Germany’s turnabout on Chinese takeovers

There is now broad consensus in the German government that the current level of scrutiny of foreign investments is insufficient.

Also available in

In February 2017, Germany, France and Italy presented the European Commission with a common position on screening investments from abroad amid concerns about increasing investment and company takeovers by non-EU investors. The joint letter outlines the three countries’ worries that Europe is losing its advantage in technological know-how, and asks the Commission to review the possibility of member states being given the ability to block foreign investment on the grounds of reciprocity (i.e. in cases where European firms enjoy limited market access in the country of origin).

The letter reinforces a position France has long represented but illustrates a shift in Germany’s traditionally open investment posture. Though China is not mentioned in the text, its recent acquisitions of key European firms were clearly in the minds of those drafting the letter.

According to a report by Ernst & Young, 164 Chinese companies bought or took over European enterprises during the first half of 2016, compared to 183 Chinese takeovers in the whole of 2015. During these six months, China invested more than $70 billion in European companies, or as much as in 2013, 2014, and 2015 combined.

Germany was the most prominent target of this effort, with 37 Chinese acquisitions in the first half of 2016. This is not a great change in number from years past (there were 39 in 2015), but the strategy and scale of companies being bought have clearly shifted. The €11 billion invested by China in Germany in 2016 is more than the last ten years put together, and increasingly targets Germany’s high-tech sector, while investment in traditional sectors – such as real estate – is decreasing.

This issue now attracts considerable public attention in Germany (the acquisition of Germany’s robot manufacturer Kuka by China’s Midea Group was a particularly high-profile case), with strong public concern over Germany apparently selling key technologies to China. There are also worries over transparency, origins of financial flows, patent rights, jobs, unfair competition and the role of Chinese state-owned companies. Yet despite such public concerns, the German ministry of economic affairs saw no threat to national security and cleared the Kuka takeover.

In Germany, there is no compulsory registration for non-EU takeovers or investment unless there is a direct military link, which then requires a sector specific review. In other cases, Germany’s ministry of economic affairs can initiate a cross-sector review on an acquisition by a non-EU investor only if it sees a potential threat to public security. The German ministry undertook 338 such reviews on foreign acquisitions of domestic companies between 2008 and November 2016, but all but one of these reviews was requested by the investor in order to pre-empt potential concerns.

The ministry itself initiated the 338th review in October 2016, regarding the acquisition of the semiconductor equipment supplier Aixtron by China’s Fujian Grand Chip Investment Fund. Yet even this deal would likely have been cleared without review had the US Committee on Foreign Investment (CFIUS) not raised national security concerns in its own review (Aixtron also holds US assets).

The concerns relate to Aixtron being a key supplier of certain Gallium nitride technologies, which are used by NATO defence contractors. The US blocked the Aixtron deal last December and, while Germany halted the takeover to review, China withdrew its bid.

There is broad consensus in the German government that the current level of scrutiny of foreign investments is insufficient. Yet there is little agreement on the way forward. This debate plays out against the backdrop of increasing divisions within Germany over its China policy more generally. Berlin has traditionally sought to engage Beijing and has been open to (and benefitted from) trade and investment from China. While this policy is now being re-evaluated, large parts of German industry want to remain open. Some liberals are already arguing that the proposals in the joint letter would excessively burden the investment screening issue with economic security concerns and reciprocity demands (according to confidential sources).

There is an equally broad spectrum of views in the rest of Europe on the viability of an EU-wide screening policy. Member states currently rely on national procedures to accept or reject foreign investment, and some have no screening process at all, as highlighted in a report by Merics. It is inconceivable that an EU body could be given the power to overrule member states. But some form of EU advisory body would not be a new idea.

As early as 2012, the European Parliament had asked the Commission and member states to set up a body that evaluates foreign investment in the EU, based on the CFIUS model. In February 2017 economist Theodore Moran reiterated this call in a paper arguing for the CFIUS’ case-by-case threat assessment to be replicated in Europe.

CFIUS limits its reviews to three types of threats: the leakage abroad of sensitive technologies (such as in the case of Aixtron); the ability of a foreign actor to manipulate or deny access to key supplies (for instance China’s acquisition of the Canadian Rare Earth Mining Company enabled it to withhold supplies to Japan when relations were tense); and the possibility of foreign surveillance or destructive malware, a concern for IT and infrastructure systems. Moran wants a similarly restrictive application of investment screening in Europe, arguing that the EU must not use investment screening to preclude foreign acquisition across entire sectors or to demand reciprocity or punish unfair practices by state-owned enterprises

It will take time for the EU to find its own, European approach to investment screening. A pan-European mechanism would require the issue of ‘security’ to be defined in a way compatible with EU law, as well as an understanding of Europe-wide security risks (i.e. identifying national security threats that could pose a threat to Europe). It would also have to be objective, meaning a common European concept on foreign investment cannot be China-specific but has to apply to all foreign investors.

In the meantime, it appears Germany will have to continue debating and finding solutions on the national level on how to tackle the increasing challenges from abroad in the area of investment.

The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.


ECFR Alumni · Editor, China Analysis
Senior Policy Fellow

Subscribe to our weekly newsletter

We will store your email address and gather analytics on how you interact with our mailings. You can unsubscribe or opt-out at any time. Find out more in our privacy notice.