The surge of Chinese FDI in Europe poses a novel challenge to investment regimes and competition policy. Policymakers should take concrete steps to deal with China's aggressive outbound industrial and technology policies and to prevent market distortions by state-controlled investors.
A wave of investment from China is breaking across Europe. Chinese takeovers of technological leaders have raised fears of a sell-out of our economies’ competitive advantage. In Germany, the Chinese Midea group’s offer to buy a controlling stake in the Bavarian robotics manufacturer Kuka has triggered fierce resistance.
Midea is the wrong target for the current backlash. But the debate over how to deal with Chinese investors is overdue. China’s state-guided outbound industrial and technology policies, aimed at technological leapfrogging through acquisitions, pose a formidable challenge to national investment regimes and EU competition policy.
The Kuka case raises questions of technology transfer and competitiveness. And since the company also supplies the defence industry, including robots for the construction of the Eurofighter, some argue that the German government should scrutinize whether the proposed deal poses a risk to national security.
Leaving these concerns aside, the privately held Midea may offer Kuka an opportunity to benefit from China’s fast growing robotics market. Most importantly, its business decisions do not appear to be driven by state-intervention. The real danger for Europe arises when state-owned companies, who are currently the majority of Chinese investors in the EU, embark on a state-driven and debt-financed global buying spree.
State-controlled investors provide reason for concern
The EU and its member states need to prevent China from exporting the distortions of its state capitalist model to their M&A markets. The chemical giant ChemChina is a prime example for an overambitious, state-supported investor mired in debt and overcapacities. The company’s multi-billion euro takeover deals in several European countries provide reason for concern.
The fear that Chinese state-controlled owners will end up absorbing key technologies and know-how, leading to a hollowing out of the industrial base of their Western competitors, may be an extreme worst-case scenario. But the track record of China’s outbound investment is not long enough to fully assess its impact.
However, it is clear that market-based Western economies are not well equipped to deal with China’s state-led outbound industrial policy push nor with the market distortions that might spill over into the EU through Chinese foreign direct investment (FDI).
Compared to earlier “newcomers” to the global FDI story such as Japan, China poses a different set of challenges. Japan’s foreign investment strategy historically did not focus on technology acquisition, but rather on obtaining market access through setting up manufacturing operations on foreign soil.
Conversely, Chinese industrial policy plans such as “Made in China 2025” and “Internet Plus” read like shopping lists for overseas investment targets that could help China obtain key technologies and licenses for its own industrial upgrading. At the same time, they contain ambitious local content requirements. This is especially true in the high-tech sector where Beijing intends to build up domestic champions while progressively shutting international competitors out of the Chinese market.
The degree of state and Communist party intervention in the Chinese economy varies, but it remains disturbingly high. As it affects how Chinese state-owned companies behave in international markets, the role of state subsidies, financing support and affiliation between SOEs deserve close scrutiny. Experience has also shown that domestic operations as well as outbound investments of Chinese SOEs are not bound by adequate risk control through a market-driven financial system.
Innovative models to protect critical industries
The challenge for policymakers across the EU lies in remaining open for investment while not letting China export the market-distorting effects of its state-capitalist model. A number of tools could help achieve this outcome:
First, innovative models of state shareholdership could protect industries critical for national economic success while avoiding direct state intervention in private companies. A good example is Denmark, where a private equity fund operated by a public foundation guarantees a domestic majority in the life science company Novo Nordisk.
Second, it will be important to strengthen and network economic intelligence sharing on China and Chinese investment across the EU. Stricter disclosure requirements for takeovers of listed companies would help create the necessary transparency for a prudential assessment of a proposed deal.
Third, the use of competition policy to prevent market distortions is critical. Merger control procedures should be systematically deployed, particularly vis-à-vis state-owned actors. The European Commission set an example by investigating the nature and extent of government control in China’s state-owned China General Nuclear Power Corp before allowing a joint venture with French electricity provider EDF to build two reactors at the Hinkley Point nuclear power plant in the UK. The EU should also consider applying its internal state aid rules, which forbid state support to give companies a competitive advantage, when dealing with potential investors from non-EU countries.
The ultimate goal will be to embed clear competition policy regulations for Chinese companies entering the EU and to ensure better investment access for European companies in a future bilateral investment treaty with China. The current debate must serve as a wake-up call for German and European policymakers who have yet to craft a coherent response to a novel and potentially very harmful type of investor.
This article was first published on the website of the Financial Times.