American made ... Chinese owned: Full version

(Fortune) -- About a mile past the Bountiful Blessings Church on the outskirts of Spartanburg, S.C., make a right turn. There, tucked into an industrial court behind a row of sapling cherry trees not much taller than I am, past a company that makes rubber stamps and another that stitches logos onto caps and bags, is a brand-new factory: the state-of-the-art American Yuncheng Gravure Cylinder plant. Due to open any day now, it will make cylinders used to print labels like the ones around plastic soda bottles. But unlike its neighbors in Spartanburg, Yuncheng is a Chinese company. It has come to South Carolina because by Chinese standards, America is darn cheap.

Yes, you read that right. The land Yuncheng purchased in Spartanburg, at $350,000 for 6.5 acres, cost one-fourth the price of land back in Shanghai or Dongguan, a gritty city near Hong Kong where the company already runs three plants. Electricity is cheaper too: Yungcheng pays up to 14¢ per kilowatt-hour in China at peak usage, and just 4¢ in South Carolina. And no brownouts either, a sporadic problem in China. It's true that American workers are much more expensive, of course, and the overall cost of making a widget in China remains lower, and perhaps always will.

But for hundreds of Chinese companies like Yuncheng, the U.S. has become a better, less expensive place to set up shop. It could be the biggest role reversal since, well ... when Nixon went to China. "The gap between manufacturing costs in the U.S. and China is shrinking," explains John Ling, a naturalized American from China who runs the South Carolina Department of Commerce's business recruitment office in Shanghai. Ling recruited Yuncheng to Spartanburg, and others too: Chinese companies have invested $280 million and created more than 1,200 jobs in South Carolina alone.

Today some 33 American states, ports, and municipalities have sent representatives like Ling to China to lure jobs once lost to China back to the U.S.: Besides affordable land and reliable power, states and cities are offering tax credits and other incentives to woo Chinese manufacturers. Beijing, meanwhile, which has mandated that Chinese companies globalize by expanding to key markets around the world, is chipping in by offering to finance up to 30% of the initial investment costs, according to Chinese business sources.

What would Henry Luce think?

The enticements are working. Chinese companies announced new direct investments in the U.S. of close to $5 billion in 2009 alone, according to New York City-based economic consultancy the Rhodium Group, which tallied the numbers for Fortune. That's well below Japanese investment in the U.S., which peaked at $148 billion in 1991, but a big jump from China's previous investments, which had been averaging around $500 million a year. Chinese firms last year acquired or announced they were starting more than 50 U.S. companies. And when China finally allows the value of its currency, the yuan, to appreciate -- and it's just a question of when -- Americans can expect to see Chinese projects, small today, really take off and have an impact on the U.S. economy. This could be a good thing for relations between the two countries. "It will take many years to balance out the flow of U.S. investment into China," says Dan Rosen, a principal at the Rhodium Group. But, he says, China's aggressive interest in U.S. investment suddenly gives Washington some leverage as it seeks to negotiate with Beijing on tariffs, trade issues, and economic policy.

None of that matters much in Spartanburg. Skilled workers at American Yuncheng will earn $25 to $30 an hour, line operators $10 to $12. That's a lot more than the $2 an hour that unskilled labor costs in China, but the company can qualify for a state payroll tax credit of $1,500 per worker (for any company creating more than 10 jobs). And by being closer to companies like Coca-Cola, Yuncheng can respond more quickly when they need new labels designed to show that a product has reduced its fat content or added more flavor. If business goes well, company president Li Wenchun expects to double the size of his operation, maybe in five to 10 years, and employ up to 120 Americans. "I'd like it to be next month, but it depends on how fast we develop the market here," he tells me through a Mandarin interpreter.

So far there's little sign of anti-Chinese sentiment among South Carolinians, who watched their state lose its cotton-based textile-manufacturing industry to low-cost countries like China. Fortune asked Sen. Jim DeMint, a Republican torchbearer for conservative causes, what he thinks of communists creating work in his home state. "South Carolina is one of the best places in the world to do business, and that's why so many international companies are moving jobs into our state" is his only reply.

Brenda Missouri, a 43-year-old leaks tester who works for appliance maker Haier, speaks about her employer in glowing terms. Haier was the first Chinese company to build a factory in the U.S. -- a refrigerator plant in Camden, S.C., in 2000. "They're good business folks; they get the job done," she says. As for communism? "Doesn't matter," she shrugs. "It's money that makes the difference."

Chinese companies, American workers

Last December the National Committee on U.S.-China Relations dispatched me to Corpus Christi to give a speech about the Chinese and their economy. Why? Because, they told me, the region is about to become home to the largest-ever Chinese-built factory in the U.S., a $1 billion plant by Tianjin Pipe Group to manufacture seamless pipe for oil drilling. If everything proceeds as planned -- the company received its air-quality permit on April 14 and hopes to break ground by fall -- Tianjin Pipe expects to employ 600 Texans by 2012 and to provide an estimated $2.7 billion to the local economy over the next decade. Corpus Christians, it turned out, wanted to know more about their new neighbors who are expected to relocate 40 to 50 families to Texas.

Upon arrival, I find it impossible not to notice the resemblance of Corpus Christi's long, curving coastline on the Gulf of Mexico to the one near Tianjin on the Bohai Sea between northern China and Korea. Some 75 U.S. locales competed for the factory, but when Chinese delegations from Tianjin Pipe visited Corpus Christi, the townspeople made them feel at home by welcoming the visitors to backyard barbecues. They even enlisted the Taiwan-born former owner of the local Chinese restaurant, Yalee Shih -- perhaps the only woman in town who could speak Mandarin -- to help them navigate cultural nuances. Shih, who also sits on the board of the Texas State Museum of Asian Cultures, delicately helped prevent a multimillion-dollar translation error over building costs that might have cost Corpus Christi the project, and also quashed what would have been an impolitic gift of clocks -- which to the Chinese symbolize death or the end of a relationship -- from a local retailer. She and others in the region's business community plan to help guide their new residents through life in America, like how to buy a car, how to rent a house, as well as where to go to buy fragrant rice instead of Uncle Ben's.

In the end, while feeling at home helps, it does come down to business, says J.J. Johnston, executive vice president and chief business development officer of the Corpus Christi Regional Economic Development Corp. "They like the strategic location of our region, the convenient access to materials coming in -- mostly scrap metal and pig iron -- and the ability to export to North and South America through the port of Corpus Christi," he says.

There are other incentives. On April 9 the U.S. Commerce Department imposed import duties of up to 99% on the type of seamless pipe that is to be manufactured by Tianjin Pipe -- a reprisal prompted by the United Steelworkers union. The Chinese company, the world's largest maker of steel pipe, had said it could not afford to export to the U.S. if tariffs were over 20%. Now its pipe will be made in America. "It's just another reason they have to have a U.S.-based production facility," says Johnston.

Even without tariffs, Tianjin had been looking to expand -- as are many Chinese companies once they reach about $100 million in annual sales. "Chinese companies, as they get bigger, have to start thinking about their global positioning," says Clarence Kwan, who runs the Chinese Services Group at Deloitte, which advises Chinese companies on doing business in the U.S. Officially the Chinese government has given approval to over 1,200 Chinese investments in the U.S., but that number is considered low because it doesn't count those made via Hong Kong -- where many Chinese companies earn equity capital from being publicly traded -- or tax havens like the Virgin Islands, where Chinese investment may stop first before flowing to the U.S. Plus, investments below $100 million don't need Beijing's nod and may be approved at the local level.

Chinese companies see America as more than a manufacturing center. So far this year they have announced plans to build a wind-energy turbine plant and wind farm in Nevada that will create 1,000 American jobs; purchased the 400-employee Los Angeles Marriott Downtown out of foreclosure; and acquired a shuttered shopping center in Milwaukee, with plans to turn it into a mega-mall for 200 Chinese retailers. In some cases Chinese companies are resuscitating American outfits that had been left for dead. About 70 miles west of Spartanburg, near the Georgia border, past signs reading "24-hour fried chicken," another Chinese company is hiring engineers -- metallurgical and mechanical, some from nearby Clemson University. In June 2009, Top-Eastern Group, a tool manufacturer based in China's coastal city of Dalian, acquired a factory here along with three other facilities from Kennametal, one of America's largest machine-tool makers, after the U.S. company, based in Latrobe, Pa., reported a $137 million loss (citing a slowdown in industrial activity) in the quarter before the sale.

This plant, in Seneca, S.C., makes drill bits. And in the months since his purchase of it for $29 million, Top-Eastern founder Jeff Chee has invested another $10 million to upgrade machinery, built a $3 million logistics center, brought back Kennametal's furloughed workers, hired 120 more, and now has his 260-employee plant working overtime filling orders for the Cleveland Twist Drills, Chicago Latrobe, Putnam, and Bassett brands he acquired. He brought back the company's old name, which was Greenfield Industries before Kennametal acquired it in 1997, and emblazoned it on a sign out front.

General Electric's former CEO , Jack Welch, he volunteers, is his inspiration. "I've read a lot of books, and I learned a lot from him," Chee says in broken English amid the sharp smell of grinding steel. "One person can change a lot." As one of China's self-made entrepreneurs, who started Top-Eastern in 1994 with just $500, Chee now has worldwide sales of more than $120 million, 4,000 employees, and factories in Germany and Brazil. He visits the South Carolina plant monthly to make sure all is proceeding as planned, and employs American managers to run it in his absence rather than bring over Chinese. "There's good, experienced people and good know-how already here," he says.

How can he make a drill bit factory profitable where Kennametal had struggled? By increasing productivity with new equipment and cutting costs, he says. Plus, Chee forges his own steel, and he owns the mines back in China for two of its more expensive components, tungsten and molybdenum. The fact that he can source from himself means he keeps the margins -- and now his tools are officially made in the U.S. The cost of making those products is much higher than in China, he says, "but the problem is customers just accept 'made in U.S.A.' products, so I have no choice. Lots of customers here have government contracts that have 'made in U.S.A.' requirements."

And how do the employees feel about having a Chinese entrepreneur come to their rescue? "Just because it's a Chinese owner, they don't really care," says Scott Henderson, a 47-year-old manufacturing manager who had been furloughed one week a month along with his workers before Chee bought the factory. "They're all happy to be working 40 hours a week." They also have the opportunity for overtime, and a third, graveyard shift has been added to serve a nearly 40% rise in orders. "I feel great about it," says Sam Marcengill, a 24-year-old technician at the plant. Last year he was laid off for six months before Chee's purchase gave him his job back. Now he's on overtime, 48 hours a week. "The work's a lot more steady. It's better. Personally I'm a lot better off. It's a great thing."

Never mind the hiccups Chinese companies experienced when they tried to enter the U.S. before. In 2005, Washington famously blocked China's National Offshore Oil Corp. (CNOO C) from buying Unocal, and Chinese appliance maker Haier failed to acquire Maytag. Now, like the Japanese in the 1980s -- when U.S. trade frictions combined with Japan's boom blossomed into Honda and Toyota manufacturing plants -- the Chinese are here to stay. Their presence initially made some folks uneasy. A few years ago a caller to The Rush Limbaugh Show complained that as he was driving past the Haier plant in Camden, the Chinese flag was flying higher than the American flag and the South Carolina state flag out front. It was an easy mistake to make by anyone looking at the three equal-height flagpoles from an angle.

Conservative media joined in and called for protests, and the public rang the factory to complain. The Chinese executives at Haier had no idea flags were such a big deal, and it became their bugaboo. The complaints continued until about a year and a half ago when Haier America factory president Joseph Sexton, who was new to the job, decided to fix it. He had two of the poles lowered so that the U.S. flag looks highest from all angles.

It took Haier some time to work through the issues of being a Chinese employer in a small, historic Southern town (pop. 6,682) lined with stately antebellum houses and home to two Revolutionary War battlefields. "Having a Chinese manager didn't work. That's why they took all the Chinese managers out of here," says Haier's human resources director, Gerald Reeves, who was one of the first hired by Haier and guided the Chinese through the realities of American-style personnel management -- including convincing them that they needed to offer health insurance. He once even asked John Ling, South Carolina's man in Shanghai, to fly home from China to talk to a manager who was arousing employee resentment by publicly embarrassing the workers, Chinese-style, for their mistakes.

Now the only way to know you're in a Chinese factory is by looking up at the large Chinese flag hanging from the rafters -- alongside an American one, of course -- and by the very Chinese motivational slogans on the walls: "Spirit of entrepreneurship -- strive for a clearly defined objective and make the impossible possible without an excuse" reads the banner over the refrigerator testing line. And if you come in February, Sexton organizes a Chinese New Year party with food and outdoor firecrackers.

What is perhaps most startling about the Haier factory is that it is actually shipping goods back to China. Best known for its mini-fridges for dorm rooms and studio apartments, Haier's U.S. plant also makes large units, good for supersized American McMansions but too large for a typical Chinese household. Now a growing number of wealthy people in China want to supersize too, so Haier has realized it can ship a small number, maybe 4,000 a year, of its highest-end refrigerators home and sell them for $2,600 apiece -- more than China's average annual income of around $2,000. (Haier also ships U.S.-made refrigerators to India, Australia, Mexico, and Canada.) There aren't enough wealthy customers yet to make it worthwhile retooling any of the 29 Haier factories in China, but the nearby deepwater port in Charleston, S.C., makes export easy enough. "There are folks in China who want high-end products," says Haier America factory president Joseph Sexton. "China is a much different place than people think."

Chinese newcomers would do well to learn from Haier's missteps as well as its great strides. "They're coming with little experience into a highly sophisticated market, and they are bound to make mistakes," says Karl Sauvant, executive director of the Vale Columbia Center on Sustainable International Investment at Columbia University and a law lecturer there, who in February published an edited volume titled Investing in the United States: Is the U.S. Ready for FDI From China?

"This is the thing the Japanese did fairly successfully: You have to be a good corporate citizen, source locally, contribute to causes and charities in the local community, and be familiar with how to navigate the corridors of Washington," says Sauvant. "And in key managerial positions you should have Americans." Legal questions, such as whether Chinese companies operating in America would be subject in U.S. courts to the Foreign Corrupt Practices Act for business practices in, say, India or elsewhere have yet to be tested, he says. And then there's the issue of the local sensitivities exhibited in the Haier flag-flying incident.

Unlike Japan, China is no U.S. military ally -- despite President Obama's naming China a "strategic partner," instead of the "strategic competitor" label it had under the Bush administration. Politically it remains a communist country, despite its capitalist economy. There's obviously more to overcome.

Chinese investors say they don't care too much about politics, but hope their entry into the U.S. can be a positive force. "This will definitely help U.S.-China relations," remarks Li, the manager of the print-cylinder factory Yuncheng, as he guides me on a tour. "Increasing communication makes the two sides closer." Even if it doesn't, business is business. "Good products are borderless," he notes. And there's always a Chinese proverb to cite: "It takes 10 years to make a sword," says Li. In other words, keep at it till you get it right, and the outcome will be strong and lasting. And perhaps transform into the plowshare that sows a mutually beneficial harvest for America and China both.