China FDI Comes to Cleveland?
Brother, Can You Spare A Few RMB?
I don’t know if this is a sign of things to come or a blip on the foreign investment radar, but at least one Chinese company is working on a long-term investment deal with a U.S. city.
Attorneys for GE Lighting contend that a proposed agreement between Cleveland and a Chinese LED manufacturer could be unlawful and a “bad deal for the city, its taxpayers and businesses loyal to the city.”
GE is trying to persuade the City Council to reject legislation that would give Sunpu-Opto the exclusive right to sell Cleveland millions of dollars in LED lights for 10 years in exchange for building its U.S. headquarters in the city.
GE Lighting and its attorneys argue that the city cannot bypass competitive-bidding requirements of the City Charter in exchange for an economic development deal.
Amazing. Just look at what we have here. A Chinese company is considering foreign direct investment into the United States. Not unheard of, although still fairly rare.
That investment is not a local distribution center but a headquarters. Companies usually make serious commitments regarding relocation to certain locales because of manufacturing or distribution advantages. That might be going on here as well, but if not, Cleveland would have to be offering a heck of a sweetheart deal to sign these guys up.
So far very interesting, but it gets even better. GE, a competitor, is saying that the city has pre-existing competitive bidding rules in place that restrict it from making such a deal as they are envisioning with the Chinese company.
There are a couple of dynamics worth mentioning here. First, American cities are hurting, big time. The possibility that a foreign investor might come in and set up its HQ, and along with it several hundred jobs, must be tantalizing.
Second, Chinese companies are inexperienced with outward investment and have already made a lot of mistakes with early deals. On the other hand, I would think that if they know anything, these firms probably know how to deal with local governments. I don’t necessarily mean that as a compliment, either.
Not to be too circumspect, I’ll just come out and express my concerns about the interaction between some of these companies and cash-strapped local governments. Someone better put some tough anti-corruption language into the city charter ASAP!
We’ve seen this before. Remember the auto factories set up in the South and Midwest by the Japanese? Some similarities, including poor economic conditions.
So will we see an aggressive campaign by American local governments to persuade Chinese investors to set up U.S. shops in their municipalities? Should bidding rules be relaxed to accommodate long-term economic development deals? Aside from the obvious (low taxes), what will these Chinese firms be looking for when they negotiate with local governments?
Lots of food for thought, particularly if this becomes a trend. Who knows, maybe in a few years the U.S. will set up Special Economic Zones on the East Coast to attract FDI. I’ve heard that works.
Wouldn’t you worry that the so-called US HQ is really just a sales and support center? If the China HQ is THE HQ, and also controls manufacturing, what other operation would they do in the US? It looks to me that this is an agreement to hire a few sales people (and many of those would have to be located in other States anyway), in exchange for a 10 – year lock-in sales contract? This sounds very fishy to me.
I’m not sure how these things go, but I suspect that all the city cares about is the total number of jobs. This is what they would tout to the public. What those jobs actually are is probably secondary. The politicians can turn around to the public and say “We brought x# of jobs to the city.” If they can get excited about a new Wal-mart, then these jobs couldn’t be any worse.
Taking off my cynic’s hat, good companies would at least try to hire good local management to look after the U.S. market. More expensive that way, of course.
Yeah. I just see this as a really stupid deal. A company sets up (what could be) a small 20 person sales office, in exchange for a 10 year exclusive purchase contract? Sounds too stupid to be true.
BTW, I like your icon / logo thing. Simple and sweet. I just mention it because I was thinking of doing something for my gravicons (or whatever its called)
Thanks on the icon. My wife and I dreamed it up over the weekend after a lot of red wine.
Back to Cleveland – 20 won’t cut it. I think the numbers floating around are in the “hundreds” range. Unless you think they would mislead the city to that degree? That would turn into a nasty fight.
Hey Stan. As a Cleveland native, I’m interested to see any attempt, good or bad, by the city government to engage with more foreign companies. In theory, it is not the worst idea. In practice, Sunpu-Opto may not be the best test case for this sort of quid pro quo municipal FDI strategy.
The deal proposed is thus: Sunpu-Opto (Ningbo Shengpu Guangdian) will set up its US HQ, including a manufacturing, distribution and R&D facility in Cleveland, and will “work diligently” to create a minimum of 350 jobs over five years. Also, Cleveland will be allowed to purchase certain products/categories of products at the lowest possible price in the market. In exchange, Sunpu gets a glut of procurement orders for Cleveland’s effort to refit all municipal facilities and traffic lights. The first ‘big’ order would be around $4 million. The no-bid contract for orders for LED lights (I don’t think it specifically rules out buying other types of lights, like OLED) lasts for ten years. Cleveland says that they want to buy from this company because they have a type of LED that doesn’t require you to change the fixture in any way. Just plug it in and go.
Other people, including industry experts, say that this type of LED, well, sucks, and that Cleveland is being stupid by locking themselves in for ten years in exchange for a not-huge number of jobs from a middle-of-the-field LED producer, in a field where technology changes rapidly and ten years from now may be entirely different (OLED). China is not popular in Cleveland, as you can imagine, due to its perception as stealing manufacturing jobs from the mostly blue-collar workforce. In addition, one of the major players in lighting, GE, employs 1,200 people on the east side of Cleveland at Nela Park, the country’s first industrial park. GE is not too happy about being shut out, even though they do not offer the same type of LED light. There are whispers that GE is not too thrilled about keeping that facility open anyway, and that pissing them off too much might lead to them pulling the plug entirely. That would obviously undo almost all the good of this deal.
The city’s legal director says there’s no problem with the city charter and that the city can do this if no competitor currently offers the same product. The vote has been delayed but it seems like city council is on board with the plan. The public (from what little Cleveland media I still consume) seems…confused.
http://www.brewedfreshdaily.com/2010/clevelands-led-misguided-led-strategy
You can see a scan of the proposed bill there along with some good informed commentary. Note that the bill is considered an “emergency measure”. Fishy. And who brokered the deal? Who gets fees? Etc.
Blatant advertising: I wrote about this on my blog as well.
Thanks for the additional info. Forgot you are from Cleveland. So you’ve been lurking, waiting until I wrote something about your hometown, eh?
More or less. Say anything about Cleveland, LeBron James, or the Browns and I’m fairly likely to pop out of the woodwork. Add in China and it’s essentially impossible for me to keep quiet.