In 2016, Chinese electrical appliance manufacturer Midea bought leading German industrial robot maker Kuka for (US)$5bn. The deal was just the latest in a string of acquisitions by China, which has turned to European innovation to fuel its transition into a high-tech manufacturing superpower, but for the German government, it was a turning point. Concerned about the loss of innovation and the national security implications of excessive Chinese investment, it set out to change rules governing takeovers by foreign companies.
“That was a watershed moment in Germany,” says Elisabeth Braw, resident fellow at think tank the American Enterprise Institute (AEI). “Where countries did have some sort of restrictions it was limited to very significant defence contractors – not with tech start-ups – so China has been able to buy a lot.”
While Chinese investment has proliferated across Europe over the past decade, Germany has been one of its chief destinations. It accounts for 14% of Chinese foreign direct investment (FDI) in the EU between 2000 and 2019, according to analysis by the Rhodium Group, the most of any economy aside from the UK, which aggressively courted Chinese money during the “Golden Era” of trade relations.
But the introduction of a new directive in 2017 significantly expanded the German government’s powers to intervene in foreign takeovers, bringing a new cohort of “critical infrastructure” companies under scrutiny, doubling the time span for probes to four months and allowing policymakers to investigate “indirect acquisitions” (when foreign investors set up an EU entity to acquire German targets). The result is that capital in-flows from China have fallen off a cliff: while Germany accounted for 12% of Chinese investment in the EU in 2018, a year later it represented less than 4%, according to the Rhodium Group.
Meanwhile, other areas of northern Europe have seen the proportion of Chinese investment they represent almost double, reflecting the growing concentration of high-tech industry in Scandinavia. In Sweden alone, Chinese companies have acquired three semiconductor manufacturers in recent years, says Braw.
“Chinese firms clearly had a very strategic view that the computer chips sector was going to become a huge growth area and that they need to shore up capabilities as much as possible,” she says. “They did that and now they own those three companies and Western companies don’t.”
Aside from Finland, most Nordic countries have maintained a hands-off approach to foreign takeovers until recently. But, in October 2020, the EU introduced a new foreign investment screening framework in an attempt to harmonise regulation across the bloc, which has acted as a catalyst for renewed scrutiny of FDI in Scandinavia.
Innovation lost to Chinese investment will stymie competition from Europe
To date, Europe has left the door open to Chinese investment because it has allowed countries including Germany to become “a more global hub for innovation and start-ups,” says Sabrina Korreck, senior fellow at think tank the Observer Research Foundation. But governments are now waking up to the downsides.
The first of these is that native institutions face increased competition for investment opportunities. “Increasing investment from Chinese sources… will make investments more costly and larger businesses and established corporations in Germany and Europe could miss out on attractive investment opportunities,” says Korreck.
This in turn could allow Chinese companies to monopolise European innovations, she adds, making it “harder for local businesses and corporations to stay competitive”. European countries still come out on top for innovation, making up seven of the top ten in the World Intellectual Property Organisation’s (WIPO) Global Innovation Index in 2020. But China has made rapid progress in recent years, climbing from 25th in 2016 to 14th in the most recent edition.
Chinese investment could weaken Europe’s influence over vital internet governance and standards, says Korreck. “When German start-ups become integrated into Chinese ecosystems and use Chinese technical solutions more frequently, Chinese gatekeeping power will increase, and their standards can eventually become the norm.”
AEI’s Braw argues that there is an additional concern about data governance. She points to the example of LGBTQ dating app Grindr, whose acquisition by a Chinese company was blocked by US authorities, reportedly due to concerns that users’ data might be used by the Chinese government to blackmail them. “If we, as liberal democracies, can’t be sure that that data remains safely handled and if we have to worry that a foreign government will access it, even the most innocuous tech-based service becomes a matter of national security, ranging from fintech to dating websites,” she says.
If we have to worry that a foreign government will access [data], even the most innocuous tech-based service becomes a matter of national security, ranging from fintech to dating websites.
Elisabeth Braw, American Enterprise Institute
While many European countries have toughened rules on foreign takeovers over the past year – the UK, for example, introduced the National Security and Investment Bill at the end of 2020, while Italy updated its FDI rules in January of this year – in most cases, new legislation is limited to sectors relating to defence and critical infrastructure. As technology and data become increasingly integral to the wider economy, this raises questions about what constitutes a national security concern.
In Germany, while Chinese investment in high-tech has dropped off in recent years, there is still strong interest in the fintech sector – and “it’s not inconceivable that fintech acquisitions would fly under the radar” of the current rules, says Braw.
Regulators are likely to address any gaps in the current rules, however, as fintech is high up the agenda when it comes to data concerns, says Alessandro Hatami, investor and managing partner at digital innovation consultancy Pacemakers: “There’s an awareness in the financial services regulators that data is a real asset that requires both accessibility and protection.”
These concerns will only heighten with interoperability initiatives such as open banking, which allow customers to share their financial data with third parties, as a data breach could pose a systemic risk to the financial services sector, he adds.
“A hostile third party – with excellent hacking skills – could use this capability to do things such as authorising malicious transactions that could result in company defaults, originate huge volumes of transactions that could crash national payments processing capabilities and more,” he says. “I don’t believe that [China is an unfriendly third party], but there are people who do, and they try to influence the way regulators operate.”
Moving forward, governments in Germany and beyond in Europe will continue to grapple with the challenge of balancing the need for foreign investment with concerns about data and national security.
“I’d be very surprised if we see specifically anti-Chinese legislation happening any time soon, for the very simple reason that China is an amazingly big trade partner with the UK and Europe and [both] do not want to alienate them,” says Hatami. “But if the current situation escalates, we could see something reminiscent of the Cold War, where on paper everything’s fine and we want to trade with each other, but sometimes specific deals (on both sides) will be curtailed.”
Home page photo of currency by Frame China/Shutterstock.