Check out GameChanger CEO Larry Popelka ’s latest article in Bloomberg Businessweek – and find out why Pork Producer Smithfield Foods can’t implement its current growth plans without President Barack Obama’s approval. Is your company next?
Pork Protectionism is a Threat to US Business
The Senate Agricultural Committee recently held hearings to investigate the acquisition of Virginia-based pork producer Smithfield Foods by China’s Shuanghui International Holdings under the premise of “protecting national security.” Concerns by some members of the U.S. Senate ranged from food safety to protecting “valuable intellectual knowledge of meat processing.”
Unfortunately these hearings are a case of misguided nationalism by elected officials who fail to understand the benefits of global business.
Shuanghui’s acquisition of Smithfield (SFD) is a great deal for the U.S. economy. As U.S. pork consumption has slowed over the past decade, Smithfield has gone through a series of layoffs and plant closures and the company struggled to earn a profit (average 2 percent profit margin since 2003).
In China, however, demand for pork is growing. Pork is the favorite meat there, and a growing middle class means more Chinese families can afford to eat it more often. U.S. pork is particularly popular and commands premium prices, as it is viewed as higher quality due to our strict food safety laws. Shuanghui is the leading pork producer in China, and its strong distribution network means it can sell Smithfield products throughout the country—something Smithfield could never do on its own…
If ever there was a win-win-win, this is it. U.S. farmers will sell more hogs, Smithfield plants will ramp up production, creating more jobs, and Smithfield shareholders would be paid a 31 percent premium on their shares. The deal would also help reduce the U.S. trade deficit, strengthen relations with China, and help improve nutrition in a developing country by making protein more affordable. What’s not to like?…
The real issue, it seems, is that many senators see Chinese companies as extensions of the Chinese Communist government. The fact is most Chinese companies are capitalist enterprises that operate exactly the same as U.S. companies and are motivated by profit, not by a secret political agenda. Many are even partly owned by U.S. citizens, so when they succeed, U.S. investors make money.
Shuanghui is a publicly traded company with U.S. investors. In 2006, U.S. investment bank Goldman Sachs actually controlled the company, as it led an LBO of Shuanghui with a group of other private equity investors; the Chinese government approved the acquisition. Three years later Goldman sold half its holdings and earned a 500 percent return. Today a Goldman fund still owns 5.2 percent of Shuanghui. It’s possible some of these concerned senators may unknowingly own Shuanghui stock themselves…
The U.S. government is requiring that the Smithfield acquisition be approved by the Committee on Foreign Investment in the U.S. (CFIUS), which is made up of presidential cabinet members who are authorized to veto unilaterally any business transaction they deem represents a national security risk. Its decisions are all made through a secretive process that does not allow public hearings or debate. The original intent of this committee was to protect national security by stopping enemy nations from getting access to critical U.S. information or technology.
Originally, many experts believed a CFIUS review was not even warranted for the Smithfield transaction, as it is difficult to imagine how pork production could ever be deemed a threat to national security. But this week’s grandstanding by the Senate committee was clearly an attempt to politicize the process and extend government oversight into all areas of international commerce—something that will be bad for all business.
If CFIUS rejects this deal, it will be a major blow to the free-market economy we enjoy. We can only hope President Obama’s CFIUS committee has had a lesson in Global Economics 101…
GameChanger is an innovation consulting company based in Alameda, Calif., that helps companies build and test breakthrough new products. For more information, please visit us at www.GameChanger.net .