| by Michael R. Czinkota and Charles Skuba
( June 21, 2013, London, Sri Lanka Guardian) For many Americans, Virginia ham is a long established part of a festive family dinner. But good old American traditions like that can carry new meaning in a global economy. The news that Smithfield Foods, owner of leading pork brands like Smithfield Ham, Eckrich sausages, Armour meatballs and Farmland bacon, is to be acquired by Chinese company Shuanghui International Holdings Ltd. caused indigestion for some in the United States.
The $4.7 billion deal, announced on May 30, 2013, would be the largest acquisition of a U.S. company by a Chinese firm. It is another of a series of recent significant global acquisitions by Chinese firms. Other examples include the 2012 purchase of the AMC movie chain by Dalian Wanda Group Corp. of Bejing and the 2013 acquisition, of Canada’s Nexen by China National Offshore Oil Corporation (Cnooc). At year’s mid-point, 2013 promises to be a record year for Chinese foreign direct investment in the United States. It is also indicative of a new focus for Chinese investment : branded consumer businesses. Previous investment attempts by Chinese companies have not always gone smoothly. A big obstacle has been that many deals have touched on national security sensitivity. The Committee on Foreign Investment in the United States (CFIUS), is a U.S. inter-agency government panel that reviews foreign deals for national security issues. It is doubtful that CFIUS will have concerns after the (consumer good based) Smithfield acquisition.
China may well be approaching a tipping point for an economic transition from being export focused to becoming consumption-driven. After improving the world by manufacturing good basic products, Chinese businesses must now learn how to succeed through marketing and excellence.
Marketing guru Philip Kotler defines marketing as both an art and a science. Chinese firms have mainly concentrated on science, via price. Now they must become better at creating higher quality products, placing them in distribution outlets that Western consumers prefer, and promoting them with a direct appeal to Western emotions. The best way to accomplish all this quickly is through the acquisition of Western firms with already established base of consumer preference. Therefore, in addition to the establishment of new brands, we are likely to see a significant expansion of Chinese acquisitions of U.S. and European consumer goods brands in the coming years.
Is this a good thing? Acquisitions by foreigners tend to be accompanied by concerns. When U.S. giant Kraft acquired British Cadbury, there was worry about diminished chocolate quality in the U.K. Now Americans (accompanied with much hamming it up by master comic Jay Leno) state that the Smithfield acquisition could lead to diminished quality and loss of American jobs.
Far from it ! The Chinese are not just obtaining products – imports and exports would have done that. Rather, the acquisition helps integrate China into the global economy, and contributes to its future branding success by delivering new connections, experience, capabilities and trust. The key benefits will be learning of both quality and marketing.
Of even more interest is the reverse flow, where international investments have a spillover effect on home country markets. Why not eat Hunan pork with Smithfield ham during a picnic at the Yangtze river? What pork other than Smithfield’s should be specified when planning the Chinese government-subsidized opening of restaurant chains in Africa ? The Smithfield acquisition opens new markets both for the Chinese investors as well as for American ham. Such is the path of true globalization.
The emerging middle class in China represents enormous opportunity not only for Smithfield but also for many American companies. But, such market expansion must be a two-way street. For more American firms to be able to have access to the Chinese marketplace, Chinese firms must be allowed and encouraged to compete in the United States.
Michael Czinkota (firstname.lastname@example.org) researches international business and marketing policy issues at Georgetown University. His International Marketing text (with I. Ronkainen) is now in its 10th edition. He served in the Reagan and Bush administrations in the U.S. Department of Commerce
Charles Skuba (email@example.com) teaches international business and marketing at Georgetown University. He served in the George W. Bush administration in trade policy positions in the U.S. Department of Commerce.