Cutting-edge tech takeovers are a strategic threat to the west
Governments should be more vigilant about foreign acquisitions in critical sectors
When Chinese home appliance maker Midea acquired a majority stake in Kuka, a pioneering German maker of industrial robots, in 2016, Kuka’s chief executive, Till Reuter, promised it would remain German. But when Kuka refocused its attention from Germany to China, Mr Reuter’s contract was terminated.
Regulators habitually scrutinise foreign takeovers of major defence contractors, but foreign acquisitions of cutting-edge technology have national security implications too. Governments should be much more vigilant.
Cutting-edge technology is one of the west’s strongest assets. It’s also easy for others to acquire by taking advantage of the openness of the globalised economy: rivals can weaken their adversaries and strengthen themselves. “Industrial penetration has become a weapon,” says George Robertson, the former Nato secretary-general and UK defence secretary under Tony Blair. “The Chinese government in particular is implementing foreign policy through industry.”
Beijing rejects such assertions. “Any normal commercial activity should not perhaps be politicised,” Chinese foreign ministry official Hua Chunying said after Midea’s acquisition of Kuka. Nevertheless, the move led to the loss of Kuka as a German company.
Soon afterwards, Berlin introduced stricter rules regarding the types of businesses that would need government approval to be sold to foreign entities. Software suppliers of companies in critical areas such as energy and telecommunications are now included. Then last year, Germany lowered the ownership stake at which foreign investments in such companies require approval, from 25 per cent to 10 per cent.
A report by the Mercator Institute for China Studies found Chinese foreign direct investment in Europe has been shifting from utilities and infrastructure to financial services and biotech. Although the EU passed an FDI screening regulation for non-EU countries this year, it is a weak tool. Last year, the Swedish government sold three cutting-edge semiconductor companies to Chinese buyers. Governments clearly need to keep a closer eye on who is buying.
The UK, operating under legislation from 2002, is looking for a new approach. It needs one: between 2002 and 2018, the government intervened in only eight business transactions on national security grounds. Who knows how much weaponised penetration of British industry took place during that time? A white paper launched in 2018 proposes government approval for acquisitions of over 25 per cent in business selling “strategic goods”, calculating that the rules would lead to some 200 applications for approval each year.
What should a better policy look like? The first step is to decide which goods and services are vital to national security. These should include not just defence equipment and infrastructure but advanced civilian technology such as industrial robots or social media.
The second aspect is the investor: should western governments pretend that all foreign countries are equal and screen acquisitions of sensitive businesses by all nations? Given that entities from lots of friendly countries conduct cross-border investments (think Canadian pension funds or Norway’s sovereign wealth fund), such an approach would require a heavy load of bureaucracy. Better, according to Jenine Hulsmann, a partner at Clifford Chance who has worked on many sensitive FDI transactions, would be a “white list providing exemptions from filing and review requirements for investors from certain countries that make non-controlling investments”.
Open societies and markets are vulnerable. But by updating the definition of what constitutes sensitive goods and services, governments can stop subversive powers from weaponising the globalised economy.