THE SELLING OF AMERICA (CONT'D) No longer content with IOUs, foreign investors are buying up real U.S. assets. Don't blame them, though. The problem is that America is living beyond its means.
(FORTUNE Magazine) – NEXT TIME an American folk singer belts out the lines ''This land is your land, this land is my land,'' he ought to change his tune -- or at least his lyrics. This country is not owned exclusively by its citizens, not by a long shot. The U.S. is up for sale, and foreigners are planting flags from California to the New York island. Never has their buying been so dramatic. And never has it made the natives so restless. What's behind the flurry? Having been triply burned by the dollar's fall, the volatile bond market, and Black Monday, foreign investors increasingly prefer to buy things over which they can exert some control. For Americans, that means the land right out from under them, their forests, and their factories. It means icons as sacred as Bloomingdale's and A&P. Even the Brooks Brothers label, beloved by generations of New England preppies, may soon belong to Margaret Thatcher's underwear purveyor, Marks & Spencer. Enough already, says a wide swath of Americans. Smick Medley & Associates, a public policy advisory firm in Washington, D.C., recently set out to measure the nation's attitude toward foreign investment. A survey of that attitude found it overwhelmingly negative. Nearly 80% of Americans outside of the opinion-making elite would like to limit foreign buying, and 40% want to halt ! it altogether. ''Joe America is nervous and suspicious,'' says the firm's president, David Smick. ''He is worried about losing control over his destiny.'' Not an enlightened response. Shutting out foreign shoppers would only treat the symptom, not the problem. The fact is, as long as the U.S. runs a huge trade deficit, foreigners will be stuck with wads of dollars to spend -- the dollars the U.S. hands them in exchange for shiploads of Toyotas, Hermes scarves, and Gucci handbags. And for those dollars to have purchasing power, they must ultimately be spent in the U.S. The gaping federal budget deficit is reason enough to welcome foreign investors. They have already bought a sixth of the U.S. government's debt. By investing in the U.S., they help finance the country's growth, since Americans are not saving enough to satisfy the nation's investment needs (see The Economy). With the intensity of bargain hunters on a bender, foreigners have accumulated U.S. assets worth an estimated $1.5 trillion, nearly a third more than the value of all the assets the U.S. owns abroad. Roughly 80% of that is still financial assets, either bank deposits or portfolio investments in corporate and government securities. But a growing share -- now $250 billion worth -- represents hard assets, property or so-called direct investments in new or existing businesses. So quick is their pace that in just a few years foreigners have already come close to catching up to the $298 billion in hard assets overseas that the U.S. spent decades accumulating. ''Last year brought the biggest surge I've ever seen,'' says Gregory Fouch, who keeps count for the U.S. Commerce Department. Foreigners spent over $40 billion on hard assets in the U.S. in 1987, up 60% from 1986. And these numbers are conservative. Though the U.S. data-gathering net is the world's best, it has its holes. For example, the Commerce Department doesn't keep track of limited partners; that's the way many foreigners make big investments in real estate in the U.S. And untold billions flow noiselessly and illicitly into Florida condominiums and U.S. bank accounts each year as flight capital from abroad. If the numbers are somewhat fuzzy, the trend is undeniable: Foreigners want things American. Their tastes for the tangible extend across the map, from Kentucky racehorses and Texas refineries to New England factories and Sonoma Valley vineyards. They own farmland in all but one state (Rhode Island so far has eluded them) and sizable hunks of Wall Street, both its real estate and the investment banking business. They sign paychecks for three million Americans, including employees of 19 FORTUNE 500 companies. FOREIGNERS have found virtually every industry enticing, but their passion lately is the country's restructured and newly competitive manufacturing sector. Last year they bought a $16.7 billion hunk of smokestack America, roughly double their previous record, set just the year before. If the current pace of purchasing continues through the rest of this year, according to calculations by Morgan Stanley's investment bankers, the buying of smokestack properties will double yet again. That brings the foreign share of the U.S. manufacturing base to an impressive 10%, nearly twice the level of other major areas of the economy. Like bees to honey, foreign shoppers are drawn to well-focused, streamlined businesses. The hottest properties currently: low-tech merchandise such as tires, natural gas, and cement -- products that cost too much to ship to the U.S. from overseas. Foreigners also gravitate to research-intensive industries like chemicals and pharmaceuticals because it is cheaper to spread development costs over a huge consumer base. The assault on the industrial heartland has made many Americans feel vulnerable. Foreign investment is suddenly noisy, front-page news, a far cry from the quiet purchases of yore. Public opinion is deeply divided. Should the U.S. cheer on these acquisitive aliens or kick them out before it's too late? Does their presence force the nation to become more competitive or knock it to its knees? Defenders and detractors in Congress have proposed a range of solutions that reflect the nation's wrenching ambivalence. Their compromise: a section in the embattled trade bill enabling the President to block foreign acquisitions of companies vital to national security. WHILE AMERICANS may find today's situation unsettling, it is hardly unprecedented. From the time of the Pilgrims to World War I, the U.S. was a debtor nation, a sponge for money that went to build railroads, canals, utilities, and telephone systems. Foreigners sold off their U.S assets after World War II and began to borrow instead, quickly turning the U.S. into the world's largest lender. Pushing overseas, Coca-Cola, General Motors, and other multinationals started piling up the nation's huge stock of foreign assets. It wasn't until this decade that the tables turned again, whipped around by , America's towering twin deficits. Paranoid Americans should take a page from their own past: U.S. multinationals did not colonize Europe, despite widespread fear that they would back in the 1960s. Foreign buyers have a long way to go before they take over the U.S. Their assets may loom large over urban landscapes and some industries, but so far they account for a mere 2% of U.S. corporate profits and only 6% of GNP. Foreigners own 12.5 million acres of U.S. farmland. But that hardly amounts to endless fields of grain; it's less than 1% of the total. Though there are plenty of exceptions to prove the rule, corporate investors from abroad are generally upstanding folk. They create jobs, both in their companies and for the many businesses that serve them. They pay around $8 billion in corporate taxes and $80 billion in wages, and boost U.S. exports by some $55 billion. They also can leave an indelible mark on managers and workers by introducing technological and operating improvements imported from abroad. Long aware of the benefits, state and local politicians aggressively seek foreign investment. They battle each other for dollars from abroad, using incentives like tax holidays and new roads as bait. ''It's hardball competition, the Blues and the Grays all over again,'' says Carl Koch, who is Alabama's chief salesman in West Germany. ''I'm not above reminding potential buyers about higher labor rates and other problems they're likely to encounter in the North. It's dirty pool, but what the hell.'' Tennessee takes a more subtle approach. Already home to 55 Japanese companies, the state published a glossy $49.95 coffeetable book to lure even more. The author, former governor Lamar Alexander, promotes Tennessee as a home away from home. ''Tokyo and Nashville are on the same latitude,'' he writes. ''The dogwoods bloom when the cherry blossoms do.'' Indeed, in certain neighborhoods in Nashville sushi bars are as pervasive as the sound of country music. True, some people find the foreign touch downright heavy-handed. Tired, as he put it, of behaving like ''indentured servants'' to ''British masters,'' Richard Lord and five top executives recently stormed out of Lord Geller Federico & Einstein, a New York ad agency acquired last summer by the British agency WPP Group. The sudden exodus by the creators of the award-winning IBM ads, graced by a Charlie Chaplin look-alike, stunned Madison Avenue. It also focused attention on the cultural problems that can arise when foreigners acquire service businesses that depend heavily on talented employees, the most mobile asset of all. EVEN LOUDER protestations come from those whom foreigners have challenged head on. By 1990, for instance, U.S. auto parts producers may have to contend with some 300 foreign competitors on their turf. Particularly vocal about what she calls ''the pinch'' is June-Collier Mason, head of National Industries, a Montgomery, Alabama, parts supplier whose annual sales total $110 million. Fighting what really amounts to capitalism at its best, she has formed Citizens Against Foreign Control of America, a self-serving organization that prints newsletters and gives lectures. Grouses Mason: ''We're peddling our country like soap powder.'' The balking will get even worse as the buying binge grows. Robert Lessin, a managing director of Morgan Stanley, expects foreign acquisitions this year to approach $75 billion, almost double last year's level. Major West German corporations alone are sitting on $50 billion of excess cash that can be used for acquisitions, much of which could flow to the U.S. He expects continental Europe to remain at the heart of the action for the rest of the Eighties. Dominating the 1990s will be Japan, Taiwan, and Hong Kong. Asian nations are following the natural progression of foreign buyers: They are slowly switching from passive investments for their financial portfolios to hands-on, tangible ones as they gain confidence in their ability to hold forth in new markets. Japan has already begun to make waves of tidal proportions. Behind the momentum are its $83 billion current-account surplus and a shortage of domestic buying opportunities. Bonds, once a haven for Japanese investors, are out. Japan's major institutional buyers lost over $10 billion in two years as the yen rose and bond prices fell. Much preferred these days are hard assets. Last year the Japanese bought or built businesses worth $7 billion, bringing the value of their direct investments to $30 billion, triple the level of five years ago. The Japanese are also hungry for real estate. Last year alone they invested in projects worth an earthshaking $13 billion, according to a study just released by the Los Angeles-based accounting firm Kenneth Leventhal & Co. Their $26 billion of U.S. holdings includes virtually all of Waikiki Beach, over a quarter of the best buildings in downtown Los Angeles, and prime urban landmarks from New York to Seattle. In the biggest hotel deal ever, Japan's Aoki Corp. recently teamed with the Robert M. Bass Group of Texas to buy the Westin hotel chain for $1.5 billion. This year, the study predicts, Japan's U.S. real estate investment could reach a staggering $19 billion. The Japanese are wild for U.S. real estate in part because land is so dear back home. Prices in downtown Tokyo can run as high as $24,000 a square foot; that's about ten times what prime commercial space sells for in New York City. Starved for opportunities, wealthy Japanese speculators have resorted to ringing doorbells in Honolulu and offering people outrageous sums for their homes. Mayor Frank Fasi decided that residential real estate inflation had gotten so out of hand that he tried -- and failed -- to pass state legislation that would bar further foreign buying. Busy as they are, the Japanese are by no means the biggest U.S. shoppers. First prize goes to the British, whose cumulative holdings in the U.S. total $70 billion. They were also the biggest buyers last year, accounting for four of the year's top ten foreign acquisitions. The Netherlands, thanks to ample investments in oil made over many years, has accumulated $52 billion in assets, and is second overall behind the U.K. Japan, with $30 billion minimum, is solidly in third place. If the devalued dollar had already turned the U.S. into a discount shopping mall, the October stock market crash created a veritable fire sale. The British engineering giant TI Ltd. offered $144 million last September for Detroit's Bundy Corp., which makes metal tubes for cars and refrigerators. The company withdrew the offer after the crash but recently reinstated it -- this time for $18 million less. Says a British tycoon: ''It's a jolly good time to buy.'' Indeed. The British announced 98 deals in the U.S. during the first three months of 1988, up from 57 during the same period last year. Even the French, laggards in the takeover race, are moving with newfound dispatch. ''We're now prepared to be woken up early Sunday morning with a phone call telling us to catch the next flight to the U.S. so we can sign a deal that night,'' says Pierre Vaillaud, executive vice president of the French oil and gas company Total. Last year Total snatched CSX of Houston for $612 million. In the rush, the gentlemanly manner with which foreigners once approached U.S. targets has all but disappeared. Role models of the new era are fighting men like Sir Gordon White, chairman of the American arm of Britain's Hanson PLC, whose 120 U.S. businesses sell such tokens of Americana as Ball Park franks and Endicott Johnson's sensible shoes. Also active in the ring these days is Canadian heavyweight Robert Campeau, who knocked out R.H. Macy in a 15-round fight for Federated Department Stores. The $6.6 billion purse puts the owner of Ottawa's skyline in charge of a retailing and real estate empire that includes the 16 branches of Bloomingdale's and 549 other stores. Concedes Campeau, whose final bid of $73.50 a share was almost 60% higher than his original offer: ''We didn't steal it.'' Price is sometimes beside the point. Foreign buyers say they are paying for more than just assets. Some are anxious to set up shop in the U.S. before any protectionist barriers lock them out. ''Our foresight paid off when television imports were restricted,'' says Tsutomu Sugiyama, a spokesman for Sony, which broke ground for a U.S. factory in 1972. Other investors are happy to pay a premium for political stability. ''The U.S. is a very safe place to invest,'' says Gilbert de Botton, head of London-based Global Asset Management, which manages $1.6 billion. ''You are as comfortable there, if not more so, than you are in your own home.'' Companies that need to be close to their customers are quite willing to pay for the privilege. Japan's Bridgestone Tire recently overwhelmed rival bidder Pirelli Co. of Italy when it offered $2.6 billion for Firestone Tire & Rubber. Some of Bridgestone's best clients are the Japanese auto manufacturers, which are gradually shifting operations abroad and by 1992 will produce an estimated two million cars in North America. That's at least eight million tires Bridgestone felt it could not afford to lose. Puncturing all hope Pirelli had of winning, Bridgestone jumped its price 37% above Pirelli's final bid. J. Tomilson Hill, head of mergers and acquisitions at Shearson Lehman Hutton, calls this ''the biggest bidding leap I've seen in 15 years in the merger business.'' GLOBALLY MINDED investors want to play in the world's biggest market. ''We were faced with bowing out of the competition if we didn't get into the U.S. market,'' says Alain Gomez, CEO of Thomson SA, the French consumer electronics and defense company. Last year Gomez swapped most of his medical electronics business, plus $650 million, for General Electric's RCA division. That made Thomson the leading television producer in the U.S. Says Gomez: ''We jumped in where we were absolutely nonexistent.'' Americans buy 32% of the world's color television sets and 30% of its chemicals, and generate half the world's ad revenues. No wonder acquirers with world-class pretensions find the place irresistible. ''The U.S. is also the cultural heart of the world,'' says Michael Dornemann, executive vice president of the German media giant Bertelsmann. That fact propelled him back and forth across the Atlantic 80 times in two years in search of acquisitions. ''I lost several pounds in the process,'' he says. But he fattened Bertelsmann into the world's leading media company when he managed to land Doubleday and RCA Records on the same day. The U.S. still has a lot to teach too, a draw for companies in search of knowledge. Taiwan's Acer Inc., which makes personal computers, wanted to learn about small business computers. So it bought Counterpoint Computers of San Jose, California, for $20 million last November and saved millions in research. Linking up with universities can also buy know-how. Japanese companies endow 16 chairs at MIT and fund some $2 million in research there. Financing high-tech startups is another route: Fully one-quarter of the money in U.S. venture capital funds comes from overseas. To expand its research in genetic and molecular technology, West Germany's Bayer backed three Yale University professors when they set up Molecular Diagnostics Inc. in West Haven, Connecticut. Technology transfer flows both ways, of course, and that is ample reason to cheer corporate immigration. Over and over, foreigners have revitalized U.S. companies with new production methods, guiding them back to profitability. When Bertelsmann bought RCA Records last year, the venerable record company was losing some $30 million a year. Dornemann, who heads up Bertelsmann's music group, quickly reorganized the company, doubled investment in the label's recording artists, cut overhead by 17%, and closed a money-losing plant. The result: RCA now turns a $75-million-a-year profit. IN AN EXTENSIVE STUDY of 250 Japanese-owned companies in the U.S., Columbia University business school professor Martin K. Starr has identified several examples of management superiority. For one thing, the Japanese tend to bring products on line twice as fast as U.S. companies. And while Japanese firms have to rework or discard less than 1% of their products, U.S. manufacturers chuck, on average, 4% of their output. When Japan's Bridgestone took over one of Firestone's failing plants in 1983, workers were producing only 600 tires a day. By adding a few shifts and retraining the work force, Bridgestone now profitably produces 3,100 tires a day. Like it or not, foreign investment compensates for a multitude of bad economic habits Americans have developed. Among the most egregious: a persistent unwillingness to save and invest at respectable levels. The Japanese sock away some 16.7% of GNP and invest 13% at home. They spend the difference abroad. By contrast, Americans put away only around 2% of GNP but investment in the U.S. runs to 5.5%. How can the U.S. invest more than it saves? You guessed it: with help from overseas. Foreign auto producers alone have invested $5.2 billion in the U.S., a welcome inflow at a time when U.S. auto producers are closing plants and laying off workers. So trying to boot out the bounty hunters would be a terrible mistake. Until the U.S. learns to do for itself again, it should be grateful for the help. But let it learn quickly: Profligacy inevitably takes a toll. ''We are much like a wealthy family that annually sells acreage so that it can sustain a lifestyle unwarranted by its current output,'' says Warren Buffett, the legendary investor from Omaha. ''Until the plantation is gone, it's all pleasure and no pain. In the end, however, the family will have traded the life of an owner for the life of a tenant farmer.'' Along the way, the family's standard of living will gradually erode. The government already pays $24 billion in interest to foreigners, for instance. That's more than the federal government spends on schools. And interest rates are higher than they would be if the U.S. did not have to finance a deficit and lure investors to buy that debt. Because of their clout in the U.S. bond market, ''foreigners have a say over how many houses get built in this country,'' says Robert McCauley, a senior economist for the Joint Economic Committee of Congress. Let the seller beware. Foreigners will have an even greater say as their claims on U.S. assets spiral. But the answer is not to regulate how the world spends its dollars. Instead, the U.S. should rediscover the lost arts of moderation and saving. Buried in its current course is a death wish: Unless the U.S. improves the trade deficit, foreigners will have accumulated enough dollars to buy every publicly traded company in the country in less than 20 years. That's a possibility that should really make the natives jumpy.
CHART: Direct Foreign Investment in U.S. by Country . . . In billions of U.S. dollars
Total 1987 Total % end 1986 Inflow end 1987 Increase
Britain $51 $19 $70 37.3% Netherlands $43 $ 9 $52 20.9% Japan $23 $7 $30 30.4% Canada $18 $1 $19 5.6% West Germany $17 * $17 -- Switzerland $12 $2 $14 16.7% Netherlands Antilles $8 $1 $9 12.5% France $7 $1 $9** 17.6% Other $30 $1 $30** -- Total $209 $41 $250 19.6%
and by Industry In billions of U.S. dollars
Industry Amount Britain Manufacturing $85 Netherlands Trade $45 Japan Petroleum $36 Canada Real Estate $24 West Germany Insurance $16 Switzerland Banking $13 Netherlands Antilles Finance $7 France Mining $5 Other Other $19 Total $250
*Less than $500 million. **Numbers are inconsistent due to rounding. CREDIT: SOURCE: DEPARTMENT OF COMMERCE CAPTION: NO CAPTION DESCRIPTION: See above.
CHART: Top Ten Foreign Acquisitions (1/1/87 to date)
Value Rank Transaction billions of U.S. dollars
1 British Petroleum (Britain) buys the 45% of Standard $8.0 Oil that it didn't already own 2 Campeau Corp. (Canada) acquires Federated $6.6 Department Stores, one of the largest U.S. retailers 3 Unilever (Britain/Netherlands) purchases the U.S. $3.1 consumer products company Chesebrough-Pond's 4 Hoechst (West Germany) acquires Celanese Corp. $2.9 / 5 Bridgestone (Japan) buys Firestone Tire & Rubber $2.6 6 Sony (Japan) purchases CBS Records from CBS $2.0 7 Imperial Chemical Industries (Britain) acquires Stauffer $1.7 Chemical from another foreign company, Unilever 8 Hanson PLC (Britain) acquires Kidde Inc. $1.6 9 Aoki Corp. (Japan) and the Robert M. Bass Group $1.5 purchase Westin Hotel Co. from Allegis Corp. 10 Montedison (Italy) buys 38.7% of the plastics company $1.5 Himont from Hercules, doubling its interest to 77.4%
CREDIT: NO CREDIT CAPTION: NO CAPTION DESCRIPTION: See above.
CHART: Who Owns ''California'' Vineyards
Almaden Britain Beaulieu Britain Beringer Switzerland Buena Vista West Germany Callaway Britain Chateau St. Jean Japan Chateau Souverain Switzerland Cuvaison Switzerland Domaine Chandon France Domaine Michel Switzerland Domaine Mumm Canada/France Domaine St. George Thailand Firestone U.S./Japan Franciscan West Germany Gloria Ferrer Spain Inglenook Britain Maison Deutz France/Switzerland Piper Sonoma France Ridge Vineyards Japan Roederer U.S. France St. Clement Japan San Martin Winery Britain Simi Winery France Sonoma Vineyards Britain Sterling U.S./Canada Winery Lake Canada