July 6, 2022

A Wave of Chinese Investment Buoys Small American Companies

The report, commissioned by the Asia Society and the Woodrow Wilson International Center for Scholars, outlines the change in China’s priorities from attracting foreign investment to becoming a global purveyor of capital. While China has been investing to develop natural resources in Australia, Africa and elsewhere for years, the coming wave is different. It reflects China’s intention to expand its already enormous but still growing domestic market. To do so, Chinese companies that have mastered manufacturing must develop their distribution, marketing and innovation skills, all areas where American businesses could help.

While there is some concern that political tensions could get in the way, the investment money is a huge opportunity for American businesses. The following four small businesses, already the beneficiaries of such investments, illustrate the aims of Chinese investors and the benefits that American companies can take from them — including rescue from a very tough economy.

Solar Power Inc., of Roseville, Calif., received a $33 million investment in March from LDK Solar, a large Chinese manufacturer of solar cells. The American company, now seven years old and with 60 employees, installs solar arrays on commercial buildings, including on the roofs of Staples Center and the 20th Century Fox movie studios in Los Angeles. Solar Power initially focused on the United States residential market but that market collapsed in the recession. In 2010 the company’s sales declined to about $24 million and its losses increased.

So Stephen C. Kircher, Solar Power’s founder and chief executive, turned to commercial projects and attracted LDK Solar’s investment in exchange for 70 percent ownership of Solar Power. Mr. Kircher had met LDK executives in China through two California financial institutions, Roth Capital Partners in Newport Beach and East West Bank in Pasadena.

“LDK Solar’s investment will allow us to compete for many projects across the United States, not just one job at a time,” Mr. Kircher said. Indeed, Solar Power recently won a three-year job to provide engineering on solar energy projects in New York and New Jersey.

Why did LDK, which has $3.6 billion in annual sales of solar energy components, buy into Solar Power? “Their aim is to employ Chinese people,” Mr. Kircher said. “They will integrate their manufacturing with marketing and distribution on our solar panel projects and then have the know-how to help them in the emerging domestic economy in China.”

MVP RV of Riverside, Calif., a maker of recreational vehicles, was able to reopen its doors this year thanks to a big order and significant investment from Winston Battery of Shenzhen, China. Brad B. Williams, Roger J. Humeston, and Pablo Carmona had purchased MVP, a motor home and travel trailer operation, in July 2008 from their employer, Thor Industries. At that time, MVP had 440 employees and close to $100 million in sales, Mr. Williams said.

Two months later, the recession began and demand for recreational vehicles collapsed. Gradually, employees were laid off, and the company closed its factory “to preserve capital,” Mr. Williams said.

“We went through more than 40 presentations trying to raise capital, with no luck,” Mr. Williams said. “But then we got a call from somebody asking us to visit Winston Battery in Shenzhen.” There the partners met Winston Chung, an entrepreneur whose company makes lithium ion batteries. “We hit it off immediately,” Mr. Williams said.

Mr. Chung gave MVP an order for a few motor homes that got the company working again. Then early this year, Winston Battery gave MVP a $5 billion order for 10,000 motor homes — which can cost from $100,000 apiece to more than $1 million — and 20,000 smaller vehicles over the next three years.

The Chinese company also began an investment “that will ultimately amount to $310 million, making Mr. Chung the majority owner of our company,” Mr. Williams said. As a result, he added, the original partners will have “a smaller piece of a bigger pie.”

The company is now back up to 250 employees and plans to take on about 1,000 more in the next few years. “We are building prototypes for the China market now,” Mr. Williams said. The recreational vehicles on order will be diesel-powered, he said, “but we will work with Winston Battery to develop electric-powered vehicles in the next few years.”

Synthesis Energy Systems, of Houston, recently got an $84 million investment from Zhongjixuan Investment Management, of Beijing, which will assist Synthesis in developing new ventures in China. Synthesis Energy was introduced to Zhongjixuan Investment, also known as ZJX, through a Chinese business associate who helped arrange a gas-from-coal energy project in China in 2006.

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Fundamentally: Picking Stocks to Keep Ahead of Inflation

IF investor behavior foreshadows what’s in store for the economy several months down the road, inflation could be a bigger threat than government figures now suggest.

The current numbers paint a rather benign picture, as core inflation in the United States has been growing at a modest annual rate of 1.1 percent. Even when volatile food and energy prices are factored in, overall consumer prices rose just 2.1 percent over the year through February, the most recent period for which data are available.

Yet the market appears to be looking past this information. Since the end of December, investors have been pulling money out of mutual funds that invest in assets that fare poorly when inflation kicks up, like intermediate-term bonds and cash, according to an analysis of fund flows by Bank of America Merrill Lynch Global Equity Research.

At the same time, they’ve been pouring money into funds that invest in traditional inflation plays. Those include Treasury inflation-protected securities, commodities and, of course, stocks. Equity funds alone have drawn $30 billion in net inflows since the end of December, according to the Investment Company Institute, the fund industry trade group.

Of course, there is still a debate over whether these shifts make sense. Worrisome levels of inflation may not materialize at all. Economists at IHS Global Insight, for example, are forecasting that consumer prices will grow at only around 2 percent a year from 2012 through 2014. They say they believe that wage growth will be muted in a sluggish job recovery.

But some strategists are bracing for an inflation jump. Jason Hsu, chief investment officer at Research Affiliates, a consulting firm in Newport Beach, Calif., said he expected the numbers to rise in a little more than a year from now. “We’re talking about inflation hovering in the 4 percent area,” he said, with a risk of it moving even higher. He pointed to the flood of stimulus that’s been pumped into the economy by governments throughout the world. Some central banks overseas have already reversed course and are raising rates to keep a lid on prices. The European Central Bank made such a move last week, citing worrisome levels of inflation in food and energy costs. Even if Mr. Hsu is right, though, there is still the question of how effective stocks will be in protecting portfolios amid rising consumer prices.

Historically, stocks have been regarded as a decent inflation hedge — at least relative to bonds and cash — because stock returns have outpaced inflation for most of the past century.

Yet it’s not always the case. Ned Davis Research, based in Venice, Fla., recently analyzed how the market performed in different inflationary environments over the past four decades. While the Standard Poor’s 500-stock index posted double-digit gains, on average, when inflation has been between 1 percent and 4 percent, stocks fell at an annualized rate of 1.4 percent when inflation jumped to between 4 percent and 9 percent.

What’s more, in periods when the inflation rate is accelerating, not all types of stocks perform the same way. Sam Stovall, chief investment strategist at Standard Poor’s Equity Research, looked at periods since 1970 when the year-over-year change in the Consumer Price Index was accelerating. He found eight such sustained periods, and saw that half of the 10 market sectors, on average, gained ground during those times; the others declined or were flat.

Which types of equities are likely to outperform if inflation starts to heat up this time?

Mr. Hsu says he thinks large, domestically based multinational companies would look attractive if inflation really took off and the dollar continued to weaken against other major currencies. Although a weaker dollar would effectively raise the cost of goods imported from overseas, it would lower prices for exports, thus benefiting the American multinationals.

Another promising area is dividend-paying stocks, said Kate Warne, investment strategist at Edward Jones in St. Louis. Since 1947, payouts issued by the S. P. 500 companies have grown at an annual rate of 5.6 percent, she said, outpacing the 3.7 percent inflation rate during the period.

BUT there is another reason to favor dividend payers, she said. Businesses that stand to thrive during inflationary periods are those that have the power to pass along price increases to their customers. And companies with growing dividends often have that ability. “When you think about it,” she said, “companies that have pricing power — and are thus able to maintain their profit margins — will be able to continue to raise their dividends.”

Brad Sorensen, director of market and sector analysis at Charles Schwab, said pricing power might be focused in certain sectors. Historically, “energy companies have proven they can raise prices pretty quickly at the pump if oil climbs,” he said. “On the other end of the spectrum, consumer companies have a hard time passing along price increases on things like clothes because there’s so much competition.”

If inflation spikes, energy has proved to be a good place to hide. But if the discussion moves from rising inflation to hyperinflation, other defensive areas of the market like health care and utilities would seem to make sense, Mr. Stovall said. After all, no matter how expensive things become, people still need to see the doctor and turn on the lights. 

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.

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