Scottdale. Many of these jobs are union jobs and Shenda, like many China buyers, is union-friendly.

A lot of U.S. media coverage, including the Post-Gazette’s “China Syndrome” editorial last month, focuses on the U.S. jobs that are lost as a result of our trade gap with China. But that is just one side of the story. The Uptegraff example illustrates that Chinese investment in the United States can save jobs and help to revitalize communities that have lost older manufacturing bases.

In Danville, Va., for example, a city distressed by the decline of the American textile and tobacco industries, the city has undertaken an economic development project that is solely focused on Chinese investment. Officials have dedicated a 4,000-acre site for an industrial park they plan to fill with Chinese firms eager to do business in America. They have hired dedicated Chinese-speaking staff to support the project and have already attracted two Chinese businesses.

It is true that U.S. foreign investment in China was critical to China’s industrial growth, but the good news is that the trend is about to reverse in a big way. Pittsburgh and firms in Western Pennsylvania can benefit if we understand this change and respond with engagement and enthusiasm rather than ostrich-like fears.

The United States is the most attractive destination for Chinese overseas direct investment, part of its “Go-Global” national strategy. Why? Because the United States has the world’s largest economy and a stable political and social environment. It also has a sizable natural resources sector, is strong in intellectual property creation and protection, and scores highly in cultural affinity because it has a long-established Chinese community.

Traditionally we have thought of Chinese investment as coming from huge, state-owned enterprises, but the trend is moving toward private Chinese businesses and is increasingly focused on medium-sized transactions.

As of October, Chinese companies no longer need to seek government approval for overseas investments if they are not in sensitive sectors or locations. Chinese investments are accelerating explosively. From July through September of last year, Chinese firms directly invested $3.1 billion in the United States.

What does this mean for businesses here?

First and foremost, it opens up a huge pool of new potential buyers, as Susan Endersbe discovered. In specific sectors, including energy, Chinese firms are extremely interested in purchasing small- and medium-sized firms, and they often are willing to pay a higher price than domestic buyers.

The Chinese look for strong brands, local manufacturing, good distribution channels and capable leadership. R.E. Uptegraff met those criteria, so a local manufacturing company and its jobs will survive.

Like it or not, the Chinese are coming and coming fast. Savvy small- and medium-sized business owners in Pittsburgh who recognize this trend can be among the early beneficiaries of their desire to acquire U.S. operations and invest in American plants, thereby creating jobs and increasing local tax bases.

Those who fail to capitalize on this mega-trend will be left behind to try to compete with these revitalized and well-funded global businesses.