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Chinese Acquisitions of Western Firms Threaten National Security

If the invisible hand won’t produce buyers at home, governments will need to step in.

The logo of Chinese video app TikTok is seen on the side of the company's new office space at the C3 campus on August 11, 2020 in Culver City, California.
The logo of Chinese video app TikTok is seen on the side of the company's new office space at the C3 campus on August 11, 2020 in Culver City, California. CHRIS DELMAS/AFP via Getty Images

Ten years ago, the idea that a gay dating app or a video-sharing app popular with teens could pose a national security risk would have seemed ludicrous. Today, Grindr and TikTok—along with countless other less famous companies that never thought of themselves as intersecting with national security—are at the center of a geopolitical standoff. U.S. President Donald Trump and many European governments are trying to ban foreign ownership of strategic firms, and these popular apps are being swept up into the mix. But banning is the easy part. Who’s going to buy companies if the Chinese and their ilk are not allowed to?

I bet you didn’t know that the social media personality Addison Rae is now TikTok’s top earner, beating out fellow stars Charli D’Amelio and Loren Gray. Most of us over the age of 20 don’t follow the latest trends on the app. We simply know that on Aug. 6 Trump signed two executive orders banning TikTok and WeChat, another popular messaging app based in China, on the grounds that they “threaten the national security, foreign policy, and economy of the United States.” Around the same time, he conducted what amounted to a public negotiation for the sale of TikTok to Microsoft. Since then, Oracle—backed by venture capitalists—has reportedly entered the takeover race as well.

Corporate ownership is the new front line in geopolitical competition. I previously wrote for Foreign Policy about Chinese firms’ growing interest in buying coronavirus-weakened European businesses and warned that this posed a national security threat. In Sweden, for example, Chinese acquisitions of Swedish firms have accelerated since 2014, with more than half of those takeovers covering focus areas of China’s Made in China 2025 plan for economic superpower status, according to a 2019 report by the Swedish Defence Research Agency.

Before the coronavirus crisis struck, governments didn’t seem to consider this issue urgent. Given that cross-border investments are the lifeblood of globalization, one can understand their reluctance. The United States was virtually alone in imposing restrictions, with Congress passing the Foreign Investment Risk Review Modernization Act in 2018, though the same year Germany lowered the limit for when investments in sensitive areas required government approval, from 25 percent to 10 percent.

Then the pandemic hit, and Chinese firms started preying on struggling Western businesses. In May, BOC Aviation (whose ultimate owner is the Bank of China) bought a large stake in Norwegian, the world’s fifth-largest budget airline.

China’s duplicitous behavior during the pandemic made governments and citizens alike realize that more circumspection was needed, and now several Western governments are trying to protect their firms from takeovers by the firms of unfriendly countries. The German government extended government regulation of foreign investments; it now includes areas that don’t just directly affect the country’s national security but also areas where foreign investments are likely to pose a threat.

France, Poland, and Spain have all taken similar steps, while Italy is strengthening its Golden Power legislation. Stricter legislation is also underway in the Swedish parliament, and the European Commission has issued stricter foreign investment guidelines that will come into force this October. The United Kingdom, meanwhile, is expanding its limited Enterprise Act and is conducting a parliamentary inquiry into foreign countries’ use of corporate takeovers. It even has a new subcommittee dedicated to the issue. And this month, the Trump administration announced plans to ban Chinese firms that don’t comply with U.S. accounting standards from U.S. stock exchanges.

It is against Western countries’ interests to lose key technology to a geopolitical rival. But the protection of firms must go further than the finished product.

These restrictions are a good step; it is against Western countries’ interests to lose key technology to a geopolitical rival. But the protection of firms must go further than the finished product. “We need a comprehensive strategy to protect U.S. and allied critical technology supply chains,” said retired Rear Adm. Mark Montgomery, who is the executive director of the U.S. Cyberspace Solarium Commission, a nonpartisan commission appointed by Congress. “This strategy should include identifying critical materials and equipment to ensure that the U.S. and its key allies can produce these goods should global supply chains be disrupted.”

But that leaves one major complication: If buyers from China and other non-friendly countries aren’t kosher, who’s going to acquire the firms? Sometimes businesses may happily remain independent.

But often owners want to sell, especially if the firm—however cutting-edge it may be—needs a financial boost. Washington is discovering that the invisible hand is not infallible. The United States lacks serious 5G firms that are able to compete with Huawei, meaning that when Western governments reject a Chinese or other foreign bidder, it could lead to a situation where no friendly candidate emerges.

Two years ago, the German government found itself part of a nail-biting exercise in precisely such a case. A large Australian shareholder of 50Hertz, a key German energy utility, was selling its shares—and the State Grid Corporation of China (SGCC) declared that it wanted to buy a 20 percent stake. SGCC had previously tried to buy a larger stake but was thwarted by a Belgian firm. The 20 percent stake, though, remained available.

With German law at the time only requiring government approval of stakes of 25 percent or above, the government couldn’t stop the deal. Instead, it took the highly unusual step of instructing the government-owned bank KfW to buy the stake. (The KfW, founded in 1948 as part of the Marshall Plan, primarily lends money to public institutions and German and European companies.)

The 50Hertz deal, though, was an exception, and Western governments still lack an overarching strategy for dealing with this issue. Trump seems to believe in an ad hoc approach, with the U.S. government acting as the matchmaker. The British government, meanwhile, has in the past sometimes quietly urged U.K.-based companies to buy British businesses, preventing Chinese outfits from doing so.

But these are just improvised measures, and China knows Western countries don’t have a long-term plan. After Britain’s decision this summer to ban Huawei from its 5G networks, Beijing’s ambassador to London, Liu Xiaoming, ominously suggested that Chinese firms may withdraw their participation in two U.K. nuclear plants.

If the invisible hand won’t produce candidates, governments will need to do so. “We need to ensure that there’s sufficient capital to replace the lost potential from Chinese investors,” Montgomery said. One strategy might be to incentivize domestic firms and others in EU, NATO, and Five Eyes countries to acquire or buy large stakes in companies whose Chinese would-be buyers have been blocked by the government.

Governments themselves could also invest. Germany has pioneered a 500 billion euro Economic Stabilization Fund that will provide loans and loan guarantees to companies weakened by the coronavirus crisis; it and other countries could create similar funds to invest in companies that Chinese firms would otherwise have bought.

And countries could follow the United States’ successful model of government-owned venture capital firms. In-Q-Tel, the CIA’s (nonprofit) venture capital firm, has a portfolio of dozens of start-ups with technology pertinent to the firm’s mission, and the Army Venture Capital Initiative performs the same role for the U.S. Army. Other countries could set up similar venture capital initiatives, which could be connected to, say, the interior ministry rather than the army or an intelligence agency.

The U.K. government, for example, could beef up its small National Security Strategic Investment Fund. “Providing alternative capital for start-ups and increased public research and development funding can be part of the solution,” said Pal Jonson, the head of the Swedish parliament’s defense committee, but he cautioned that “it will also require companies in the tech sector to make more selective decisions whom they partner up with.”

If firms are important enough to warrant exclusion of certain foreign buyers on national security grounds, they must be important enough for governments to invest in. In some countries, it may not (yet) be legally possible, but where it is, investments and acquisitions could even be a good deal for taxpayers: Businesses with cutting-edge technology vital to the nation’s well-being are likely to prosper in the long term.

In 2018, after Grindr was acquired by the Chinese gaming company Kunlun, the Committee on Foreign Investment in the United States (CFIUS) grasped the national security implications of a gay dating app’s data in the hands of a Chinese owner. In a rare move, it forced Kunlun to sell Grindr. But the Chinese firm pulled a trick.

The new owner, a completely new Delaware-based investment group jointly led by a former executive at the Chinese search engine Baidu and a Singapore-based businessman, has close links to Kunlun. When CFIUS ordered Kunlun to sell Grindr last year, the two businessmen advised Kunlun. They then founded the firm that bought the app, Reuters reported. Grindr has, in other words, barely left Kunlun.

Western governments need to plan their next steps. Otherwise, their well-intentioned plans to keep intellectual property and key technology safe from subversive firms could seriously damage U.S. and European security.

Elisabeth Braw is a fellow at the American Enterprise Institute. Twitter: @elisabethbraw

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