The Link Between China’s Smithfield Foods Acquisition and Sinovel Wind

Since the announcement last week that Shuanghui International, the dominant pork and sausage processor in China, has made a deal to acquire Smithfield Foods for $4.7 billion, much of the press has been focused on what that acquisition might mean for food safety in the U.S.

After all, for years, China has generated a macabre stream of high profile food safety horror stories that might cause Sweeny Todd to blanch.

One hopes that Shuanghui International’s plan in acquiring Smithfield Foods is to import U.S. food safety standards to China rather than obtain an outlet for the melamine-tainted milk, cadmium laced rice and rat meat masquerading as lamb that appear as regular menu items in China.  If indeed there is a growing market in China for safe foods, Shuanghui International’s proposed acquisition of Smithfield Foods may presage a huge new market for American processed food exports to China. 

So what does the proposed acquisition of Smithfield Foods by the Chinese have to do with renewable energy?  And why should this acquisition be scrutinized in the much larger context of U.S.-China trade and investment?  Well the answer, of course, is China’s decidedly tenuous respect for intellectual property.  The explanation lies in the deeply imbedded interconnections of Chinese business interests and the West’s overlapping concerns about a host of Chinese business practices.  Let me explain.

As we have written, the once promising wind energy opportunities for China and the U.S. have been sidetracked by China’s single-minded push to dominate the wind turbine manufacturing industry.  This in turn has resulted in a souring of the relationship between China and the international wind industry; this climate not only is driving foreign participants out of China, but also is cannibalizing the domestic market among Chinese competitors, producing an increasingly unhealthy industry.  The high profile case of industrial espionage involving Sinovel Wind Group Co., Ltd., one of China’s largest wind turbine manufacturers, and American Superconductor, for a time a rising star in the U.S. renewable energy sector, accelerated this trend. 

What connects wind turbines and sausage is a company whose most prominent investor is the son of former Premier Wen Jiabao.  As reported in the New York Times, New Horizon Capital, which was co-founded by Winston Wen, has teamed up with Goldman Sachs and other “global deal makers” to put together the deal for Smithfield Foods.

So, should we care that New Horizon Capital, which has a significant investment in Sinovel Wind, a company known to have stolen AMSC’s intellectual property, desires to acquire Smithfield Foods?   And while the national security review by the Committee on Foreign Investment in the United States will be an integral part of the Shuanghui/Smithfield Foods acquisition process, should that be the entire scope of the inquiry? 

Some prominent former Obama Administration officials, including Dennis C. Blair, President Obama’s first director of national intelligence, and Jon M. Huntsman Jr., the former ambassador to China, suggest that whether companies protect intellectual property also should be a consideration of the Committee on Foreign Investment in the United States, which presently only judges whether an investment in the United States could pose a national security risk.    While this recommendation, which is outlined in the recently released private Commission on the Theft of American Intellectual Property, “IP Commission Report”, specifically recommends using acquisition review opportunities as another tool to combat intellectual protection theft, there have been high profile cases where other proposed acquisitions by Chinese companies (most notably the failed bid by CNNOC to acquire Unocal Corp. in 2005) arguably have foundered for reasons other than national security concerns.    

So to what extent should we “triangulate” those issues?  Would a business relationship marked by misconduct in one industry be cause for us to be less receptive in another?   Is it sufficiently compelling to question one acquisition because investors in the acquirer also are profiting from intellectual property theft in another industry?  Where is the line drawn and why?  These are all questions that deserve robust consideration.

Lead image: Wind turbines via Shutterstock

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Lou Schwartz is a lawyer and China specialist whose firm, China Strategies, LLC, focuses on the environmental and renewable energy sectors in China and provides its clients a range of support, including research and analysis, due diligence, merger and acquisition, private equity investment, compliance and data security. Lou has written and lectured widely about China and has taught law and development in China at the university level.

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