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The Folly of Blocking Chinese Takeovers

I came across some recent articles in the European trade press that got me wondering about the Chinese investment trend and the impact foreign financing could have on the tech sector.

European Union industry commissioner Antonio Tajani reportedly supports the establishment of a new authority that would examine foreign investments in strategic European businesses. Theoretically, the agency, which would be modeled after the US Committee on Foreign Investment, would also have the right to block foreign takeovers and acquisitions if they were perceived as a danger to European knowledge or technology.

To nobody's surprise, the underlying concern appears to be rooted in increased overseas investments from Chinese entities. (You’ll find the original report in the German paper, Handelsblatt , here along with a couple of other sites — EUobserver.com and PCWorld — that picked up the story in English.)

Really? This is the best we can come up with? Stopping foreign takeovers of strategic businesses in the quest to protect our “indispensable” technology and knowledge? I’m not buying it.

Here’s how I see it. Western companies have been pouring billions of euros and dollars into China so they could save heaps of money on labor and overhead expenses. They have overcome all sorts of political, logistical, and cultural obstacles to elbow their way into a fledging market and secure their places in that part of the world. Now, when the new Chinese bourgeois or entrepreneurial capitalists — made wealthy by the ripple effect caused by years of Western investment — want to do what their predecessors have done (i.e., invest in developing hot spot markets or gain a competitive edge on the global scene), many Western businesses and politicians cry foul.

Businesses and politicians can’t just stop the globalization machine when it is not serving their near-term financial or bureaucratic interests. “What goes around comes around” is the adage that keeps coming to mind. Japanese, American, and European companies have had their day watching profits soar because they off-shored production, created partnerships in desirable geographies, or flat-out acquired weaker global competitors. Companies from all of these regions have shaped and forever influenced the world’s auto, banking, industrial machinery, retail, technology, and telecom sectors, to name a few.

Were we collectively naïve enough to think that one day Chinese companies wouldn’t pursue — or would never be strong enough to pursue — the same kinds of ventures they were subjected to a decade or two ago? Just maybe it’s time for the Chinese to lead the next phase of worldwide business direction. They have money in the bank to back up their big-game talk, and they have developed the Western world’s appetite for profitability and growth.

In a world where money talks and strong balance sheets impress Wall Street, why is the Western world so afraid to let Chinese companies make overseas investments in IP and technology development?

I’m not saying Chinese investors should have carte blanche to do whatever they feel like; in the same vein, I never believed Western corporations should have had carte blanche in developing nations either. There have to be reasonable limits and a more effective way to safeguard intellectual property and know-how, although I’m short on ideas on how to feasibly do that in the interdependent world we now live in.

Of course, governments feel obliged to wave the “it’s-in-our-national-interest” flag when the threat of potential evildoers mounts and weakens the home team’s advantage. And, obviously, narrowing the European-Chinese trade deficit should be addressed on some level, if only to create a relatively balanced import-export landscape.

But, I don’t think adopting protectionist strategies actually does much for the business world or consumers. Proposed measures like these sidestep possible solutions that endorse fair competition worldwide, and furthermore, they dilute the “only the strong survive” conjecture that drives business success in bull or bear markets.

What do you think? Do we need another government organization to write the rules of international business? Or, is this something corporations should hammer out by themselves?

Also, have you had any experience with the Committee on Foreign Investment in the United States (CFIUS)? I’d like to hear how it works, and if it’s a model worth replicating in Europe.

12 comments on “The Folly of Blocking Chinese Takeovers

  1. stochastic excursion
    January 4, 2011

    Japan was active in Western acquisitions around the 1980's, and there were similar protectionist objections.  A few boom-bust cycles later, and look where we are.  The Western business landscape has undoubtedly transformed somewhat, however Western businesses are arguably in a better position than those in Japan.

  2. mfbertozzi
    January 4, 2011

    @Jennifer: I personally believe you have right mentioned “shouldn't have carte blanche” from both sides. The key factor is to reach a reasonable trade-off. Statistically speaking, during the decade 1988-2008 CFIUS received about 2000 notifications and performed investigation only on 3% of them (involving Presidential decisions in 0.7% cases). CFIUS pronunced green light in 2005 for one of the most important Chinese investment in US: acquision by Lenovo of IBM PC business unit. Any organization could of course improves, in principle I think CFIUS could act as proven model also for European Union. Am I really wrong on this analysis?

  3. Jennifer Baljko
    January 5, 2011

    @stochastic excursion  – You're right. These things come in cycles, and often depend on what kind of hit a country or region suffers when economic tides shift. Taking a stab in the dark, I'd say the reaction in tough times, more often than not, leads to “Save ourselves” policy measures and finger-pointing blame. Reversely, when everyone's rich and happy, businesses and governments are more willing to look away. Also, while in some sectors the Japanese are obviously weaker today than 30 years ago or so, they did quite a job at changing many practices that have become entrenched in today's high tech supply chain and raised the bar of performance expectations globally. Alas, since history tends to repeats itself, even the mighty fall, and those that can turn competitors' missteps into a profitable venture will be the new darlings.

    @mfbertozzi  – Thanks for those numbing stats – “Statistically speaking, during the decade 1988-2008 CFIUS received about 2000 notifications and performed investigation only on 3% of them (involving Presidential decisions in 0.7% cases).” Do you have a source for these numbers? They're quite telling. I'm really not sure how this would work in the EU. How would this proposed organization determine which nation-state's companies have more strategic technology or know-how. Would German electronics and auto companies win greater protection than say Spanish or French renewable energy or logistics/transportation operators? Too many gray areas for me to think this will actually become a reality.

    Thanks for the posts.

  4. mfbertozzi
    January 5, 2011

     

    Dear all, official references are from US Department of Treasury that yearly reports CFIUS activity.  At web site “http://www.treasury.gov” several intersting papers from CFIUS are available and you can found for example notifications and investigations splitted by country, market sector and so.

    You can also take a look at Table 2.1-pag.57 – Graham, Edward M; David M. Marchick (May 2006). US National Security and Foreign Direct Investment, available on line at “http://www.petersoninstitute.org/publications/chapters_preview/3918/02iie3918.pdf”.

    Still thinking on how EU model could mutual run, will post my thoughts soon, many thanks.

     

  5. mfbertozzi
    January 5, 2011

    Some more analysis/information, collected from CFIUS annual report09, just to keep more live the discussion. Covered transactions by acquiring in US are very relevant from Canada (total values 36, in 2007-2009 timeframe), Israel (23, same timeframe) and especially from UK (97, in 2007-2009). From China only 13 within same period. Maybe funds from Far East was (are) going through financial european ventures?

  6. Jennifer Baljko
    January 5, 2011

    Thanks for these links and stats… I'll scan them as well. – Jenn

  7. Anna Young
    January 5, 2011

    There is an old English adage that says 'those who in glass houses should not to throw stones'.

    Many European countries,particularly here in England are already suffering from such policies with high local unemployment; a consequence of investing in China and other Asia countries. Now to resort to protectionism in the national interest does not play fair although Chinese business should not expect a carte blanche when trying to invest in the West.

    The Chinese business moguls are not completely innocent in their approach; they are most interested in the technology the West has to offer which will assist their own country's development.

    I agree reluctantly that a government organisation may be required to sanction the type of chinese investment necessary although politics will have the upper hand.

  8. Hardcore
    January 5, 2011

    In a free market economy you cannot block the takeover of a company who's shares are listed on the stock markets.

    This is just the same as the complaints  10-20 years ago about Japanese companies buying western businesses, and look how that turned out.

    One only has to look at the recent Cadbury fiasco, where the  'USA' bought a 'British' company  after declaring they would keep it open  they proceeded to asset strip it and move the products to Poland, where Craft could maximize its profit margins, and yet we did not hear too many Americans complaining about it.

    Once a company goes public it belongs to the shareholders, and in many cases the shareholders sole interest is to maximize the cash they can gain from the shares that is the bottom line , if that means selling the company to  a Chinese company then so be it.

    The sad part of this, is that many of  these Chinese companies believe they can gain some massive advantage without actually doing the R&D leg work in the first place

    In many cases they would be better served by strengthening their own holdings and management systems, rather than trying to 'import' them from purchased companies.

  9. eemom
    January 5, 2011

    Allow me to take a different point of view.  The Western world invested in the far east and enjoyed lower costs and high profits for it.  I venture to say that no, these companies did not look ahead and foresee what the future will hold.  I agree that we have seen unemployment rise and technology being shipped oversees, which is the long term negative effect to the practices we've had for several decades.

    Do two wrongs make a right?  If we didn't have the foresight to keep technology and employment where it belongs, should we just totally give up and say fair is fair?  I believe that what is happening now is the western world waking up to the “bed they made” so to speak and trying to limit the damage – which may be a little too late.

    I do agree that government involvement will be necessary to incentivise companies to invest in their own countries.

     

     

     

  10. Jennifer Baljko
    January 6, 2011

    Anna young, Hardcore, eemom:

    Good points. There is something to be said about history repeating itself, and I'd like to think many executives running tech companies today have read up on past trends and outcomes. Even so, doesn't it feel like the same loop-the-loop maneuvers time and time again? Companies dive head first into whatever part of the planet is the hot low-cost spot (Mexico, Eastern Europe, China, etc), they reap as many benefits as they can when the going is good, and then when things sour (like they usually do, either because of politics, economics, cultural challenges, changes in consumer behavior), companies and governments act like this the first time something like this has happened.

    Like you said, we've already lived through several of these cycles. Want to bet that in 10 years time we'll still be having this globalization-protectionist debate and likely won't be much further along in ironing out the wrinkles?

  11. JLS
    January 6, 2011

    I haven't seen anyone mention the fact that when you are dealing with China and Chinese businesses, it is not the same as for most of the rest of the world.  Chinese business ad government are joined at the hip to a much higher degree than the rest of the world.  It is still a totalitarian regime that do not play fair in many ways, including monitary policies, lack of respect for IP and patents, etc.  There must be safeguards that prevent the wholsale looting of companies they may acquire or what we have seem so far is just an indication of things to come.  We blew it my allowing our capitaist industries to export jobs that we need for our own population.  Not everyone are in high tech doing highly skilled jobs.  We need the low end factory jobs, too.  At the rate it is going if you are not highly skilled, your only options will be the fast food industry, toll booth money collector, Wallmart clerks, or agricultural workers, who now are mostly here without papers anyway.  Protectionism is not something that should be taken lightly and usually is counter productive, but we must make sure it is not the only option we have left.

  12. Skyhigh
    January 6, 2011

    Things always contradict in the West, whereas in the East – we honour trust and respect, where we say it and we mean it. We don't chew our words, like in the West.

    When the US economy collapsed (still is…), instead of pointing fingers at their own mega investments made in China over the past decades, in order to save cost and avoid high taxes, they blamed China for stealing all their jobs. That's what the Republican kept saying.

    The US blamed China for pollution. The question is, hasn't US gone through the same industrialisation era and polluted the environment too from the 20s to 70s? Simply because US can no longer afford to invest high cost in pollution control and shifted their production to the China, they can push all their blames. So… US can import cheaper goods, with a cleaner pollution record? Realistically, this hasn't met up their agenda and still US ranks top!

    When US is in trouble again and again, to save the world – China is the largest stakeholder of US bonds and debts. What did China get in return? Backstabbed!!!

    US continues to print money and weakens US dollar, forcing China, Japan and other Western nations to swallow huge debts for Obama's ever-increasing debts that will take generations of US citizens to roll the astronomical figures.

    Protection has never been the best choice because if you do the same to China, China can retaliate and you are forced to buy your goods from someone else.

    Europe took advantage by shifting their plants from Western Europe to Eastern Europe. It works out fine though… But this market isn't significant compared to the vast market in the East – China that is.

    Now China has improved, thanks to the investment from the West. In return, they want to create jobs and buy companies and IP in the West, isn't that offering a win-win situation for creating new jobs and pumping the investment back into the West?

    This the Chinese respect – “You have helped me and I will help you, in return.”

    However, if any Western companies are linked to the government or defence, I certainly agree that protection should be imposed as it concerns national security.

    Nonetheless, if companies are publicly-listed, games should be played the fair way. Look at SGX buying our ASX. Australia still opens up their playground for a tiny country to pump in money to the continent and provide a bigger playground by becoming the 4th largest stock exchange in Asia Pacific, instead of remaining as the lower tier player.

    More than ever, protectionism is the game the West politician plays, in order to extend their stay in the office, by giving people the false impression that the government is doing everything they can to keep their jobs.

    So… My question is…. If you protect your economy, are you going to nationalise your companies to save millions of jobs? I bet no and the truth is…. The Western government had done nothing to save those jobs because you got no money to nationalise any.

    What's the best option?

    The West can only choose to open their doors and embrace globalisation. If you have force-opened someone's door, then be prepared to be force-opened yours oneday.

    If you cannot afford to use your own national reserves (the numbers are going red and negative, especially one by one, more and more European countries are in debt), then let someone stronger to provide you the financial reserves.

    If only the European and the US government stop discrinimating China and see them as threats, this world can be so much in harmony.

    A lot of times, it is how we think. If the West thinks China is a threat, then what's good is always perceived as evil.

    US has a long history of suspecting every single country as threat, and US still playing the Cold War, alone… US is always living like a paranoid.

    Does Europe still play the Cold War game with US? I hope not…

    There is a saying, “This world shares the same Sun and Moon. We are no different. We are all trying to save our skins. If oneday the world shall not see the Sun, can we still see we if we are White, Yellow, Brown or Black?”

    The only thing you can see is pitch Black. There is no more colour and protectionism isn't going to save anyone.

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