Yet a look beyond the Hollywood glitz reveals that the French are not fleeing America. Vivendi is a company that strayed too far from its core business (utilities), not from the Arc de Triomphe. It still runs the water systems for cities like Indianapolis. Moreover, as data from the U.S. Commerce Department show, French business buys into the American dream. France was the only major country that increased its direct investments in new companies in the United States last year, while investments from Germany, the Netherlands and Switzerland dropped 80 percent.
The macro picture is still too murky for this year, but JP Morgan says that three of the 10 largest European acquisitions in the United States in the second quarter were made by the French, totaling $500 million. America is the top destination of French investment, receiving some 27 percent of the total. “The French are extremely global in their thinking,” says Eric Schwalm, manufacturing consultant for Bain & Co. in Boston, who is currently working with several French clients on U.S. expansion. “They understand you are not truly a global enterprise if you are not in the U.S. market.”
Investment numbers are a better barometer of the marketplace than political mood. The plunge in new-investment levels is largely a product of the collapse of the M&A boom in the late 1990s, notes the U.N. report. So many megadeals failed to meet the cost savings and other benefits they set out to achieve that CEOs are now wary. With stock markets far below their peaks, all those European CEOs aspiring to buy a chunk of America can no longer readily afford it. The faltering U.S. recovery doesn’t help, and JP Morgan managing director Paul Gibbs notes that skepticism about accounting transparency in the United States also weighs on investors’ minds. Despite slowing last year, acquisitions still accounted for more than four fifths of all investment into the United States.
The complexity of measuring direct investment makes it easy to reach the wrong conclusions. In addition to M&A, this number includes money spent to start up new companies, and cash flows between the U.S. divisions and central offices of companies headquartered in Europe. When all this was added together, France and the U.K. were the only nations to raise direct investment in the United States last year, while Germany and the Netherlands posted negative numbers.
So is it the Germans and Dutch who are pulling out of the U.S. market? Hardly. The negative investment flow reflects mainly the poor performance of their existing operations. According to Commerce Department data, some $4.6 billion flowed back to Germany last year, in part because German companies posted net losses on their U.S. operations. The Netherlands also showed a net outflow because Dutch companies borrowed more than $7 billion via their American subsidiaries. All this outweighed new equity capital coming in.
The worldwide political battle over Iraq appears to be having little if any effect on these investment flows. For the French, it’s pretty much business as usual. “The French don’t mix business with politics,” says Todd Malin, director of the Washington-based Organization for International Investment. Dassault Aviation, maker of Falcon jets, has operated in the United States since Charles Lindbergh introduced the company to Pan Am in the early 1960s. Last spring, in the days of freedom fries, Dassault’s U.S. chief Jean Rosanvallon got a few calls and letters from customers who were uncomfortable buying a corporate jet from a French company. Only one delayed his plans, though, and over the summer Dassault broke ground on new paint hangars in Arkansas and Delaware, as well as a flight-operations hangar in New Jersey, for a total investment of $30 million. With 65 percent of the corporate-jet market in the United States, he expects to invest $100 million more during the next three years. “There is no reason at all to retreat in any way,” he says.
This kind of industrial deal is more typical of French investment trends, if far less glamorous, than Vivendi and its decision to dump an American stable of movie and rock stars. Two weeks ago a unit of Saint Gobain, the giant French materials company, announced plans to build a new duct-liner plant in Texas. Tiremaker Michelin is investing heavily in marketing and branding in the United States. Others simply keep a low profile. Americans had no idea a French caterer was feeding their Marines until a few dozen congressmen petitioned to cancel the contract with Sodexho during the heat of the diplomatic battles over Iraq. (They retracted once they realized it would cost American jobs.) And the giant $1.4 billion Nissan plant that opened in Mississippi earlier this year is owned by Renault.
Not all French companies are flourishing, of course. Alcatel went on a U.S. acquisition spree at the height of the boom, but like many telecoms, ended up with a glut of communications equipment once reality set in. Like many American and German rivals, it has had to ax thousands of jobs and sell off pieces of its U.S. business. Suez, like Vivendi, was an overextended utility that made the mistake of dabbling in media. Early this month it sold its U.S. water-treatment arm for $4.35 billion to help pay down its debt.
The free fall in new foreign direct investment is worrisome, even if not necessarily political. Foreigners are still snapping up U.S. Treasuries, allowing the United States to maintain its enormous debt with the rest of the world. But that kind of money can flit away very quickly, while direct investment establishes a longer-term commitment. “The U.S. cannot sustain its spending and fiscal policy without a return to a much more robust flow of FDI,” says Paul Laudicina of AT Kearney. He just surveyed global CEOs on their investment plans, and China topped the United States as the hottest destination for the second year in a row. The key factor in whether investors will come back, reports Laudicina, is the still-foggy outlook for the U.S. economy. But one thing is clear. Don’t blame the French.
