By Paul Eckert and Rachelle Younglai and David Ljunggren
WASHINGTON/OTTAWA, Aug 23 (Reuters) - Back in the day, before the U.S. Congress tore apart China’s proposed multi-billion dollar deals with Western companies one after the other, Beijing’s lobbying left little to the imagination.
China’s Washington embassy blasted out form letters to every U.S. lawmaker when it was upset with Congress, warning of grave damage to Sino-American relations, congressional aides recall.
One aide to a senator, who was being courted by arch rival Taiwan, was told by visiting Chinese officials “that all trade between your state and China will come to a screeching halt!”
The confrontational tactics rarely worked - in one pivotal decision, Congress in 2005 essentially killed Chinese state oil company CNOOC’s $18.5 billion bid for U.S. firm Unocal - and now China has largely abandoned them.
Instead of issuing tirades, the Chinese hire top-notch lobbying firms whose ranks are filled with well-connected former U.S. and Canadian officials; buy TV advertisements to buff their image; and seek acquisitions less likely to stir nationalistic fervor.
Whether this new strategy fares any better could be known soon. CNOOC is trying to buy Nexen Inc., a Canadian oil company with assets in the U.S. Gulf, in a deal valued at $15.1 billion. China’s Wanxiang Group is poised to take over A123 Systems Inc, a struggling U.S. battery maker that received hundreds of millions of dollars in grants from the Obama administration. And Huawei, a Chinese company founded by a former People’s Liberation Army soldier, along with Chinese telecom company ZTE Corp, are coping with a congressional security investigation.
China may be the world’s second largest economy, a veto-wielding permanent member of the U.N. Security Council and the fastest growing export market for a United States eager to revive its economy through trade. But the country of 1.3 billion labors under a poor image in Washington.
Chinese firms - even those like Wanxiang that are not directly beholden to the ruling Communist Party - face intense scrutiny from lawmakers who see them as tools of China’s geopolitical strategy or part of a system that grossly favors their own firms with allegedly illegal subsidies and what critics see as an artificially low currency.
CNOOC’s second major bid for a North American company, Calgary-based Nexen, came after the Chinese firm laid the groundwork in Canada and after Beijing made an effort to understand how the U.S. Congress operates. Nexen, Canada’s 10th largest energy firm, has 10 percent of its assets in the U.S. Gulf.
“They know there is no point in just arriving and doing a brief tour of the country and thinking that approach will produce results. Those days are over,” said a source familiar with the Chinese lobbying effort in Canada, who spoke on condition of anonymity.
When CNOOC came looking for introductions in Canada, it chose Hill and Knowlton Canada and its president, Michael Coates, a longtime Conservative who worked for a government minister before becoming a lobbyist in 1983.
Coates, who was leader of Conservative Prime Minister Stephen Harper’s election debate preparation team for three federal elections, accompanied CNOOC Vice President Fang Zhi during talks with top Canadian bureaucrats in which Fang stressed Canada was an attractive place to invest. He did not mention any particular targets.
Along with doing their homework and talking to the right people in financial markets, Chinese firms had a greater intuitive grasp of what was possible in Canada, a second source familiar with China’s lobbying said.
“They went after Nexen because they knew everybody knew Nexen was a mess. If Nexen had been a crown jewel ...” this source said, making clear a bid for a more important firm would have been rejected.
The companies still need approval from Canadian authorities.
Hill and Knowlton Canada declined to comment.
In Washington, CNOOC also hired Hill and Knowlton. Its lobbyists include a former Democratic congressional aide, Robert Ludke, who worked with the Chinese company during its failed bid for Unocal.
And CNOOC is voluntarily submitting its deal for a U.S. government security review.
“In contrast to 2005, we’re finding people are much more willing to consider the benefits of the deal from a U.S. perspective,” CNOOC spokesman Peter Hunt said.
The turning point for Chinese lobbying efforts in North America was the tumultuous CNOOC attempt to buy Unocal, whose blue-and-orange gas station signs were something of an icon to many, including some U.S. lawmakers.
In the summer of 2005, Congress voted overwhelmingly against the bid. It was a protest vote, but CNOOC understood that it meant the deal was going to be rejected by the U.S. government and it jettisoned the plan.
China’s U.S. ambassador knew something had to change.
Just over a week after the vote, the Chinese Embassy retained top lobbying firm Patton Boggs. The monthly retainer, which was initially $22,000, has since climbed to $35,000, according to the latest forms disclosed under the Foreign Agents Registration Act.
A handful of lawmakers, who were shocked at the visceral reaction to the Unocal deal, formed a group to help China understand Congress and vice versa. The Chinese Embassy started inviting members of Congress to meet their policymakers and its ambassador - then the suave and good-humored Zhou Wenzhong - paid visits to Capitol Hill where he would take verbal beatings over volatile issues such as China’s support for Sudan.
“As long as the door was closed and the media wasn’t there, (lawmakers) and the Chinese discussed third rail issues,” said one congressional aide. “This allowed Americans to blow off a lot of steam.”
Representatives, who rarely got the chance to talk to U.S. Cabinet members, much less Chinese policymakers, were now able to confer with Beijing’s top ministers and make productive trips to China. The bipartisan Congressional U.S.-China Working Group “helped translate the Congress into Chinese,” said the aide.
Gone were the old ham-handed approaches - like the 20-page blast fax on Taiwan and Tibet that once went to scores of U.S. lawmakers, according to congressional aides and trade experts.
China’s sheer economic size and importance as a market increasingly speak more effectively than its diplomats or hired hands from K Street.
While Chinese imports to the U.S. remain very high, 420 of the 435 congressional districts saw higher growth in exports to China than they did to other overseas markets in 2011, according to trade data compiled by the U.S.-China Business Council. Even districts of strident critics of Beijing or authors of protectionist legislation aimed at China enjoyed rapid growth in exports to the Chinese market.
And the tide of Chinese investment has just begun, with China and its companies sitting on hundreds of billions of dollars in cash.
CNOOC and Wanxiang are doing whatever it takes to avoid a repeat of what happened to Huawei, the world’s second largest telecom equipment maker, which has had deal after deal fall apart in the United States.
In 2008, Huawei and private equity firm Bain Capital were forced to give up their bid for 3Com Corp after a U.S. panel rejected the deal because of national security concerns. Some lawmakers fear that Huawei gear could allow the Chinese to tap into the U.S. telecommunications network or even provide a way for it to sabotage systems.
Then in 2011, the company was forced to relinquish plans to buy some assets from U.S. server technology firm 3Leaf after the Committee on Foreign Investment in the United States mandated that Huawei divest certain parts of the deal.
It was a shock - especially given the deal, which had already been consummated - was worth just $2 million. Huawei had not even filed with the U.S. government for security approvals.
In contrast, when Wanxiang announced in August it would rescue A123 Systems, the companies quickly said they would ask the U.S. government to review the deal for potential national security concerns.
The Chinese auto parts maker - which plans to provide up to $465 million to A123 - has retained a law firm for the security review, but has not hired lobbyists to make the case for the takeover.
“We’re confident the process will be transparent and will be fair. I think we’re trying to help the company and save the jobs,” said Pin Ni, president of Wanxiang America Corp.
With lawmakers probing Huawei for any potential threats to U.S. telecommunications, the company has boosted its lobbying efforts. It plucked Donald Purdy, a member of a White House staff team that drafted a U.S. national strategy to secure cyberspace in 2003, to serve as chief security officer for its U.S. operations.
“Politics are politics. The realities of this industry are that, whether you are talking infrastructure or devices, it is a transnational industry. It is utterly borderless,” said William Plummer, U.S. spokesman for Huawei.
The company now has seven firms registered to lobby U.S. lawmakers, including APCO, Doyce Boesch and Fleishman-Hillard, according to forms filed under the lobbying disclosure act. T hat is up from four firms in 2011, two in 2010 and one in 2009.
Top lobbyists for Huawei include William Black, a former chief of staff to Steny Hoyer, then Democratic leader in the House of Representatives.
Huawei has also started appealing to mainstream audiences. During this year’s Summer Olympics, it aired commercials on NBC. The company sponsored a high profile food fair in Chicago and is set to sponsor similar events across the country.
In Canada, Huawei has made strenuous efforts to show a long-term interest in the country since winning a contract in 2008 to build networks for domestic operators Telus and Bell Canada.
It opened a Canadian head office in Ontario and has received a grant from the province to create jobs and invest C$67 million in research and development. Huawei has since hired an executive from Canadian tech company Nortel Networks to be its senior vice president and has partnered up with Telus to establish a center in their names at a leading Canadian university.
But hiring a former government official doesn’t always work.
Take China’s ZTE Corp, the world’s fifth largest telecom gear maker. It hired Jon Christensen, a relatively unknown former Republican congressman from Nebraska.
The FBI has since opened a criminal investigation of ZTE’s sale of U.S. computer equipment to Iran in breach of U.S. sanctions, and Christensen resigned as ZTE’s lobbyist after the probe became public.
And many lawmakers have yet to be persuaded by China.
“The fact that they have formalized their lobbying efforts means that they’re getting bolder and bolder in the actions that they have, and I think that should concern individuals in the United States,” said Republican lawmaker Randy Forbes, a key critic of the Unocal deal.
One veteran advocate for Taiwan independence - Beijing considers the island a wayward province - says China’s heavy-handedness often backfires, to his group’s advantage.
“A lot of people say they’re gaining prowess, they’re being more prominent and they’re learning ... but I have never seen it,” said Coen Blaauw of the Formosan Association for Public Affairs.
But Blaauw says China’s deep pockets and big market talk.
Referring to the top Republican and Democrat in the House of Representatives, he said: “My worry is the big corporations who can call up John Boehner and Nancy Pelosi and tell them ‘If you do this, (the companies will) lose billions and billions of dollars.'”