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China’s disquieting FDI in high-tech

In the previous decade, the big Chinese push outwards was for energy and other natural resources. Now the focus seems to be shifting towards technology and Intellectual Property (IP). This change  in China’s focus aligns with the Government’s ‘Made in China 2025’ plan, released in 2015, which seeks to establish it as the world leader in ten industries, including Information Technology  and Artificial Intelligence (AI), communications, robotics and new energy vehicles.

The concerns that were raised when Chinese companies were acquiring natural resources are emerging in tech space as well. Multiple news reports indicate that the U.S. Treasury is drafting rules that will prevent companies with substantial Chinese ownership from acquiring ‘industrially significant technology’. These reports come after a White House statement (29 May 2018), accusing China of pursuing ‘state-directed acquisition of sensitive United States technology for strategic purposes’. There is an increasing fear in the United States and other advanced economies that acquisitions of tech firms may eventually result in sensitive U.S. technologies being exported to China by willing multinational companies, fearful of being locked out of the Chinese market.

The issue of control over such technologies came up also in 2016 when a Chinese appliance maker acquired Kuka, a German company that makes industrial robots. Security concerns in the U.S. scuppered a planned takeover of another German enterprise, computer chip equipment maker Aixtron, in 2016. In April 2018, the German government cleared the acquisition of Cotesa, a supplier to Airbus and Boeing, by a state-owned Chinese firm, after a prolonged investigation into its national security implications.

Meanwhile, Germany has complained about a lack of reciprocity from China: Chancellor Angela Merkel, making a speech in Beijing, raised the issue of foreign companies getting the same rights as domestic players along with protection for their brands and data. The head of the German intelligence service publicly said that acquisitions by high-tech companies coincided with a drop in cyber espionage activities from China: “Industrial espionage is no longer necessary if one can simply take advantage of liberal economic regulations to buy companies and then disembowel them or cannibalise them to gain access to their know-how”.

Fears of IP theft are not unfounded. China has reverse engineered — or replicated — foreign technology in the recent past. High-profile examples include Japan’s famous Shinkansen bullet trains and Russia’s Sukhoi-27 fighter aircraft – which were first purchased, then copied and are now aiming to be exported to the rest of the world. China is already a leading exporter of defence hardware, and proposes to build high-speed railways in Indonesia and Malaysia.

Data security is another area of concern as data has become a valuable commodity. On 2 July 2018, the National Telecommunications and Information Administration, the U.S. telecom regulator, rejected a 2011 application, filed by China Mobile, seeking to provide services in the U.S. market. On 5 March 2018, the U.S. Treasury blocked a proposed $117-billion acquisition of U.S. chipmaker, Qualcomm, by Singapore-based telecom company, Broadcom, on national security grounds. It cited Broadcom’s relationships with third party foreign entities and a reduction in Qualcomm’s competitiveness, which could lead to Chinese firms setting standards for 5G telephony.

The U.S. apart, other governments too have started scrutinising Chinese investments. In 2017, Australia rejected a bid by a Chinese consortium (with a state-owned company as a partner) to acquire a majority stake in an electricity grid company, serving 1.7 million consumers. Australia is also concerned about Chinese interference in its political process and creation of a pro-China lobby in its parliament, which was also a major driver for ‘foreign interference laws’ being passed by the Australian parliament. The UK is now rethinking the $26-billion Hinkley Point C atomic power plant in the country in which a Chinese government firm has a 33.5% stake. A report tabled in parliament says that consumers have been locked into an expensive long-term deal.

Chinese takeovers have caused concern in the developed world before now. In 2005,  the state-owned China National Offshore Oil Corporation’s (CNOOC) bid to acquire American oil major, Unocal, ran into opposition in the U.S. Congress  on grounds that China does not  permit similar investments in its own oil sector. Later, when CNOOC acquired Nexen, a Canadian oil company, the Canadian government, mirroring U.S. reaction, revised guidelines for takeovers by foreign state-owned companies.

Chinese investment has moved from natural resources and hard infrastructure, such as ports, mostly in the developing world, to high-tech industries of the future in which the West currently has an edge. China is trying hard to catch up – with large amounts directed towards research. A consulting firm, CB Insights, estimates that 48% of the money flowing into AI start-ups globally during 2017 was in China. Since state-directed research tends to leave gaps, acquisitions of strategic firms and industrial espionage serve to fill those blanks. Chinese investments and their impact on host economies have been a worry for African and smaller Asian economies for some time now, a worry that is now spreading to the larger and developed economies too.

In the recent past, the U.S. has threatened punitive tariffs on Chinese exports, stirring similar responses from China, which is now working together with the EU to strengthen ‘mutual trade ties’. This may end up undermining the U.S. position on trade and also the West’s attempt to preserve its edge in technology.

Neelam Deo is Director, Gateway House.

Amit Bhandari is Fellow, Energy and Environment Studies, Gateway House.

This blog was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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