(Bloomberg) -- U.S. President Barack Obama appeared to block a Chinese company from buying Germany’s Aixtron SE, marking only the third time in more than a quarter century that the White House has rejected an overseas buyer as a national security risk.
The president upheld a recommendation by the Committee on Foreign Investment in the U.S. that the sale of the semiconductor-equipment supplier to Grand Chip Investment GmbH should be stopped, according to a statement Friday by the Treasury Department.
"The national security risk posed by the transaction relates, among other things, to the military applications of the overall technical body of knowledge and experience of Aixtron," according to the statement.
Impeding the 670 million euro ($715 million) acquisition frustrates China’s ongoing quest to buy Western engineering prowess, which has sparked political concerns about foreign ownership both in Europe and the U.S. China is particularly intent on developing its own semiconductor production to lessen its dependence on foreign technology.
CFIUS reviews purchases of U.S. companies by foreign buyers and pays particular attention to purchases of technology with defense applications. It has a say in the Aixtron deal because the company has a subsidiary in California and employs about 100 people in the U.S., where it generates about 20 percent of its sales.
Aixtron responded on Saturday by saying that the decision is limited in its application.
“The presidential order was limited to the U.S. business and did not prohibit the acquisition of Aixtron shares” by GCI, the Herzogenrath, Germany based company said in a regulatory filing. “The bidder and Aixtron are currently evaluating the impact of the order issued by the President of the United States on December 2, 2016 on the conditions to be fulfilled under the takeover offer and the consequences on the takeover process.”
Aixtron technology can be used to produce products including light-emitting diodes, lasers and solar cells, and can have military applications in satellite communications and radar. Northrop Grumman Corp., a major U.S. defense contractor, is among its customers, according to a Bloomberg supply chain analysis.
Grand Chip is a special purpose investment owned by investors in China, some of whom have Chinese government ownership, according to the Treasury statement. The proposed acquisition was to be funded in part by Sino IC Leasing Co. Ltd., which belongs to an industrial investment fund established by the Chinese government to develop the country’s integrated circuit industry, Treasury said.
“It will be extremely difficult for China’s state-owned enterprises to do deals in the semiconductor industry looking forward,” said He Weiwen, deputy director at the Center for China and Globalization. “It definitely posts a negative impact on China-U.S. relations, but the damage is limited.”
The decision comes at a crucial moment for U.S.-China relations. President-elect Donald Trump has accused China of carrying out unfair trade practices that hurt U.S. workers and said he’d impose tariffs on Chinese goods. Meanwhile, Chinese foreign direct investment in America reached a record $15.3 billion in 2015, according to Rhodium Group.
“A normal commercial acquisition deal should be considered using commercial standards and market principles,” Geng Shuang, a spokesman for the Foreign Ministry, told reporters in Beijing after Bloomberg News reported Thursday that the president was poised to block the deal. “We don’t want the outside world to over-interpret this commercial activity from a political angle nor to add political interference.”
Notable investments by Chinese companies include the purchase of Smithfield Foods Inc. by WH Group Ltd. in 2013 and China National Chemical Corp.’s bid for Syngenta AG, which CFIUS cleared in August.
This marks the second time Obama has blocked a deal on national security grounds. The first was in 2012 when he stopped Chinese-owned Ralls Corp. from developing a wind farm near a Navy base in Oregon. Before that, in 1990 then-President George H.W. Bush stopped a Chinese acquisition of MAMCO Manufacturing Inc., an aircraft-parts maker.
The U.S.-China Economic and Security Review Commission said last month in a report to Congress that CFIUS should be authorized to stop Chinese state-owned enterprises from acquiring U.S. companies, saying Beijing uses the firms as "a tool to pursue social, industrial and foreign policy objectives."