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  - February 19, 2008 -  

Supply Chain News: Will Your Next Company Owner Be China or Russia?


Concerns over So-Called “Sovereign Funds” Continue to Grow; as Billions of Dollars Pile Up in State-Owned Investment Vehicles; Intellectual Property Risk for Manufacturers?



SCDigest Editorial Staff

SCDigest Says:
A recent study estimates that of approximately 1,300 publicly listed companies in China in 2004, only about 20 were genuinely private; the rest were all ultimately controlled by the state.

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Debate continues in the US and across the globe about the potential risks from so-called “sovereign funds” – investment vehicles owned by the governments of countries around the world.

While so far the investments by these government-controlled funds have been limited, in large part due to concerns about potential negative public and political reaction, the dollars available to these funds continues to grow at substantial rates, leading some to expect more attempts at direct investments by the funds will be made.

China’s fund, for example, recently made an investment that gave it a 10% stake in investment bank Morgan Stanley – and some believe manufacturers and commodity producers may be targets before long.

Writing recently on the Wall Street Journal editorial pages, Indiana Senator Evan Bayh said there would be outrage if the US government proposed making direct investments in private US companies – but that there seems to be little pushback when such moves are made by foreign governments.

“As Americans, we realize the folly of allowing our government to own our private companies, yet paradoxically, some appear far less alarmed by the prospect of another country's government doing the same,” Bayh wrote.





Incredible Wealth to Invest

A huge concern is simply the size of the money such sovereign wealth funds now have to invest. Most estimates place the total at over $2 trillion dollars. One estimate says that total will grow to $17 trillion by 2010 – enough to buy every US public company if it were to occur.

Obviously, that’s not going to happen, as Western governments would likely take action quickly to block such moves if they become too frequent. Others argue that the fear is misplaced, and point out foreign governments already own trillions of US federal debt (bonds), which overall is beneficial for the US to support its trade deficit and keep interest rates low.

Literally fueling the growth of the sovereign fund wealth is the explosion in oil and other commodity prices. That has led countries such as Russia, Norway, and most Middle Eastern countries to build up tremendous reserves in these funds. The largest fund is that by The United Arab Emirates, which is thought to have assets of about $900 billion.

China’s story is somewhat different, as its $200 billion fund has come largely through its exports of manufactured goods, not commodities. Additionally, the government there has major a stake in most Chinese companies. A recent study estimates that of approximately 1,300 publicly listed companies in China in 2004, only about 20 were genuinely private; the rest were all ultimately controlled by the state.

A few years ago, Chinese company Lenovo purchased IBM’s PC business. Shortly thereafter, Chinese appliance maker Haier made a strong bid for US manufacturer Maytag, but was ultimately outbid by Whirlpool.

More recently, the chairman of China’s Baosteel Group said there was “a strong possibility” that the group would launch a bid for the Rio Tinto mining group, though the company later denied this intention.  China’s government and companies have already made many investments in commodity producers in Africa, South America and other locations.

Some believe China may gain real advantage in maintaining commodity supplies that may become even tighter in future years as a result of these investments.

Others worry that eventual investments in Western manufacturers and technology companies by China’s sovereign fund or Chinese companies will erode the competitive advantage of those companies.

Wolf Klinz, a German member of the European parliament, recently said German companies are worried that China will steal its intellectual property through sovereign fund investments.

Senator Bayh also wrote that, “China's drive for economic advantage -- including rampant intellectual property theft, currency manipulation and subsidies for manufacture and export -- raise serious concerns about how sovereign funds might be used.”

He calls for new legislation that would only allow “passive investment” by sovereign funds in US companies – meaning the investment could be for financial returns only, and the foreign governments could take no active role in a company even if they amassed sizable stakes that would normally give such a shareholder considerable influence. More active positions are not currently legally barred.

Do you think there is real reason to be concerned over potential sovereign fund investments? What about Chinese companies buying Western ones? Why? Let us know your thoughts at the Feedback button below.

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