Smithfield buyout by China Co.

Reform Party of California Commentary

Business on an uneven playing field

China's food supplier, Shuanghui International Ltd., is attempting to buy Smithfield Foods, Inc., the word's biggest pork supplier.[1] If the transaction does go through, it would be the biggest Chinese buyout of a U.S. company. This transaction shines some light on several aspects of how America does business with the rest of the world. Smithfield portrays the transaction as a great win-win for the U.S. and China. The Reform Party isn't so sure about that characterization.

Intellectual Property

In the course of becoming the largest U.S. producer, Smithfield developed efficient methods to produce pork. It is reasonable to assume that once Smithfield is bought, its technology will flow to China and used to increase efficiency. Increasing competitiveness is the point of China's push to raise its standard of living and grow its economy. Presumably, that increased efficiency will eventually be used to directly compete with U.S. and other pork suppliers. Smithfield's CEO, C. Larry Pope assured senators on the senate Agriculture Committee that such a thing would not occur, but the basis for that assurance is unclear. By contrast, China's record of relentless, focused economic competition is well understood.

Good intentions are irrelevant

Mr. Pope said much in defense of the transaction, including this: "Let me be clear: Shuanghui intends to retain Smithfield’s management team, its plants and its employees." Obviously, what Shuanghui "intends" is irrelevant. The only thing that counts is the written terms of the buyout. Even if the buyout specifies that Smithfield management will never be replaced and that they have full autonomy to continue operations as they wish, which is undoubtedly not the case, the day will nonetheless come when that management is gone and whoever new comes in will report to Shuanghui. That new management absolutely will do what Shuanghui demands or they won't be part of the management team. That is just basic common sense. Irrelevant fluff statements like Mr. Pope's simply provide no logical basis for comfort that this won't lead to ferocious competition against American farmers and companies.

Unfair playing field

To their credit, at least some of the senators on the Agriculture Committee expressed frustration with the proposed sale. Their concern is that Chinese companies, often partially or wholly Chinese government owned, can buy Smithfield but Smithfield. By contrast, the American government could never come in and buy Shuanghui. The Chinese government would never permit that. That is the simple reality of the unfair playing field here. This game is rigged.

State capitalism vs. private capitalism

What this represents is just part of a much bigger competition. The Reform Party sees this as a fight to the death between two ideologies, state capitalism versus private capitalism. This fight is not a matter of a military shooting war. The Chinese government is too smart for that. China is implementing an intelligent, shrewd and focused strategy of state capitalism against the West's unfocused, self-centered and often chaotic, internecine capitalism. The fight is global and Smithfield is just a tiny part. It is also useful to note for context, that it is easy to argue that the Chinese are now more capitalistic than the Americans, Europeans or Japanese. There is plenty of evidence that supports that assertion. This is not just about pork. It is about everything. 

What the Iraqi oil minister recently said about the Chinese in relation to Western firms (Exxon-Mobile) in attaining access to Iraqi oil gets right to the point. “We don’t have any problems with them,” said Abdul Mahdi al-Meedi, an Iraqi Oil Ministry official who handles contracts with foreign oil companies. “They are very cooperative. There’s a big difference, the Chinese companies are state companies, while Exxon or BP or Shell are different.”[2] The New York Times article went on to say this: “The Chinese are very simple people,” said an Iraqi Oil Ministry official who spoke on the condition of anonymity because he did not have permission to speak to the news media. “They are practical people. They don’t have anything to do with politics or religion. They just work and eat and sleep.”

In other words, Chinese companies don't have shareholder lawsuits, quarterly earning goals and other impediments that Western companies have to deal with. Western companies compete with each other while the Chinese government ruthlessly supports its companies, e.g., by giving them technology that we are dumb enough to let them steal. U.S. companies are so self-centered that they will not even cooperate with the U.S. government efforts to help them defend themselves against cybertheft.

The concern for U.S. companies is that if the U.S. public comes to know how badly they have been hacked and how much has been stolen, there will be bad P.R. and shareholder lawsuits.[3] There isn't even any good way to assess just how much has been lost to China, Russia and other hacker countries and thieves, but it could easily amount to trillions of dollars. To the extent that politics can affect things, the situation is the epitome of incompetence and shortsightedness.

Back to the hams

When one puts the proposed Smithfield acquisition into that context, it is easy to see how it fits, even though it is just a small piece of the competition. It is also easy to see how naive U.S. executives like Mr. Pope are when it comes to dealing with China. It is also easy to see how inept the U.S. congress is in requiring fair competition. The failure to two-party politics is glaring in the context of trade with some of our partner-competitors. This is not an argument that all of our trade partners compete like this. However, when it comes to defending the American standard of living and the American economy, two-party politics is not just failing. It is betraying us all.


Footnotes:
1. Bloomberg story: http://www.bloomberg.com/news/2013-07-10/smithfield-ceo-says-company-won-t-change-after-china-deal.html; Senate Agriculture Committee video and witness statements; http://www.ag.senate.gov/hearings/smithfield-and-beyond_examining-foreign-purchases-of-american-food-companies
2.  New York Times, June 3, 2013; http://www.nytimes.com/2013/06/03/world/middleeast/china-reaps-biggest-benefits-of-iraq-oil-boom.html?_r=1&.
3. China hacked multiple U.S. weapons systems: http://www.usnews.com/news/newsgram/articles/2013/05/28/report-china-hacked-costly-us-missile-defense-weapon-designs; Industrial espionage; http://www.npr.org/2013/05/07/181668369/u-s-turns-up-heat-on-costly-commercial-cyber-theft-in-china; Up to 90% of U.S. companies have been hacked: http://ftijournal.com/uploads/images/FTI7_blocking_the_breach.pdf; U.S. companies suppress information about hacking: http://www.marketplace.org/topics/tech/mums-word-us-businesses-hacked-china.

Unaccountability at the DoD

Reform Party of California Commentary

DoD's Unacceptable Accounting Practices

On September 10, 2001 defense secretary Donald Rumsfeld said that the Department of Defense (DoD) was unable to account for $2.3 trillion tax dollars. Of course, the next day was September 11, 2001, better known as 9/11. Whatever fallout might otherwise have come from secretary Rumsfeld's amazing comment simply vanished in the ensuing chaos.

Reuters investigative journalist Scot Paltrow picked this "lost" issue up. Reuters is in the midst of publishing a series of his reports on how DoD deals with its accounting and budgets.[1] Although DoD itself says its practices are clean and accurate, the agency is not audit ready and probably won't be for quite some time. Paltrow's research suggests that DoD errors in paying personnel is common, despite DoD's denials. In 2011, former defense Secretary Panetta issued a directive requiring DoD to become audit ready by 2014.[2] However, given the circumstances that is unlikely to happen.

Not surprisingly, there are some personal tragedies and outrages that come with the mess. Some of our soldiers were not paid what they were owed. That sometimes forced them to sell personal belongings and get food from charities. When confronted with questions about why pay was being withheld, DoD personnel sometimes could not answer because they did not know and apparently did not have any way to find out.

Part or much of the problem seems to stem from (i) DoD's accounting technology and (ii) the fact that working on things like accounting and budget control do not advance anyone's military career. DoD's Defense and Accounting Service (DFAS; http://www.dfas.mil/) is responsible for accounting and budgets, but they are using equipment that is over 40 years old, including ancient IBM mainframes. In 2010, DoD scrapped a 10 year effort to modernize it's accounting procedures. By the time DoD abandoned its attempt to upgrade its systems, it had spent $1 billion. What benefit to taxpayers or the DoD, if any, came from that $1 billion effort is unclear.

DoD's assertions that it knows what it is doing are simply hard to accept, given the scope of the problem and how long it has existed. Since there are no formal audit data, no one knows the real situation. Maybe that is intentional and maybe it isn't. Regardless, Rumsfeld's $2.3 trillion estimate came in 2001. Since then a whole lot of money has passed through the DoD. Given that, it is reasonable to guess that the amount unaccounted for in 2013 is about $3-4 trillion. Of that, $100-200 billion could have been stolen. No one knows the amounts because there have been no audits. As mentioned above, there have been no audits because the DoD cannot be audited.

So what?

It is reasonable to ask why anyone should care about a story like this. After all, there are more important issues to think about. The Reform Party does not speak for the Democratic or Republican Parties. However speaking for itself, $3 trillion is far too much to be left unaccounted for. And, the Reform Party does not consider a potential theft of $100-200 billion to be insignificant. The Reform Party does not even consider either the $1 billion lost in the upgrade attempt or the inept treatment of our veterans to be insignificant.

This situation has existed for years and presumably it is worse now than it was when secretary Rumsfeld tried to raise it in 2001. In Reform Party opinion, that represents a series of failure by two-party politics, including the politicians from both parties who have been involved. It represents a major failure by the executive branch to manage its operations. In that time there have been democratic and republican presidents. It also represents failure by a congress that always was overwhelmingly composed of democratic and republican politicians. Those politicians in congress failed in their duty to oversee DoD operations. Maybe the failure arose from congress' perception that the problem was not worth their time or effort. Whatever the reasons, they all failed.

It is also fair to characterize this as a failure to two-party politics. If two-party politics had been more focused on service to the public interest than on service to special interests, then the situation may never have arisen. Of course, there is no way to know that. According to Paltrow, some special interests both inside the DoD and outside of government were vested in the failed status quo. If that is true and self-interests really were a significant factor in creating and maintaining this mess, then it is more evidence of how profoundly broken two-party politics really is.

The "So what?" in this is simple. If you want more fine service like this from the democratic and republican parties, simply keep voting for their politicians and sending them money. You will continue to get the fine quality service that gave us a DoD that cannot be audited and that sometimes treats our veterans like garbage. If, on the other hand, you suspect that something might be amiss, the only option is to walk away from the two parties. As argued elsewhere [3] there are several reason why they cannot and will not change.




Footnotes:
1. Link to Scot Paltrow's first Reuters story: http://www.reuters.com/article/2013/07/09/us-usa-pentagon-payerrors-special-report-idUSBRE96818I20130709; Julie Mason's interview with Paltrow: https://soundcloud.com/juliemasonpolitics/scott-paultrow-from-reuters.
2. Link to Panetta's directive: http://www.defense.gov/News/NewsArticle.aspx?ID=116014.
3. Self-interest and politics: http://reformparty.org/reform-party-of-california-essays-self-interest-vs-public-interest/; ideology and politics: http://reformparty.org/reform-party-of-california-essays-what-is-the-proper-size-and-scope-in-government/.