China Is Bargain Hunting—and Western Security Is at Risk

On April 7, a Chinese company suffered a surprising setback in the United Kingdom. Following an uproar by British legislators, an arm of the Chinese state-owned investment firm China Reform had to abandon its bid to dominate Imagination, a leading British technology firm that makes smartphone chips. Even if that effort failed, others are likely to succeed.

That’s because many Western manufacturers of popular products will face financial uncertainty as a result of the coronavirus pandemic, making them easy prey for Chinese companies, which are already on a corporate buying spree in the West.

Canyon Bridge, a Cayman Islands-based outfit that is majority-owned by China Reform, bought Imagination in 2017—but the U.K. government didn’t intervene. This month, however, when China Reform attempted to put four directors on Imagination’s board and thus seize control of the company, British members of Parliament rebelled; China Reform abandoned the attempt.

Imagination is well known, but across Europe, North America, and other advanced economies there are countless cutting-edge firms in key sectors such as biotech and electronics that are neither as rich nor as well funded as Imagination. And like most other companies, they’ve been hit by the standstill that coronavirus has imposed on the economy. A recent survey of more than 10,000 Japanese firms, for example, showed that 63 percent predicted the coronavirus would have a negative impact on their business performance.

Many Western manufacturers of popular products will face financial uncertainty as a result of the coronavirus pandemic, making them easy prey for Chinese companies

China Reform’s majority stake in Imagination is part of a major Chinese acquisition spree in Europe and North America over the past few years. Last year, for example, Chinese entities invested 11.7 billion euros (nearly $13 billion) in European Union countries, the vast majority of it in mergers and acquisitions and only a minimal share going to forming new companies. In 2018, Chinese entities invested some $25 billion in the United States. Government support makes it even easier for Chinese companies to buy foreign firms.

Chinese acquisitions have caused headaches in Western capitals before. In 2003, Chinese mergers and acquisitions of foreign companies amounted to $1.6 billion. By 2006 it had shot up to $18.2 billion, often involving takeovers of Western household names. But many of those acquisitions, such as TCL’s takeover of France’s Thomson Electronics, ended in failure.

Then came the 2008-2009 financial crisis, which presented another opportunity for Chinese businesses. In a manner similar to what the world may now be about to experience, they went on an acquisition spree among weakened Western outfits. But that, too, went south for many of them when the acquired companies’ value continued to slump, as Wang Duanyong of Shanghai International Studies University pointed out in a 2011 paper.

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But China, Inc. persevered. It shifted its attention from Western legacy companies to, for example, state-of-the-art technologies and research and development facilities. Today’s investments and takeovers continue in that mode and are often part of China’s Made in China 2025 strategy, through which China plans to become a superpower in technology, manufacturing, and cybertechnology. As Max Zenglein and Anna Holzmann of the Mercator Institute, a German think tank, note in a new report on Made in China 2025, “in smart manufacturing, digitalization and emerging technologies, China wants to leapfrog and leave foreign competitors behind.” A key part of the strategy is to buy up Western firms. In a 2019 report, the Swedish Defence Research Agency found that Chinese acquisitions of Swedish firms have accelerated since 2014. What’s more, half of the takeovers fall within focus areas of Made in China 2025.

Today’s investments and takeovers continue in that mode and are often part of China’s Made in China 2025 strategy, through which China plans to become a superpower in technology, manufacturing, and cybertechnology.

Indeed, Chinese investments now target Made in China 2025’s core sectors. Northern Europe—home of many innovation-heavy smaller businesses—is currently China’s top investment target in Europe. By contrast, the Chinese buy almost no firms in Central and Eastern Europe, apparently because those countries don’t have enough cutting-edge firms in China’s preferred sectors. Another report by the Mercator Institute, the “Chinese FDI in Europe: 2019 Update,” points out that Chinese companies also engage in enormous quantities of research and development collaboration—often of a sensitive nature—with Western counterparts.

In the United States, the government has woken up to the national security implications of losing sensitive capabilities to China; the Committee on Foreign Investment in the United States (CFIUS) now plays a very active role in screening potential takeovers on national security grounds. (Last year, it famously forced a Chinese company to reverse its acquisition of the gay dating app Grindr.)

The EU has no CFIUS, only a largely toothless screening mechanism. Some countries are stricter: Earlier this month, the German government introduced a new bill that allows regulators to scrutinize investments that are likely to affect the country’s security. (Previous German legislation requires government approval for all investments over 10 percent that pose a direct threat to national security.) The U.K. government screens acquisitions in the military, dual-use, computing hardware, and quantum technology sectors.

If a Chinese outfit offers a good price to an ailing Western maker of, say, advanced sewage technology, will the board turn it down as matter of patriotic duty? It’s unlikely.

Here’s the thing: Lots of companies with cutting-edge technology are not active in national security, even when national security is defined broadly. They simply make extremely good parts or products, or offer extremely good services, that are vital to their country’s economy.

Ventilators—primarily made by U.S. and European companies—are currently demonstrating their value to every country’s well-being, and there are countless other similarly vital and even more technologically advanced products. But now businesses are suffering from the effects of the coronavirus. And as private companies not active in the national security sector, they’re not bound by strict regulations. Their boards’ only objective is to balance the books. If a Chinese outfit offers a good price to an ailing Western maker of, say, advanced sewage technology, will the board turn it down as matter of patriotic duty? It’s unlikely.

At the moment, nothing is more urgent than the medical care of coronavirus victims. But the care of ailing companies shouldn’t be far behind. As the Chinese government demonstrated when sending medical supplies to Italy after EU member states had failed to do so, it rapidly spots and exploits Western vulnerabilities. Bloomberg reports that China-based banks are already seeing a spike in requests from Chinese outfits interested in acquiring European companies.

Many Western governments have already passed business aid packages to make sure companies don’t go under. But that’s not enough. Margrethe Vestager, the European commissioner for competition, has just proposed that governments buy stakes in vital companies to prevent Chinese takeovers. They will also need to screen Chinese raiders taking advantage of the coronavirus. “The U.K. government shouldn’t act on one-off cases because individual legislators start lobbying,” suggested Ruth Smeeth, who was until last November a member of the British Parliament’s Defense Committee. “That only means that high-profile businesses are examined, not the smaller players who may be even more relevant.”

As for the EU, Sven-Christer Nilsson, a former CEO of the Swedish telecommunications giant Ericsson, told Foreign Policy that “it absolutely has to establish a CFIUS, as do the individual member states. We can’t wait, or we will see the Chinese giving offers companies can’t refuse.”

The American CFIUS, in turn, needs to rethink what constitutes national security—ventilators clearly do. They must also ask if national security is the only criterion for rejection. Indeed, takeovers should be screened too for the damage they could do to the economy.

“If we have learned anything from the current crisis, it should be that the definition we have been using of national security has been insufficient,” said Smeeth. “Our world has changed beyond recognition, and by default so have our core industries. Our mergers and acquisitions policies need to reflect that.”