Economy

The inaugural FT-Nikkei Investing in America ranking is a snapshot of the best US cities for foreign multinationals to do business in. This report looks at the biggest challenges facing overseas investors in the US, how the winning cities are pulling in more deals — and why the laggards are falling behind More

Pittsburgh long symbolised America’s rustbelt, that stretch of the industrial midwest and north-east that once boomed with steel, cars and coal. In recent years, however, the city has been trading a rusty reputation for a robotic sheen.Still known as the Steel City despite no working steel mills, Pittsburgh has the muscular look of an industrial-era American city, its downtown jutting proudly above the confluence of three rivers that once served as a primary thoroughfare of national commerce. Indeed, the city of 300,000 in western Pennsylvania is also known as the City of Bridges for the many examples spanning the Allegheny and Monongahela Rivers, which flow into the Ohio.

Despite its national reputation as a city that reached its prime more than a century ago, Pittsburgh finished 15th in the inaugural FT and Nikkei Investing in America ranking of the best US cities for overseas businesses, wedged on the list between the hip and techie Austin and Portland. The most-cited motive for investment there is the availability of a skilled workforce, according to data from fDi Markets, an information provider owned by the Financial Times. These skills often radiate from Carnegie Mellon University, a few miles from downtown. The product of two predecessor institutions founded in the early 20th century, CMU is today world-renowned for its computer science and robotics programmes.Indeed, much of Pittsburgh’s renaissance is built on the foundation of its industrial-age prowess. “We were the Silicon Valley of the Industrial Revolution,” says Dave Mawhinney, executive director of CMU’s Swartz Center for Entrepreneurship. Western Pennsylvania both extracted and produced the materials that powered that revolution: coal, oil, glass, Carnegie steel. Thanks to CMU, it went on to have the materials needed for the digital revolution: commercial computers, robotics institutes, artificial intelligence labs. Google, Facebook, Amazon and other big tech companies have set up shop to tap the associated human capital, Mawhinney says.“Pennsylvania’s rich history of innovation is one of the best things about the commonwealth, and our world-class research institutions and universities are some of its greatest assets,” Tom Wolf, governor of Pennsylvania, said earlier this year. In August, Wolf announced a tax cut for businesses in the state, where corporate income taxes are the second-highest in the country. Last month, Pittsburgh hosted the first Global Clean Energy Action forum, convening global leaders to discuss the green energy transition, a significant source of foreign direct investment into the US. “Pittsburgh is the city that built America,” said US energy secretary Jennifer Granholm, adding that it exemplifies “how a legacy energy and industrial-dependent economy can be transformed into a technology and innovation powerhouse”.Knowhow: Pittsburgh benefits from Carnegie Mellon’s research prowess © Cooper Kostelic/Carnegie Mellon UniversityThere are challenges. The airport is wanting for direct flights to key destinations, native capital is in short supply, and the city’s smokestack reputation can be a burden. “People still have the image of the steel mills and the smoke-filled air,” says Mark Anthony Thomas, president of the Pittsburgh Regional Alliance, a non-profit economic development group. “Manufacturing is still very important, and crucial to our economy, but when you visit it’s a beautiful, green, charming place. When people see that they’re immediately transformed.”Thomas points to activity in robotics, AI, advanced manufacturing and climate technology, noting that the city is home to both overseas engineering giants — such as Germany’s Bosch, which has a research centre there — and successful homegrown start-ups, such as space robotics company Astrobotic and language app specialist Duolingo, Pittsburgh’s first “unicorn”, as billion-dollar start-ups are known.Other companies are being drawn in. Tata Consultancy Services, the Indian multinational, opened a research centre in April that will focus on AI and the internet of things. CMU now has a TCS Hall, following a $35mn gift from the consultancy. “Our company has always been focused on hiring people from universities and they tend to grow with the company,” says Suresh Muthuswami, TCS’s North American chair. “So wherever we look to invest, we look for a strong university presence.” Also catalysing the city’s tech sector are groups such as the Pittsburgh Robotics Network, whose executive director, Joel Reed, argues that the city benefits from an ingrained civic culture of engineering. “If you’re in robotics, you need to come to Pittsburgh,” he says. A pivotal moment, he adds, was the arrival in 2015 of Uber’s Advanced Technologies Group, which specialises in autonomous vehicles and contributed significantly to the city’s tech ecosystem. Reed’s network estimates that Pittsburgh is home to 105 robotics companies.The communications sector has benefited from heavy investment too, notably from video conferencing company Zoom, which opened research centres in Pittsburgh and Phoenix, Arizona, in May 2020. In announcing the move, chief executive Eric Yuan referred to the cities’ “incredibly well-educated, skilled and diverse talent pools” and said Zoom was planning to hire 500 software engineers “drawing largely on recent graduates of the many local universities”.In the past, many of those graduates would not have hung around long enough to be hired: brain drain was a persistent problem. “Every year, 3,000 of the smartest people in the world come to Pittsburgh,” Mawhinney says. “Before 2006, we exported them all to the Bay Area, or to New York City, or where they came from, like India or China. But when AI and robotics started to come of age 15 years ago, we started to retain a lot of that talent.”Thomas, who moved to Pittsburgh from New York, thinks that companies may likewise see advantages in smaller cities as they respond to increasing costs and the prevalence of flexible work as result of the pandemic.“In a post-Covid world the smaller markets have a greater opportunity now to really position themselves for FDI,” he says. “We want to make sure that we’re teed up to take advantage of that.” More

European leaders have been quick to condemn Germany’s bumper energy package, claiming that Berlin’s decision to go it alone puts households and companies in the rest of the bloc at risk of paying higher energy prices. Mario Draghi, Italy’s outgoing prime minister, has said the €200bn package, unveiled last week, undermines unity. “Faced with the common threats of our times, we cannot divide ourselves according to the space in our national budgets,” he said. France’s finance minister Bruno Le Maire and his Irish counterpart, eurogroup chair Paschal Donohoe, have echoed Draghi’s calls for a more co-ordinated response. They were joined on Wednesday by Ursula von der Leyen, the EU commission president, who has called for a bloc-wide ceiling on the price of gas — a measure Germany has objected to. Hungary’s prime minister Viktor Orbán, who has spent much of this year locked in disputes with Brussels, has been even more critical, decrying the package as “cannibalism”. Orban called out the measures for falling foul of EU rules on state aid by helping German companies “with hundreds of billions of euros” at the expense of rivals elsewhere. Are claims that Berlin’s package is outsized correct? Germany’s finance minister Christian Lindner may have insisted that the Comprehensive Protection Shield is “proportionate” to the size and vulnerability of the German economy. But, by any reasonable standards, the package is large. The €200bn plan, much of which will be financed with debt, corresponds to 5.6 per cent of the country’s economic output in 2021. Although Lindner has said the package will cover two years of spending, it comes on top of the €100bn of support already allocated by Berlin. Between the two packages, German companies and households could receive 8.4 per cent of gross domestic product in energy subsidies, though there may be some overlap.Together, the €300bn figure is more than double the financial support provided by Italy and France combined, the region’s largest economies after Germany. In GDP terms, the package is at least three times as big as the support offered by most other eurozone countries. Antonio Fatas, professor of economics at INSEAD, said the size of the package “raised valid questions about whether this constitutes state aid in support on its business”.The figures announced are a cap, however, and the German government could end up spending less should energy costs fall. This is indeed what happened in the case of the country’s Covid-era economic stabilisation fund, which was also criticised by member states for its largesse. The fund had an original limit of €600bn to bail out companies hit hard by the pandemic, but has only used around €50bn of the funds available.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

So what is Germany’s justification for such a large package? Germany is the eurozone’s manufacturing engine. Its factory output in 2021 was larger than that of Italy, France and Ireland combined. Its energy-intensive companies have, therefore, been hit particularly hard by the impact on energy costs of Russia’s invasion of Ukraine. Some defenders of Germany’s policy say this justifies its fiscal largesse. Others argue that, while a pan-Europe solution to the energy crisis would have been the best solution, the package would benefit other countries in the region — especially those with close trading relationships. “It is still preferable to lack of fiscal support at all and a deep economic contradiction in Germany,” said Silvia Ardagna, chief European economist at Barclays Bank. “It is in no EU country’s interest, given close trade ties within the single market, to have Germany’s economy weaken excessively,” said Sandra Horsfield, economist at Investec, an asset manager. “A massive terms of trade shock [such as the European energy crisis] leaves only undesirable options on the table. It is a matter of choosing the least bad among them.”

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

Will Germany’s package lead to higher prices elsewhere? That is possible. Nick Andrews, Europe analyst at Gavekal Research, argued that by lowering bills, the German package is likely to result in stronger demand, pushing up gas prices on Europe’s wholesale markets. “While German companies will benefit from lower energy prices, their counterparts across much of Europe will pay more, undermining their competitiveness,” said Andrews.Berlin claims that the package will maintain the incentives to save energy as it will only subsidise a basic allowance of gas and electricity. It would also have to comply with state aid rules on energy subsidies, which were revised in July.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

The package could also complicate life for the region’s policymakers. Energy is the main reason why eurozone inflation reached a fresh record high of 10 per cent in the year to September, more than five times the European Central Bank’s 2 per cent target. France’s 30-cent per litre rebate on the price of fuel at the pump that came into effect in September, nearly doubling the previous rebate of 18 cents introduced in April, combined with the maintenance of a tariff shield on gas and electricity prices, pushed down energy inflation to below 20 per cent in September — far lower than the eurozone average. Given the size of Berlin’s package, the divergence in inflation between Germany and the rest could be even greater. A one-size-fits-all monetary policy would, Andrews said, become “more challenging to devise and a great deal less effective in execution, adding to the fragmentary forces at work in the eurozone”. Does the package raise the risk of a market panic? Since Germany launched its programme, its borrowing costs have fallen. Other countries are not in such an enviable position. The market turmoil in the UK, triggered by unfunded tax cuts, is a reminder of the perils that many countries are facing if they try to support their households and businesses with greater generosity.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

Yet, with Germany refusing to co-operate on EU-wide gas caps, some countries, particularly in eastern and southern Europe, may end up with little choice but to risk a borrowing crisis and spend extra funds to subsidise households and businesses. Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said national initiatives were justified because “the EU can’t act quickly enough”. However, Fatas said, while co-ordination was difficult, given the severity of what Europe potentially faces this winter, there was “no other way to move forward” than a common solution. More

Early this year, Mazda cars rolled off an American production line for the first time in a decade. Mazda Motor’s new plant near Huntsville, Alabama — a joint project with fellow Japanese carmaker Toyota — began producing a sport utility vehicle designed for the US market.The U-turn by Mazda, years after it severed ties with longtime partner Ford and bowed out of US manufacturing, shows how much the company relies on US sales. North America has become its biggest profit centre outside Japan, growing to account for 30 per cent of group sales even as Japan’s share has shrunk.Mazda and Toyota jointly own and operate the Alabama facility, and have together invested $2.3bn in the project. Neither can afford for it to fail.

“Our future growth lies in the US,” says Masashi Aihara, a Mazda veteran who is now president of Mazda-Toyota’s joint venture. “Our fortunes are riding on this resumption of US manufacturing.”Japan has been the biggest foreign investor in the US for three straight years, as companies chase growth in the world’s richest country. But the market also presents challenges — especially rising costs and cultural differences — that may make some prospective investors think twice. Japan’s cumulative direct investment in the US reached $721bn last year — 14 per cent of the $4.98tn total, according to data from the US Department of Commerce. American subsidiaries and affiliates of Japanese companies exported $75.3bn worth of goods in 2020 — well ahead of second-placed Germany’s $47.5bn. Their research and development spending totalled $12bn, a close second to Germany’s $12.7bn, and they employed about 930,000 workers, second only to UK companies.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

About half of Japan’s investment has been in manufacturing. Besides the car industry, there has been fresh spending in food and pharmaceuticals, tapping into strong US demand. Fujifilm last year announced plans for a ¥200bn ($1.4bn) drugmaking plant in the US.In the service sector, meanwhile, retail group Seven & i Holdings acquired petrol-station convenience store chain Speedway for $21bn in 2021. It now expects its overseas convenience stores to top their domestic counterparts in operating profit this fiscal year. “North America is becoming the main driver of our business,” says Ryuichi Isaka, Seven & i’s president.Japanese companies operating abroad have generally focused on China, south-east Asia and Europe along with the US. The rise in investment in America comes amid concerns about China, which is expected to rival the US market in size but is beset by growing political risks.These include the punitive tariffs imposed on Chinese imports by Washington, along with increasing Chinese government interference with the private sector. Japan’s direct investment position in China grew only 26 per cent between 2015 and 2021, compared with 50 per cent in the US, according to data from the Bank of Japan.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

“Given the business risks, we can’t really hit the gas on our China operations,” an executive at a Japanese carmaker says.The push by US president Joe Biden’s administration to bring manufacturing and supply chains home has made it difficult for Japanese companies to import parts and materials from China to the US as they have in the past. Businesses looking to expand in the US need to invest more to build up local procurement and production networks.This expenditure does not guarantee success. Competition is intensifying not only from local players, but also from European and South Korean rivals.And the US does not necessarily offer the best returns on investment to begin with. Profit margins on direct investment by Japanese companies have stayed solidly in the double digits in China, with south-east Asia generally not too far behind that at about 10 per cent. But they have long been below 10 per cent in the US, slumping to less than 5 per cent since 2020.One factor is high costs: in a survey last year by the Japan External Trade Organization (Jetro), a trade promotion body backed by Japan’s government, more than half of Japanese companies operating in the US cited rising wages as a challenge, with nearly as many pointing to increases in logistics and procurement costs.A further difficulty is the wider range of wages in the US compared with Japan, where deflation has gripped the economy for three decades.Employee pay tends to vary little under the seniority-based wage structures that Japanese companies typically use, and efforts to introduce merit-based pay have so far done little to change that. But in the US it can be hard to attract outstanding talent without outstanding pay.Industrial group Hitachi, for example, which is trying to fill engineering and other positions at its digital technology centre in California with the help of a global employee database, says it is “not easy” to share staff between Japan and the US because of differences in remuneration systems between the two countries.This also applies to management, leading to situations like the head of US-based 7-Eleven making about 20 times as much as the boss of Seven & i, its Japanese parent.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

Poor returns on mergers and acquisitions, especially in the finance and telecommunications sectors, also weigh on FDI’s overall profitability. When Japanese companies buy businesses in the US, they often subsequently struggle with integration — overcoming differences in language, culture and corporate climate to align local management with the Japanese parent. The US’s widening political divides can be especially tricky to navigate.Take abortion. As conservative states ban the procedure, companies face the question of how to support their workers. But Japanese businesses are largely unfamiliar with the Christian cultural background of the debate, and find it hard to unite employees with differing views. A list compiled by Yale University of nearly 140 companies offering abortion-related support includes few from Japan.Japan’s cautious business culture adds to such difficulties. Companies have historically tended to enter the US market only after their products and services are established in Japan, but size and agility do not necessarily go hand in hand. Some observers think that doing things the other way around could deliver higher returns. Ralph Inforzato, special adviser to Jetro Chicago, argues that Japanese entrepreneurs should look to the US sooner rather than later. “In 2022, Japanese businesses, especially tech start-ups should consider quickly ramping up their business models in the US first, and then in Japan,” he says. More

Polarisation has defined American politics over the past decade. But one area where Democrats and Republicans have stood side by side is a growing concern about Chinese investment in the US. The shared worry that Beijing-backed companies could be taking over strategic US assets has led to a rare bipartisan effort to empower the Committee on Foreign Investment in the US, an inter-agency panel that vets inbound investment for security risks, to deter unwanted transactions. Bolstering Cfius, as the Treasury Department-led federal agency is commonly referred to, has allowed different US administrations to thwart deals that would have given Chinese companies access to critical data and technology that could potentially be used to harm the US.

The new barriers erected to protect US consumers and corporations have, however, made executing deals with companies from allied countries — including Japan, Britain and the Netherlands, three of the largest sources of foreign direct investment — more expensive and led to longer closing periods. Cfius reviewed a record 436 transactions in 2021, according to its latest annual report. Most of the focus has been reserved for companies based in countries perceived as hostile to the US, including China and Russia. But allied nations that have operations in countries such as China and Russia are also being affected. Although deals are rarely blocked, approval periods have lengthened.“The world has changed and the risk has changed over time,” says Ivan Schlager, a partner at law firm Kirkland & Ellis and a leading adviser to companies navigating the Cfius process. “So reviews are taking longer to start and the complexity both around technology and supply chain has increased even for friendly investors.” Cfius was established in 1975 by President Gerald Ford as a defence mechanism to protect US companies from being taken over by, at first, sovereign funds of oil-rich countries and a little later by fast-growing Japanese conglomerates. The committee, which in addition to the Treasury also includes members of the Departments of Defense, Homeland Security, State and others, has generally operated in obscurity, giving foreign investors little insight into its decision-making process. However, its main focus has been to block deals from a select batch of investors from hostile nations.Under the more protectionism-prone administration of Donald Trump, Cfius was revamped and given greater powers to prevent a broader variety of transactions, including minority investments. Trump’s 2018 Foreign Investment Risk Review Modernisation Act introduced for the first time a de facto mandatory review of foreign investments in US businesses that supply critical technologies to more than two dozen industries. Before the legislation, Cfius filings would mostly be voluntary. The main target for Trump was Chinese companies trying to buy critical US technology, infrastructure and property close to military, air force and navy bases. During his time in office, Trump blocked Broadcom’s $142bn bid for the US chipmaker Qualcomm on the grounds that the then Singapore-based company had ties to China. He also pushed Cfius to shut down TikTok, the Chinese-owned video platform.President Joe Biden, who beat Trump in 2020, has followed in his predecessor’s footsteps. He recently passed an executive order to deepen scrutiny of deals involving foreign investments in high-tech industries such as artificial intelligence, quantum computing and biotechnology. Although Biden’s order did not single out any specific country, it highlighted that “some countries use foreign investment to obtain access to sensitive data and technologies for purposes that are detrimental to US national security” — a clear reference to China and Russia.Aimen Mir, a former Cfius official and now a partner at law firm Freshfields Bruckhaus Deringer, says that, despite the greater scrutiny around critical industries, most transactions are concluded with few problems. “The tough scrutiny that certain deals undergo shouldn’t be taken as reflecting the broader investment environment in the US,” Mir says. Cfius, he adds, is “certainly more of a deal consideration” for investment banks and M&A lawyers than it was 10 years ago. “But I think it’s the rare instance, where it’s actually something that is preventing deals from going forward.”

Lawyer Aimen Mir says Cfius is ‘more of a deal consideration now’ but rarely a deal-breaker

This sentiment was echoed by Janet Yellen — who, as US Treasury secretary, chairs Cfius — in a statement on Biden’s September order. The move, she said, “highlights Cfius’s increasing attention to national security risks in several key areas . . . while maintaining the US open investment policy.”Data show that Cfius’s tougher scrutiny is having the desired effect. Chinese companies’ investment has collapsed from $59bn in 2016 — a record year for foreign takeover deals in the US — to $4bn in 2021. Over the same period European companies have increased their overall investment from $248bn to $261bn. Schlager says that in many ways Cfius has created an opportunity for buyers from US allies to take over assets that would have otherwise fallen into the hands of wealthier buyers based in more hostile countries. “It’s true that it’s taking longer to get a deal done but it can get done,” he says. “What has changed is that you need strategic planning upfront before a transaction.” More

While the attention of many British investors has been riveted on the turmoil in sterling and UK government bonds, they should not ignore the global context in which these ructions have been taking place.Led by the US Federal Reserve, there has been a concerted drive to higher interest rates in the advanced countries as the central banks respond to the peaks in inflation. They seek to correct the errors of 2021 when they persevered with ultra-low rates and plenty of extra money creation for too long. From New York to New Zealand and Brussels to Seoul, official interest rates have been on the rise. This has led to bond sell-offs, pushing longer term interest rates upwards in sympathy with the official short rates. I kept the fund out of longer bonds in anticipation of these moves. Only China and Japan have stayed out of these changes. They kept inflation down, as they limited the expansion of their money supplies, keeping credit and prices under better control. Japan still borrows money for around zero interest. The danger now is that central banks will switch from making the error of too much money and credit with rates too low (which is inflationary) to too little money and credit with rates too high — causing a recession. When asked about this, the Fed replies that tough medicine is needed to cut inflation, their only current priority. This year, the 10-year rate of interest on US government debt soared from 1.65 per cent to a peak of 3.94 per cent on September 27. This has forced US mortgage rates up over 6 per cent and led to a sharp decline in the housing market. The European Central Bank has been late to stop bond buying and to raise rates, but the German 10-year state borrowing costs have still risen from a negative figure at the start of the year to a peak of 2.2 per cent recently. With German inflation over 10 per cent that still looks low and means more rate rises to come. Both the Fed and the European Central Bank have clearly signalled their wish to raise rates further, which helped fuel the hectic September sell-off. As a result, the interest rate on very long-term borrowing is often now lower than the interest rate on shorter-term bonds. This reflects the growing market view that we are heading into a sharp slowdown of activity which may become recession in some countries.

Once a recession has been long enough and deep enough to satisfy the central bank that inflation has been killed, they will have to lower official interest rates again.As we edge towards the northern winter, markets need to worry about the continued supply problems in energy markets. The EU has just announced policies to cut electricity demand at peak periods, to cap prices and to tax excess profits.If the winter is cold — with too many windless days — there may need to be tougher moves by the EU to ration power, with more difficulties for industry in general and high energy using businesses in particular. The US is in a stronger position with a surplus of gas for its own needs. The surveys indicate slowdown or recession with industrial orders weaker.This background has been unhelpful for most share markets as well. The clear intent of central banks to slash demand, money and credit in the system implies lower turnover growth, falling profit margins and lower profits for many businesses. The market is also unable yet to put a clear and believable timeline on how long the central banks will pursue tough policies, and when they will have to relent to stop a slowdown becoming a slump. The portfolio has maintained a commitment to shares as a balanced fund has to, with an emphasis on a widely diversified portfolio around the world index. Switching out of Nasdaq, the US technology index, helped control losses, with the world index having some sectors like energy that have done better in these difficult conditions. The fund still retains some of its specialist exchange traded funds offering exposure to the digital revolution and the green transition. While activity among the underlying businesses in these areas has continued to grow, their overall performance has suffered from markets discounting future growth in revenues and profits at higher discount rates to reflect rising interest rates. Clean energy and battery technology are the best performers as countries try to force the pace of renewable investment. We have had such a sell-off in bonds that I am starting to commit some of the fund’s cash into 10-year Treasuries. The world investment markets will not perform well until the US alters policy from one of promoting recession. European markets remain rightly nervous about the Ukraine war and disrupted energy markets.As I write this the market is rallying on hopes of some limits to rising rates as evidence mounts that inflation will fall next year. Bonds should be the first to turn for the better. If we are fortunate the Fed will start to relax before triggering a deep recession. If not, the Fed will relax more at a later date. Either way, inflation will be a lot lower and longer term interest rates will then fall. Sir John Redwood is chief global strategist for Charles Stanley. The FT Fund is a dummy portfolio intended to demonstrate how investors can use a wide range of ETFs to gain exposure to global stock markets while keeping down the costs of investing. [email protected]

The Redwood Fund — October 5 2022NameWeightCash19.39%iShares Core EM IMI ACC1.90%iShares Core MSCI WLD GBPH D20.49%iShares Global Clean Energy2.38%iShares USD Short Dur USD D12.02%iShares USD Tips 0-5 GBP-H D5.63%iShares USD Treasury 7-10Y5.00%L&G All St in Lnk Gilt IN-IA3.23%L&G Cyber Security UCITS ETF2.02%L&G Hydrogen Economy ETF1.69%L&G Robo Global Robotics & Aut1.83%Lyxor Core MSCI Japan DR-MHG2.90%Lyxor Core UK Government Inf4.25%SPDR 0-5 EM USD Government2.25%Vang FTSE 250 GBPD3.97%X MSCI Korea1.45%X MSCI Taiwan4.04%X S&P500 GBP5.56%Source: Charles Stanley More

In May, Georgia announced the largest economic development project in its history — a deal with Hyundai to build a $5.54bn electric vehicle and battery manufacturing plant near the port city of Savannah.The agreement, which promises to create 8,100 jobs, solidified the south-eastern US state’s position as an important centre for the emerging American electric vehicle (EV) industry.

But a deal in one of the most cutting-edge of business sectors has its roots in a decades-old piece of Georgia history. Nearly 40 years ago, the state set up an office in Seoul to take advantage of an economy that was opening up at the direction of a more market-oriented government industrial policy.Although it took more than a decade for that 1985 decision to bear fruit — in 1996, the Korean conglomerate SK Group announced it was building a plant east of Atlanta — cities across the state are now seeing the benefits of what has become something of an investment bridge between the Asian economic power and the rapidly developing state. South Korea is now the biggest overseas investor in Georgia, with $12.5bn in foreign direct investment projects announced in the state to date — nearly double the amount of second-placed Japan, according to fDi Markets, an FT-owned information provider. These commitments by Korean companies have created over 29,000 jobs in Georgia, more than in any other US state. Although the Hyundai deal is by far the largest, Georgia’s Korean inflows gained speed in 2005, when Kia Motors announced a $1bn manufacturing plant in the small town of West Point, which acquired the nickname Kia-ville. The plant promised to deliver 2,500 jobs to a former textile hub hit hard by unemployment after the industry offshored. “We’ve really seen South Korea take off as the most important investor country for us right now,” says Pat Wilson, commissioner of the Georgia Department of Economic Development, who recently flew to South Korea to recruit suppliers for the Hyundai plant. The state estimates that suppliers will bring in an additional $1bn of investment. Georgia has many of the same attractions as other big economies across the American Sun Belt, including low corporate taxes, top-tier universities and access to some of the US’s largest airports and shipping lanes.But both Korean companies and Georgia officials say it is the decades-long effort by state and local governments across the political spectrum to develop relationships in Korea — including job training programmes aimed at creating a skilled workforce — that has made the region so attractive to Korean multinationals.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

“You can’t over-emphasise the importance of workforce development and the efforts that the state has put into that,” says Rick Douglas, Kia’s director of people and culture in Georgia. Kia received a $410mn incentive package from Georgia for its investment, which included property tax abatements, a custom-built workforce training centre, and road and infrastructure improvements. Georgia’s success with Korean investment is something of a model for state and local US authorities, which have had to become more active in attracting foreign investment as competition for capital in the global economy has intensified. Timothy Minchin, a professor at La Trobe University who has written extensively on the Kia deal, notes that while incentives provided by Georgia helped secure the investment, they were not the only factor. Sonny Perdue, Georgia’s Republican governor at the time, began courting Kia in 2003 and formed a personal relationship with Kia executive Byung Mo Ahn. The automaker had explored sites in neighbouring states before selecting Georgia, rejecting a $1bn incentive package from Mississippi.“This deal was about personal connections, about people, as much as it was about money,” Minchin wrote in a research paper.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

Wilson says those personal connections helped lay the groundwork for the Hyundai investment; at least 44 Korean suppliers moved to the state following Kia’s arrival. The 2007 free trade agreement between the US and South Korea, which came into effect in 2012, has also reduced barriers to entry.The Hyundai deal could spur even more investment, according to Hye Min Kang, an investment specialist at the Korea Trade-Investment Promotion Agency (Kotra), which opened an office in Atlanta this year. “Kotra Atlanta is receiving countless inquiries from potential Korean corporations interested in investing in the state of Georgia,” Kang says. In addition to Savannah’s Hyundai plant, the north-west Georgia town of Dalton secured a deal this year with Hanwha Q Cells, one of the world’s largest solar producers, which will expand its solar module manufacturing operations in the Peach State. Combined with SK Group’s plans to build semiconductor and battery plants near Atlanta, these commitments put Georgia at the centre of President Joe Biden’s plans to establish a domestic supply chain for clean energy and to counter China’s dominance of the sector.“The investments are in technologies that are strategic over a long-term horizon,” says Thomas Byrne, president of the Korea Society, an American non-profit that promotes US-Korea co-operation.Byrne adds that there is a geopolitical element for South Korean companies, as well: Korean companies remain heavily dependent on China for EV battery materials, and their US investments are a way of minimising their vulnerability to a regional strategic rival. “The US-Korea alliance is in the core national security interests of both countries and crucial to regional stability in north-east Asia and, more broadly, in the Indo Pacific region,” says Jon Ossoff, a Democratic senator from Georgia who selected South Korea for his first foreign trip after taking office last year.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

The investments have helped change the face of Georgia, burnishing the image of a state that was once predominantly known for its segregationist past. The Atlanta metropolitan area has the seventh-largest Korean population in the US, according to Pew Research Center. Gwinnett County, the suburban Atlanta region where most of Georgia’s Korean population resides, has been hailed as the “Seoul of the South”.National policy threw a wrench in the relationship between the two trade partners this summer when the Inflation Reduction Act, a landmark US climate package, stipulated that by 2024 EV tax credits would be available only for models assembled in North America. This renders Hyundai, whose Savannah plant will not begin production until 2025, and other foreign investors ineligible. Korean trade groups slammed Congress for passing the legislation, describing the provision as discriminatory and in violation of the Korea-US Free Trade Agreement.“We are hopeful that a solution through the US federal government can be found that takes into consideration Hyundai’s significant past and committed future investments in the US market, including the $5.54bn EV plant in Georgia,” says Ira Gabriel, a spokesperson for Hyundai.Last week, Georgia Democratic senator Raphael Warnock introduced a bill to delay the 2024 deadline after urging the Biden administration to use “maximum flexibility” to ensure Georgia’s carmakers can benefit from the tax credit. Georgians were also caught in a bitter trade dispute last year when LG Energy Solution accused rival SK Innovation of stealing intellectual property, leaving a $2.6bn battery plant in the city of Commerce and thousands of jobs in the balance. Ossoff was a lead negotiator in the $1.8bn settlement, spending more than a hundred hours in discussions with executives. “There’s an important role for elected officials to play in helping to resolve disputes, helping to open doors and helping to facilitate investment in operations,” says Ossoff, adding that the “strong, personal, working relationships” between elected officials and Korean corporate leaders helped set the groundwork for a deal. More

When a Wisconsin lawmaker was driving home from Chicago last month, he pulled over outside the Foxconn plant in Mount Pleasant, Wisconsin, and was struck by how empty the area looked.“There literally is a gorgeous six-lane highway that was built for 18,000 vehicles and automated trucks [that looks] totally abandoned. It’s incredible,” says representative Gordon Hintz, a member of the Wisconsin State Assembly. The highway had been expanded to accommodate the transport of electronics produced at the site, which is operated by the Taiwanese multinational best known for assembling the iPhone.

On July 12 2017, Wisconsin’s then-governor Scott Walker, a Republican, and then-Foxconn chief executive Terry Gou signed a 14-word agreement drafted in pen on a single piece of paper: Foxconn would invest $10bn to build a 20mn sq ft manufacturing campus and create 13,000 jobs, which the state of Wisconsin would incentivise to the tune of $3bn. The deal electrified the Republican party leadership at the time: President Donald Trump and House speaker Paul Ryan, a Wisconsin representative, were both eager to bill themselves as revitalisers of the US manufacturing sector. For Gou and Foxconn, the plant announcement came at a time when the Trump administration was considering tariffs on electronic imports. At one point, Trump dubbed the future plant “the eighth wonder of the world”. But the sprawling complex and 13,000 jobs never came, and the project has become a case study in the gap between dealmaking hype and on-the-ground reality. Sphere of influence: Foxconn says its Wisconsin plant is a ‘key strategic asset’ © Mark Hertzberg/ZUMA Wire/ShutterstockOnly four buildings, including a conspicuous glass sphere, were constructed at Mount Pleasant, which, though it describes itself as a village, has a population of about 28,000. US media reports over the past few years have detailed allegations from Foxconn employees who said they had nothing to do at the plant, while the company has given few details about what, if anything, is being made there.One former employee, who asked for anonymity, estimates that in a three-month period this year, only one month featured work to do, when the plant was producing motherboards for Google and Amazon servers. “Very quickly after that [initial announcement], it just sounded too good to be true,” says Kelly Gallaher, a local resident who runs watchdog group A Better Mount Pleasant. In its original announcement, Foxconn said it would use the plant to make Gen 10.5 LCD screens, the latest generation of the display technology. It abandoned those plans and said it would make smaller Gen 6 screens, but subsequently gave those up, too. Sources say Foxconn has spent years trying to figure out what to do with the plant. The company counters that “the macro-environment for the global technology industry has changed very dramatically” since 2017, and says it “does not disclose the nature of our manufacturing operations to protect aspects of commercial sensitivity”.The company says it has “continued to find ways to create new business opportunities in Wisconsin, while also investing over $1bn and hiring hundreds of employees”.Substantial investment has come from the local community too. Together with surrounding Racine County, Mount Pleasant bought up land to create the 3,000-acre Foxconn site, with compulsory purchase a possible option, says Robin Palm, a municipal planner for the village. According to a payout spreadsheet seen by the Financial Times, Mount Pleasant spent over $181mn buying up private property.Mount Pleasant and Racine County issued more than $310mn in debt to acquire the land and make infrastructure improvements, with about two-thirds of the funds raised by the village, according to the Wisconsin Legislative Fiscal Bureau. Despite early signs that Foxconn’s plans were faltering, the village and county went ahead with their spending, and the town’s infrastructure is now overdeveloped. (The local agreement with Foxconn included almost $800mn in addition to the state incentives.)The state, however, changed tack. After a new governor, democrat Tony Evers, took office, the Wisconsin Economic Development Corporation, the state-run entity that entered into the Foxconn agreement on behalf of Wisconsin, renegotiated last year. Foxconn is now eligible for only $80mn in state incentives based on investing $672.1mn and creating up to 1,454 jobs by 2024, a far cry from the figures in the original 2017 deal. The most recent available headcount, reported by Foxconn in December 2020 as part of its tax arrangement with the state, is 600 employees.Kathleen Gallagher, executive director of the 5 Lakes Institute, a non-profit focused on establishing high-tech activity in the Great Lakes region, thinks that Mount Pleasant was taken advantage of. “Any village of that size wouldn’t have the sophistication to understand all this,” she says. “The village relied on this small sliver of the business community and the state . . . [but] they didn’t have the right people.” Approached for his views on the deal, Mark Hogan, head of WEDC at the time it was made, declined to comment. The WEDC, Racine County executive, Racine County Economic Development Corporation, and Mount Pleasant village president Dave DeGroot did not respond to requests for comment. The debt and interest payments taken on by Mount Pleasant are a considerable sum for a community of 28,000 people — they amount to over 500 per cent of the village’s annual operating revenue, according to Moody’s, which has downgraded Mount Pleasant’s credit rating.The contract with Foxconn states that the town will meet its debt repayments through property tax paid by the company. In order to do that, Foxconn must pay an annual bill of roughly $30mn — equivalent to its property being valued at at least $1.4bn. But since the property’s valuation is closer to $500mn, Foxconn must cover the resulting tax shortfall — some $17mn.While that is a relatively little for a company that brought in record revenue of $214bn in 2021, Hintz says some residents fear what could happen should Foxconn fail to pay. A Better Mount Pleasant’s Gallaher points to a lawsuit filed against Foxconn in Illinois, in which Foxconn argued that, because it was a foreign company, it could not be sued in the US. Others are more sanguine. Mount Pleasant is confident that Foxconn will make its payments, says village trustee Nancy Washburn, particularly since it has fulfilled its tax obligations until now. Foxconn notes that it is “the largest taxpayer in Racine County” and has demonstrated its “ability to meet contractual payments while adapting to market demand”.Alan Yeung, Foxconn’s former point person in Wisconsin, says that the company had intended to build the Gen 10.5 screens, but that “the market condition had changed”, with Chinese LCD screens undercutting the competition. He adds that “the investment climate of Wisconsin changed dramatically”, referring to Walker being voted out of office.On claims that Mount Pleasant’s workers sometimes have nothing to do, Foxconn says it “is not immune to supply chain shortages for critical materials” but sees “a workforce that is flexible and fulfilled” as key to capturing business opportunities. The site, it says, remains “a key strategic asset”. “Are we disappointed that it worked out the way it did? Absolutely,” says Washburn. But she and Palm say Mount Pleasant is now betting another company will move into the Foxconn site — either to share it or take it over — because the community’s infrastructure is now set up to handle growth. More