Protectionist Sentiment Swells Between China, West

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Summary

What Chinese companies encounter in the West today is still a far cry compared to the obstacles Western companies confront in China.

Large swaths of Chinese industry are off limits to foreign acquisition or foreign majority ownership, such as banking, securities, telecom, transportation and professional services.

Some Western companies believe protectionism sentiments are increasing.

By Fan Yu

A Chinese company's pending purchase of German chip equipment maker Aixtron SE (NASDAQ:AIXG) was blocked by President Obama on the basis of national security concerns Dec. 2. The move underscores growing sentiments of increased scrutiny on Chinese investments in the West.

The presidential order effectively barred the acquisition of Aixtron and its U.S. subsidiaries by Fujian Grand Chip Fund. Aixtron was notified by the Committee on Foreign Investment in the U.S. (CFIUS) earlier that it would advise the president against approval of the merger.

The decision wasn't unexpected. In late October, the German government withdrew its prior support for the €670 million ($714 million) Aixtron-Fujian tie-up on "previously unknown security-related information."

While CFIUS never discloses reasons for blocking cross-border deals, the decision is said to be driven by production techniques of a compound called gallium nitride, sources told Reuters. The little-known material which Aixtron's technology helps produce is used in production of military equipment such as radar, antennae and lasers. It suffices to say that the U.S. government isn't keen on Beijing obtaining the military-grade technology.

Increased Inquiry

The Aixtron decision reflects growing sentiments in the U.S. and Europe against Chinese investments in general as the world's No. 2 economy has overtaken the United States as the world's biggest asset acquirer.

Sigmar Gabriel, Germany's economics minister, has signed off on legislation to limit foreign acquisitions of EU companies involving "key technologies that are of particular importance." German concerns over Chinese investments increased after Chinese appliance manufacturer Midea purchased German robotics and engineering firm Kuka earlier this year for €4.5 billion ($5.0 billion). Kuka is a key supplier to many German and U.S. industrial firms and defense contractors.

The United States also is ramping up review of cross-border deals. CFIUS earlier this year blocked a buyout of Lumileds, a lighting company under Dutch technology giant Philips NV, by Go Scale, a Chinese private-equity firm. In February, China Tsinghua Unigroup abandoned a proposed deal to purchase digital storage manufacturer Western Digital Corp. (NYSE:WDC) also due to impending CFIUS investigation.

Large swaths of Chinese industry are still off limits to foreign acquisition or foreign majority ownership.

Analysts believe that Chinese investments into U.S. companies will receive further scrutiny once President-elect Donald Trump enters office. During his presidential campaign, Trump pledged to conduct more stringent review of Beijing's trade and economic policies.

China's Protectionism

What Chinese companies encounter in the West today is still a far cry compared to the obstacles Western companies confront in China. Large swaths of Chinese industry are still off limits to foreign acquisition or foreign majority ownership, such as banking, securities, telecom, transportation and professional services.

While some industries were taken off of the "restricted" list by Chinese authorities in recent years, some Western companies believe protectionism sentiments are increasing in recent months.

"German companies here feel that there has been a considerable rise in protectionism," Germany's ambassador to China, Michael Clauss, told Reuters.

"We are receiving more and more complaints, especially since the beginning of this year," Clauss said. While German companies - especially the automakers - have benefited from a growing Chinese economy in the past decade, they still must manufacture cars within China with local partners.

U.S. firms in China had similar experiences. In the most recent survey of American Chamber of Commerce in China conducted earlier this year, one in 10 U.S. companies with a presence in China said they planned to move or had already moved a portion of their activities away from China due to regulatory obstacles.

Companies within the technology, industrial and natural resources sectors were the most downbeat on Beijing's attitude towards foreign companies - 83 percent said they felt unwelcome. And the sentiments were reflected in their financials - 64 percent of U.S. businesses in China were profitable last year, down from 73 percent in 2014.

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