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.