The European Union looks set to adopt an investment screening mechanism soon. This is welcome news, not least for addressing the imbalance between China’s ability to buy almost at will in Europe and its own tight controls on European investments into China. But something more immediately momentous is currently unfolding in the four biggest economies in Europe: by the end of 2018, France, Germany, Italy, and the United Kingdom will all have taken important steps to protect economic assets from foreign takeovers. This unprecedented securitisation of foreign investment is a response to China’s plan to create global innovative industrial champions for itself, including in the defence sector. Will the rest of Europe now converge on this type of defensive approach? The answer will shape Europe-China relations, and could have important ramifications for the success of China’s stated ambitions.
In the space of just one week, Germany has made two unprecedented moves. In July, the German government had the state-owned development bank KfW acquire a 20 percent holding in 50Hertz Transmission GmbH, one of Germany’s largest power grid operators. This meant that State Grid Corp of China’s attempted acquisition of 50Hertz effectively fell. Shortly after, Berlin moved again to block a Chinese takeover by preventing Yantai Taihai Group from buying Leifeld Metal Spinning, a firm producing high-specification metals for the aerospace and nuclear industries.
The federal government specifically cited security when it activated its veto power, making the failed Leifeld bid Germany’s first veto ever on security grounds. This follows directly on from reform of Germany’s Foreign Trade and Payments Ordinance. The amendments tightened the rules for foreign investors and enabled the German government to initiate a security assessment if a foreign investor purchases 25 percent of a company’s shares. Sectors subject to review include critical infrastructure, energy, information technology, finance, and transport, extending a system already in place for the arms industry. With regard to 50Hertz, the bid may have gone through under the new rules but Germany decided to kill off the Chinese bid by matching it, revealing that the government is concerned enough about protecting key assets to go beyond its own newly refined rules. This decision implies that there is a broadening definition of what constitutes a national security threat, including if a foreign investor only seeks a minority stake.
Observers detect an accommodative mood in Beijing with regard to Europe
Germany’s investment rules may tighten yet further, and not only from government initiative. In April the federal states, represented by the Bundesrat, urged Berlin to lower the threshold for vetoing foreign investment from the current 25 percent to 10 percent. This unanimous proposal by Germany’s federal states illustrates the growing consensus for more protection from China’s deep pockets and industrial ambitions. Even though Germany’s economically powerful federal states have benefitted from Chinese investment in the past, they see both Chinese investors increasingly targeting their most valuable industries and a distinct lack of protective measures from the German government to counter such advances. Germany's Minister for Economic Affairs and Energy Peter Altmaier has confirmed that the threshold will be lowered, possibly to 15 percent.
Meanwhile, the French government is set to present parliament with its action plan for business growth and transformation. The text contains measures to protect strategic national assets from foreign takeovers. In 2004, a government decree had empowered the economy ministry to block the acquisition of assets linked to the defence industry. In 2014, a further decree added energy, water, electronic communications, and public health to the list. Now the government plans to add artificial intelligence, big data, nanotechnology, space, and the finance industry to the existing sectors in order to align French defensive measures with those of China and the United States. At the same time, the French government is creating new tools to protect intellectual property rights at risk of forced transfer when French companies invest overseas. The government is also moving in the direction of moving power over investment screening to the presidency. It currently sits exclusively with the economy ministry.
The Macron presidency signalled early its intention to protect industrial assets from takeovers that could place French technologies at risk. Almost immediately after taking office the new government decided to temporarily nationalise the shipbuilding company STX to prevent key civilian and dual use technologies from being leaked to Chinese competitors, given the Italian bidder Fincantieri’s joint venture in Shanghai in the luxury ship industry.
In turn, Italy also expanded its screening system beyond defence and national security industries so that the government’s “golden powers” also cover high technologies in general. The Italian government is now able to veto such transactions or dictate conditions to all parties. Rome used its new powers early this year to set conditions on the sale of Piaggio Aerospace's executive P180 turbojet business to PAC Investments, a Chinese state-backed consortium, and to prevent any transfer of military technologies.
The UK has been taking similar steps. This summer the British government submitted its legislative proposals for national security and investment reform. The plans consist of an investment screening mechanism triggered by voluntary notification of problematic transactions, but the government reserves itself the right to undertake national security assessments, even retrospectively. It estimates that, once the scheme in place, it will receive around 200 notifications a year, half likely to need a national security assessment. The plan also creates a toolbox to impose conditions that mitigate risks, including punitive measures. The British approach promises a system strictly focused on national security rather than one focused on strategic sectors. It lists three threats as susceptible to trigger a security assessment: intelligence activities, the capacity to disrupt key infrastructure, and inappropriate leverage.
These defensive moves in France, Germany, Italy, and the UK form part of a larger shift among Western countries. Similar developments are taking place in Australia, Canada, Japan, and the United States. Looking ahead, the key question is the extent to which this approach will spread to the rest of Europe. The European Commission’s investment screening proposal should be adopted by the European Council this year. The adopted proposal sometimes invites a degree of scepticism given its non-binding nature: once in place, the EU will still lack executive powers to block deals.
This scepticism fails to take account of the dynamic game between the EU and member states. Investment screening at EU level will prompt all member states to start thinking of foreign takeovers from a security angle. Europe-wide discussion started by the Commission will help raise awareness in all capitals, even those ideologically opposed to stricter controls over business. The system will generate transparency, through greater media scrutiny of the links between investment, security, and technology transfers, and because member states and the European Commission will be keeping an eye on what other member states are doing in this arena.
In a non-binding system, member states willing to give up strategic assets for cash will still be able to do so, but the political constraints will be more difficult to escape. In the end, the key decision-maker will remain the sovereign state, but the EUplay an important role in helping harmonise practice in Europe so that all member states progressively align by reforming their national legislation and building a sound implementation mechanism.
China’s response so far has been hesitant. Some outrage has been voiced in Chinese media and at think-tank conferences, but there is an awareness that the Chinese system is comparatively more restrictive. At the same time, observers detect an accommodative mood in Beijing with regard to Europe as Trump’s trade war takes precedence over all other issues and China seeks out friends. There is also introspection going on in Beijing. The transparent course charted by Xi Jinping at the 19th Party Congress, telling the world in unambiguous terms that China’s goal is global leadership in 2050, could have been too much too early, and could partly explain the resistance China now faces in the West. The idea that a low profile worked better for Chinese interests applies to the Made in China 2025 plan too – all administrations in the West now justify their protective measures by citing that plan. Overall though, China should be expected to work pragmatically with the new constraints it faces in Western Europe.