Caixin
Aug 02, 2018 08:27 PM
BUSINESS & TECH

Chinese Tech Takeover Abandoned in Face of Berlin Veto

*A Shandong province company dropped the planned purchase of a German machinery-maker after apparently anticipating that Berlin would block the deal

*This latest incident follows increasing scrutiny of Chinese acquisitions in sensitive sectors in Western Europe and beyond

(Beijing) — A Chinese buyer’s acquisition of an advanced German machinery manufacturer has become the first deal Berlin has effectively blocked due to concerns about surrendering key technology.

Yantai Taihai Group Co. Ltd. had intended to purchase Germany’s Leifeld Metal Spinning AG partly through its French subsidiary for an undisclosed fee. However, the Shandong province-based appliance and machinery manufacturer abandoned the deal in anticipation that the German government was about to veto the deal, Leifeld sources confirmed.

German media reports suggest that the Federal Government voted (link in German) to block the acquisition due to “security issues” last week, and could count on the almost certain backing of Chancellor Angela Merkel's cabinet in a final vote scheduled for Wednesday.

Yantai appears to have anticipated the deal’s collapse and abandoned it in advance. On Tuesday, the company announced (link in Chinese) in a filing with the Shenzhen Stock Exchange that it was abandoning eight-month-old plans for a “major restructuring” in connection with its French subsidiary, saying it was unable to continue with the move due to recent “international conditions.”

Germany’s advanced machinery and robotics industry has long been of interest for China as the government pursues its “Made in China 2025” plan to develop its own domestic high-tech manufacturing sector, a plan partly modelled on German’s lauded “Industrie 4.0” strategy.

Yet concern over China’s access to the country’s leading technology has mounted, particularly in the wake of appliance-maker Midea Group Co. Ltd.’s 4.5 billion euro ($5.26 billion) acquisition of Kuka AG, Germany’s biggest robotics company, in 2016. In July 2017, the German government strengthened its scope for investigating and blocking foreign acquisitions to include giving up technological know-how and access to “critical infrastructure” as part of potential national security threats.

Germany’s move followed the trend of growing concerns in European capitals over Chinese money. In the U.K., China General Nuclear Power Group’s ultimately successful move to secure a 33.5% stake in the planned $26 billion Hinkley Point C nuclear power station was unexpectedly delayed for two months in 2016 over security concerns. The business secretary has announced plans to make it a criminal offence for companies not to notify the government of deals that carry any potential security issue. The U.S., Japan and Australia have taken similar steps.

While the U.K. has strengthened its security review mechanisms while touting its supposed “golden age” of trade ties with China, Germany has similarly increased scrutiny while enhancing commercial relations. Last week, German state bank KfW purchased (link in German) a 20% stake in network operator 50Hertz in order to fend off a rival offer from China’s State Grid Corp., according to German newspaper Handelsblatt. This came despite the two countries having signed a raft of deals worth around $23.5 billion the same month.

The government’s vetoing of the Leifeld deal goes one step further as it is the first time the government directly wielded such powers, and it could have a “snowball effect,” across Europe, said Larissa Brunner, an analyst with Oxford Analytica. “Regardless of whether a proposed Chinese acquisition poses a risk to national security or not, the greater salience of the issue could heighten perceptions across Europe that such a threat exists, leading to more and more scrutiny.”

Yet so far this year Chinese interest in Europe has only grown. Last month, law firm Baker McKenzie reported that Chinese mergers and acquisitions (M&As) in all sectors in Europe totaled $22 billion in the first half of 2018, nine times more than M&As in North America. This was a 4% increase on 2017, if the $44 billion megadeal for Swiss agrichemicals firm Syngenta is excluded. The Guardian reported the same month that China General is also looking to buy stakes in eight other British power stations.

Yet a key challenge is that while Germany may push for greater scrutiny of deals, Europe’s response is likely to remain uncoordinated, Brunner believes. “While Western EU member states appear to grow more concerned over Chinese investment, some Southern and Central countries such as Greece and Croatia are much more positive,” she said.

“The EU is expected to introduce an FDI screening mechanism later this year, but this will most likely harmonize legislation across member states rather than impose any binding legislation or replace national screening,” she added.

Contact reporter Ke Dawei (daweike@caixin.com)

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