Tales of Adventures in Foreign Investment

By Kennedy Maize

Washington, D.C., September 29, 2011 — A story in the Wall Street Journal recently – about a Chinese wind firm pirating U.S.-owned software that controls wind turbines – reminded me of how, in the 1980s, China stole a coal mine from legendary U.S.-Russian oilman Armand Hammer. The moral of the story, for me, is that China never changes and Chinese business ethics are the equivalent of military music: an oxymoron.

In broader terms, the latest tale of woe and intrigue in foreign climes is a reminder that investments in strange lands and cultures requires more than the usual vigilance and foresight. Prudence requires more than assessments of business risk. Look out for criminal conduct as well. Hold onto the wallet.

The current story concerns the criminal conviction of an American Superconductor Corp. engineer for selling his company’s wind controller software under the table to China’s Sinoval Wind Group Ltd., once American Superconductor’s biggest customer. Sinovel has denied the charges that it pirated the American software.

The 38-year-old Serbian engineer entered a guilty plea in Austria and got a reduced sentence of three years in prison and a payment of $270,000 to American Superconductor. The U.S. firm is suing Sinoval in Beijing on civil charges. Good luck with that.

Some 30 years ago, Occidental Petroleum, under control of the mythical Hammer, a Russian emigre (some wags joked that Hammer was really the secret head of the worldwide Soviet spy agency KGB) then well into his 80s, announced a major Oriental business breakthrough with the Peoples’ Republic of China. Los Angeles-based Oxy, working through its wholly-owned Tennessee coal company Island Creek (which once employed Al Gore’s father, former Tennessee Senator Albert Gore, Sr., after he lost a reelection bid in 1970), would develop a major, state-of-the-art strip mine in Shanxi Province.

China would provide the coal reserves, the labor, and the market. Oxy would put up the capital, oversee construction, and share the profits of the An Tai Bao coal venture, opening up the province’s considerable coal reserves and helping to fuel the country’s emergence on the world business stage. Hammer’s political partner in the project was Premier Li Peng, protégé of Deng Xiaoping and a Soviet-trained hydro engineer (later the prime political mover behind the Three Gorges Dam on the Yangtze River).

Construction on the Chinese coal mine began in 1985, with the 87-year-old Hammer at the ribbon cutting on the project that Oxy had financed with $650 million. Six years later, with Hammer dead, the mine was running full-tilt and Oxy was bleeding red ink as a result. China controlled the price it would pay for the coal from the mine, and Li Peng had no interest in seeing Hammer walk away with a profit.

China had managed to socialize the benefits of the mine and privatize the costs to the U.S. firm. Sheryl WuDunn of the New York Times – who in 1989 had won a Pulitzer Prize with her husband Nick Kristof for their coverage of the massacre at Tiananmen Square – wrote in 1991, “These days, as Occidental tries to withdraw from an apparently money-losing venture, the mine exemplifies the skepticism with which many foreign countries now view the Chinese market.”

At the time, energy journalists – and I was among them – were joking that the Chinese coal mine deal mimicked a standard country music lyric. China got the mine, and Oxy got the shaft.

The same sort of sovereign shenanigans happened in India with Enron in the end of the 20th Century and the early years of the new millennium. The former Houston-based energy company (which was not entirely a criminal enterprise throughout its history) invested heavily in a gas-fired power plant in the Indian state of Maharashtra known as Dabhol. Enron believed it was protected by the British business heritage in India and a sovereign guarantee from the Indian government that the risks were covered.

Not quite.

Maharashtra’s state-owned energy board ended up with the project and Enron got slow-walked out of India with empty pockets. Some analysts have argued that its multi-billion-dollar misadventure in India marked the start of the fall of the House of Enron.

Times seem not to have changed very much when it comes to investments in rapidly-developing countries. Just study American Superconductor Corp. for the latest lesson.