Chinese Acquisition of U.S. Companies: Sometimes a Cigar May Just Be a Cigar

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Since 2012, there has been increased interest in Chinese companies purchasing U.S. businesses.  In the recent report published by the Committee on Foreign Investment in the United States (CFIUS).  According to the report’s findings, CFIUS reviewed 147 transactions in 2014, which was a 52% increase over the number of notified transactions in 2013.  Fifty-two of these cases were subject to follow-up investigations in order to determine if they posed a risk to U.S. national security interests.  Unsurprisingly, for the third consecutive year, China led all foreign countries in filings, with 24 transactions reviewed, an increase from 21 the previous year.

Two months into 2016, China shows no signs of slowing down its acquisition requests. State-owned China National Chemical Corporation offered to purchase Swiss pesticide Syngenta AG for $43 billion.  Syngenta maintains chemical facilities in the United States deemed potential terrorist targets by U.S. officials. In late January 2016, China’s Zoomlion Heavy Industry Science and Technology Co., Ltd., made an offer for the U.S. crane manufacturer Terex Corporation.  In addition to being a state-owned enterprise, Zoomlion, a construction machinery manufacturer, has a longstanding relationship with China’s People’s Liberation Army, calling into question if providing a supplier of critical infrastructure equipment to U.S. government agencies poses a risk to U.S. national security.  As recently as February, the Chicago Mercantile Exchange announced that it would be sold to a consortium led by the Chongqing Casin Investment Group of China, and Fairchild Semiconductor recently rejected a takeover bid by China Resources Microelectronics and Hua Capital Management out of concern that CFIUS would reject it.

 There were notable purchase attempts in 2015 as well.  Tsinghua Unisplendour Group , China’s largest state-owned chip design company, proposed to buy a 15 percent stake of Western Digital Corporation, one largest computer hard disk drive manufacturers in the world.  The deal ultimately fell through when the Chinese company backed out once CFIUS intended to conduct a second-stage investigation.

The potential acquisition of these companies can certainly be interpreted as being driven by Beijing’s national interests.  The targeted companies bear closer inspection as the fields that they represent coincide with the strategic industries outlined in China’s Fifth 12 Year Plan (2011-2015); namely, environmental protection; new generation information technology; biological; high-end equipment and manufacturing; new energy; new materials; and new energy automobile. This raises alarm particularly as some security professionals have intimated that the China’s 12th Five Year Plan provides almost a blueprint for Chinese cyber espionage operations, the intent of which has been the theft of secrets and intellectual property to gain competitive advantage.  Indeed, some are already suggesting that the 13th Five Year Plan, expected to be released soon, will undoubtedly provide future targeting hints.

At their base, China’s Five Year Plans are social/economic roadmaps that set government priorities and policy direction.  In this light, the potential acquisition – and cyber targeting for that matter – of some of these U.S. companies and the sectors that they represent makes sense given the broad guidance found in that priority document.  However, while that may explain some of the targeting that has transpired, it does not address those activities directed against organizations that fall well outside of Five Year Plan scope.  Therefore the question remains: what percentage of these acquisitions, and by extension what percentage of all suspected Chinese-related cyber espionage, is for hostile intention as opposed to trying to obtain information, albeit illegally, for other purposes?

After a thorough review of the purchase proposals, the U.S. Intelligence Community believed that based on 2014 activity there may have been a coordinated foreign strategy to acquire U.S. critical technology businesses, the same judgment it reached the prior year, which is far from conclusive.  The recent CFIUS report indicates that in 2014, there were 114 cases filed, with 51 of them requiring second-stage investigations.

Due to the difficulties of detecting and attributing cyber espionage activity, and the limited available public information, it is uncertain if attempts of Chinese companies to acquire U.S. businesses within these strategic industries can be correlated to suspected Chinese cyber operations with any level of fidelity.  Such an effort may yield some beneficial insight into how a larger effort is conducted, or it may be trip down a rabbit hole.  Nevertheless, while cyber espionage operates below the radar, attempted acquisitions are transparent.  In this regard, China has not obfuscated its intentions, looking to invest in those areas that it has deemed essential to its country’s continued growth. And while there is legitimate concern about China using these developments to reduce U.S. influence and gain access to those very critical areas that could impact U.S. national security, there is equally compelling evidence that China may be attempting to acquire them to preserve their own internal interests.

For example, one U.S. official expressed concern about the deal and its potential impact on U.S. competition for the Chinese market.  However, the purchase can be interpreted as Beijing’s attempt to increase its agricultural sector for its ever-increasing population, as China’s arable land declined 6 percent over the past decade, according to World Bank estimates.  Policy direction in the 12th Five Year Plan succinctly states industry should support agricultural development.  Such sentiments are echoed in the recently released “Number 1 Central Document” by China’s Ministry of Agriculture in which it cited agricultural innovation and development as a top priority.  In this context, this possible acquisition seems benign when compared to the attempted purchases of semiconductor companies or the mercantile stock exchange that calls into question the intent of such procurements.

Part of the stigma may ultimately rest in the fact that many of these Chinese companies are state-owned and believed to be under the control or at least influence of the government that supports them.   This has prompted the introduction of a new bill in Congress that would expand CFIUS’ powers during the review process.  While nation state involvement in the mergers and acquisitions process raises red flags, it shouldn’t be an immediate deal-breaker as foreign investment is the byproduct of globalization.  Sometimes the acquisition of a company may just be that – a way to provide the means to bolster and improve the purchaser’s own capabilities. Framed in this context, these efforts may be less about putting the United States on the defensive, and more about trying to put and keep China on even ground.