Tag: investment
Geopolitical investments into Europe – What you gonna do when they come for you?
So far 2016 has seen a record of Chinese corporate dealmaking in Germany. These first six months alone €8 billion in mergers and acquisitions were announced – a sum bigger than all Chinese M&A in Germany over the last five years combined. Germany isn't an isolated case. Chinese investment has grown all over Europe. Between 2010 and 2014 Chinese investments into the EU have increased ten-fold.
Interest in Europe's corporate landscape is natural. Europe is home to a large market, leading R&D and top-notch companies. There'd be something seriously wrong if China wouldn't want to invest in Europe. So this ain't a bad thing.
But then again, Chinese investment is entering a different ball game. Gone are the days when China invested in low-value added economic segments such as natural resources and basic manufacturing. It's now about high-value added companies ranging from software and robotics to waste management and advanced machinery – all technological areas highlighted as economic priorities in the 13th Five-Year-Plan and the Made in China 2025 industrial strategy. Second, in a majority of these deals the Chinese state looms large. Last year 70 per cent of all Chinese investment in Europe was undertaken by state-owned enterprises, who enjoy access to cheap Chinese capital to fund such takeovers. What we are seeing, according to Sebastian Heilmann, President of the Berlin-based Mercator Institute for China Studies, is "governmental-program capital working behind the scenes". Chinese companies are – with the help of the state – buying some very promising European firms that would provide China with an economic competitive edge in the future. In addition, now that a lot of companies are digitalised and working with clouds, buying one company can provide important insights and data into other customer companies. Some cases, such as the recent buy-out of Aixtron, raise particular questions as the Chinese state seems to have been involved in first ensuring a massive crash of Aixtron shares, only then to be bought up by a Chinese company "on the cheap".
This new trend is so far met by two particular tendencies in Europe's political sphere: naivety and fear.
Naivety by those free trade liberals that believe a market should be entirely left to its own devices as well as those that believe "reciprocity" is the name of the game, meaning we should focus on European companies being able to invest as freely in China as vice-versa. Both, the European External Action Service and the EU Member States, have stressed this need for reciprocity in investment relations.
Then there's the fear. Regrettably, too often reporting about rising Chinese investment is coming with an underlying sensationalist emotional undertone; fear mixed with an inherent racism (think 'yellow peril') that China is on a shopping spree, buying out and overrunning Europe.
Both are obviously wrong and say more about ourselves than others. Naivety places too much confidence in our free market. It ignores the geopolitical dimension. Too much blind faith is put in the belief that China would swing open the doors to its own economic market just because we ask and that's what our markets are like. China doesn't have an open market. China's top rulers sitting in the Zhongnanhai complex have every tool at their disposal to intervene in the market at any time convenient. An opening for investment now, can easily be followed by a clampdown later. Their lever will always be bigger than ours. Contrarily, fear underscores a lack of confidence in Europe's economic system and its political leadership. It doesn't believe we're up to the challenge of facing off politicised investments. Marilynne Robinson aptly described this in her essay "Decline" recalling the period of Japanese economic strength in the 1980s:
"Remember when Japan seemed bent on buying every stick and stone of this perishing republic? At least so far as our journalism was concerned. None of these things were the fault of the Japanese. They were simply the screen on which, for the moment, we projected our anxieties."
Between these two sentiments, a clear-headed pragmatism needs to prevail, which places confidence in the market economy, builds resilience against political motives and takes national and European interests better into account when it comes to mergers and acquisitions by foreign-owned enterprises. Basically, we need better national security investment screening regimes.
At the moment, there is a lack of effectiveness and quite frankly confusion when it comes to foreign investments in Europe. Let's remember the case of Kuka, a robotics company described as Germany's crown jewels in its drive to automate and digitise manufacturing. Just this year Chancellor Merkel together with President Obama visited Kuka's exhibition at the Hannover Industrial Fair, describing the company as the future of German industry. When it was announced that China's Midea launched a takeover offer for Kuka, the German government's response was silence. It took nearly a month for them to register the event. By then they were scrambling for an answer, in the end realising that their prescriptive national security regime governing investments didn't give them any leeway in this merger anyway. Or consider the case in France when GE made an offer for Alstom back in 2014. Wanting to inhibit the offer but having no leverage from its own investment screening regime, France hurriedly passed the "Montebourg Decree". This expanded the regime's sectoral operations, requiring would-be foreign buyers to get permission from the Minister of Economy when investing in French energy, transport, water, health or telecoms companies. Before, the 2005 version of France's investment security screening regime limited government intervention to M&A activity related to national defence.
Europe has a hodgepodge of different national security screening regimes for foreign investment (the think-tank MERICS has an excellent overview in this recommendable paper written by Thilo Hanemann and Mikko Huotari).
A two-pronged strategy is needed to strengthen the screening of foreign investments into Europe.
First, national security screening regimes need to be strengthened. Some EU Member States only look at the defence sector, others look at a number of sectors, and again others don't have any screening regime at all. The European Commission should organise a conference bringing together national, European and US officials in this field in order to discuss these issues and share best-practice. Why include US officials? Because the US is the gold standard when it comes to screening foreign investments. It has ample experience through its Committee on Foreign Investment in the US (CFIUS).
This inter-agency committee can ask companies to modify the terms of their deal and advise the US President to shoot down a deal. Its mandate is broad enough to look at a very wide variety of investments and it commands such respect internationally that the mere notification that it is investigating a deal can suffice for companies to withdraw their offer. In 2012, for example, out of 114 notices of mergers and acquisitions, CFIUS investigated 45 cases. Out of these, a single one was blocked with executive power by President Obama while 22 cases were abandoned as the companies withdrew their merger plans after they knew they had CFIUS breathing down their necks. This agency actively looks for transactions of interests, particularly those that hadn't been notified. I'm sure the German equivalent doesn't necessarily do that. Most likely it only looks at the big cases that come to light due to media attention – as the case of Kuka highlights.
As such, there's great room for improvement on the Member State level. Bringing national, EU and US officials together to exchange views and experiences, the European Commission could then publish a best-practice document with guidance that would allow EU Member States to consider updating their respective legislation.
Secondly, these national screening regimes should be supplanted by a supplementary European screening regime. The EU is too interconnected to consider foreign-based investments into a single national company through the national lens alone. European interests and solidarity must be taken into account. Two particular arguments come to mind.
Put simply, foreign investments into national companies have cross-border implications. Gazprom buying up strategic gas storage in Germany has implications for European, especially Polish, energy security. Or, hypothetical example, imagine a Chinese state-owned enterprise buying up a small Italian company, which has relevant subsidiaries in other Member States or which owns a piece of land near an important military facility somewhere else. That one deal that President Obama blocked in 2012 is a case in point. He denied Ralls Corporation, a firm owned by two Chinese nationals, from acquiring wind-farms in Oregon, because these renewables installations were all within range of restricted air space used for drone testing by the Naval Weapons Systems Training Facility.
Secondly, the EU Member States are strongest in cohesion through the EU. It might be difficult for a Member State like Malta, Lithuania or Hungary to block a massive Chinese, Russian or other great-power foreign-based investment, as there could be political consequences for preventing such a deal. But were the EU to block such a deal, the individual Member State wouldn't be singled out for blame. Apple and Microsoft are two cases in point. It's the EU that called out Microsoft's anti-competitive behaviour and slapped Apple with a massive bill in back taxes, not individual Member States. This European dimension therefore has clear benefits to Member States and Commissioner Oettinger has already called for a European investment screening regime.
Therefore, the European Union could establish a CFIUS equivalent – a kind of Committee on Foreign Investment in the EU (CFIEU) which would bring together national officials and European officials from different policy fields to screen investments into Europe.
However, chances of a powerful, decision-making CFIEU being established seem pretty slim. It's clear that the EU Member States wouldn't accept a supranational authority that decides on foreign investments into their national corporate landscape.
In this context, it might be more realistic to start with a consultative body. For example, in the field of energy security, the EU has a European Gas Coordination Group that brings together national and EU experts on gas security and adopts opinions and reports. Perhaps there could be a kind of "European Foreign Investment Coordination Group".
This group would look for transactions of interests, consider the political circumstances and investigate the European dimension of the deal. In the end it could adopt an opinion that would be made publicly available and that would have to be addressed at the national level. That way it could still influence national decision-making and put pressure on Member States. By highlighting possible ramifications of a deal for third-party Member States, it would also allow those to publicly comment and get engaged in the deal. This would to a certain degree Europeanise national processes.
Some of the recent merger cases should be a wake-up call to get active. Europe shouldn't fear Chinese, Russian or any other investment but neither should it naively believe all these investments are pursued by a purely company logic. It should put in place security safeguards that make sure we separate the wheat from the chaff.
Author europecallingblogPosted on September 29, 2016 September 30, 2016 Tags CFIUS, China, investmentLeave a comment on Geopolitical investments into Europe – What you gonna do when they come for you?