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China, Savior Of The Rust Belt


Only last September, Charles W. Freeman III was one of America's top international trade negotiators. As a Mandarin-speaking lawyer in the Office of the U.S. Trade Representative, Freeman shuttled between Washington and Beijing as he wrestled over such issues as software piracy and the valuation of the yuan. On those trips, Freeman would "fly over the Midwest and wonder what was down there." These days he's finding out. His down-to-earth mission: selling China on the Rust Belt.

Now managing director of the China Alliance, a venture of three law firms -- two Midwestern and one Canadian -- Freeman advises clients in such cities as Detroit, Milwaukee, and St. Louis about how to tap into the $820 billion in foreign reserves that China is holding. In the process, he could help salvage some of the hundreds of small U.S. auto parts makers struggling to survive. But Freeman sees a more overarching effect. Investment in America's heartland, he argues, would strengthen Chinese ties to the U.S. and promote goodwill and influence in Washington. Eventually, China might even join Japan and South Korea as a player in the world's most lucrative auto market, he contends.

So far, Chinese companies aren't lining up for a piece of the Rust Belt. Freeman has yet to complete a deal, though he claims to be close to selling two Midwestern auto parts companies -- makers of brakes, heaters, and air conditioners -- to Chinese investors.

Freeman, 41, gained his focus on China naturally: His father was President Richard M. Nixon's translator on his ground-breaking trip to Beijing in 1972. After graduating from Tufts, Freeman studied Mandarin at Shanghai's Fudan University and then got a law degree at Boston University. He spent the next four years at a venture-capital firm in Boston before moving to Hong Kong, where he helped run the local office of the San Francisco-based Asia Foundation. Returning to the U.S., he did a stint as a Capitol Hill aide, then went to work for U.S. Trade Representative Robert B. Zoellick.

Now his firm is trying to smooth the way for U.S. and Canadian companies to sell products in Asia. But Freeman sees a more intriguing sideline: selling companies outright. And auto parts makers seem like a smooth fit for Chinese investors. They're small companies of the type that dominate Chinese manufacturing, they're in an industry where China wants to make inroads, and they're in dire need of capital. "Everywhere I go, I hear the same thing: 'God, we are screwed,"' says Freeman. "They tell me: 'This business has been in my family for 75 years, and I have third-generation workers here. My own kids aren't interested in taking it over, and now I don't think I can even stay in business."'

NOT AN EASY SELL

With Geely Automobile Co. planning to produce an inexpensive car for the U.S. market this year and Chery Automobile Co. saying it will begin exporting in 2007, Rust Belt manufacturers could provide a supplier base for those Chinese auto companies or any others that eventually set up production in the U.S.

Still, the idea of snapping up small American companies, even at fire-sale prices, isn't an easy sell on the other side of the Pacific. "China is only at the very beginning stage of investing in the U.S.," says Todd M. Malan, president of the Organization for International Investment, a Washington lobby for U.S. subsidiaries of foreign-based companies. Its count of Chinese members: zero. Indeed, a closely guarded list of some 250 Chinese-owned companies in the U.S., compiled by the Embassy of the People's Republic of China in Washington and obtained by BusinessWeek, features only two readily recognizable names: appliance maker Haier Group, which failed in its bid last year to buy Maytag (MYG), and Lenovo Group, which completed its purchase of IBM's (IBM) PC Div. last September.

Chinese manufacturers are only now being officially encouraged to invest in the U.S., concedes Dai Yunlou, commercial minister-counselor at the Chinese Embassy. And China's would-be shoppers were put off last summer when a hail of protest from Capitol Hill helped kill China National Offshore Oil Corp.'s (CEO) bid to purchase California-based Unocal Corp. (CVX). Now, says Freeman, Chinese investors ask: Is our money welcome there?

The hesitation may be real, but Donald H. Straszheim, president of Los Angeles economic consultants Straszheim Global Advisors, predicts a massive transformation just around the corner. Soon, he says, Chinese manufacturers "will be buying what we call 'reach': logos, trademarks, brand names, customer lists, sales forces, warehouses, advertising, technology, managerial talent, and expertise."

Some U.S. cities are trying to bring on the arrival of that day. Milwaukee Mayor Tom Barrett sought Freeman's advice before taking a delegation to Ningbo, an auto manufacturing hub south of Shanghai, last October. Barrett's goals: open the Chinese market to imports of large-engine motorcycles, such as Milwaukee-made Harley-Davidsons, and attract Chinese money to Wisconsin's struggling small manufacturers. China estimates that it has half the world's motorcycles. But a third of them have noisy, smoky, two-stroke engines, more like lawnmowers than cars. Harley-Davidson (HDI), which plans to open its first dealership in China this year, figures its bigger, smoother bikes could appeal to China's upwardly mobile city dwellers.

Freeman suggested that Barrett pitch the big Harleys first to municipal police departments. Their visibility would create "enormous cachet" and help overcome the so-called safety rules against big bikes that also protect local motorcycle makers. Next, he told Barrett, "your goal should be to put the mayor of Ningbo on a Harley."

Freeman says he gives both American and Chinese companies the same counsel: "The first thing you need when deciding on foreign investment is good government relations and the support of local governments and communities." An idea being kicked around in the U.S.: building a Chinatown in Milwaukee to make investors a little more comfortable when visiting their money.

By Paul Magnusson


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