Germany Is Getting Tougher on Chinese Money

(Bloomberg Opinion) -- It’s not particularly logical that, after years of permissiveness toward Chinese investors buying up German industrial jewels, Berlin has decided to ban the acquisition of Leifeld Metal Spinning – a technologically advanced but small firm from the town of Ahlen in North Rhine-Westphalia. While it sends a clear signal that the anything-goes era is over, it’s also a worrying consequence of a dearth of clear rules.

Leifeld, a closely held company, makes machines and tools used in the production of extra strong metal parts that are inputs, for example, in the automotive, aerospace and nuclear industries. That may sound important for national security, which was the reason cited when the government made its decision. But Leifeld reported revenue of 28.5 million euros ($33.1 million) in 2014, the last year for which Bloomberg has financial data; the government has allowed much bigger companies playing an important role in strategic industries to be sold to Chinese investors. The most memorable example is Kuka, one of the global robotics leaders, acquired by Chinese appliance maker Midea for 4.5 billion euros in 2016. KraussMaffei, an industrial equipment manufacturer sold to a consortium led by ChemChina for about $1 billion, is another.

When those acquisitions took place, Germany looked feckless at times. In recent months, however, the government has been determined to look after national interests a little more like the U.S. does, subjecting potential deals to more scrutiny and getting a state-controlled bank to preempt a Chinese investment in power grid operator 50Hertz, part of Germany’s critical infrastructure.

This massive Chinese investment in Europe – at a cumulative 131.9 billion euros, it caught up last year with European investment in China, according to Rhodium Group –  isn’t always a problem. Automotive giant Zhejiang Geely saved Swedish carmaker Volvo by acquiring it in 2010. There’s no question European firms have benefited from the depth of Chinese investors’ pockets. But China is a country where the state plays an outsize role in the economy. So when state-controlled firms take part in acquisitions (in Germany, for example, they bought into KraussMaffei, energy producer EEW and other large companies), concerns about subsidies and unfair competition can be justified. Besides, with the Chinese government using every opportunity to raise domestic companies’ competitiveness, technology transfers can end up going further than just the acquiring firm, whether public or private.

The biggest concern, however, is reciprocity. Last year, Chinese direct investment in the EU approached 30 billion euros, compared with a reverse flow of about 7 billion. Some of the biggest Chinese acquisitions in Europe deals would have been impossible or at least highly unlikely for European companies in China. According to Rhodium Group, the equivalents of the Kuka and KraussMaffei deals wouldn’t have been allowed. 

It’s telling that analysts have a pretty good idea of how China would treat one investment or another, but it’s not easy to figure out what European countries might do in any specific case. Why is the Kuka deal OK, but not the Leifeld deal?

Last year, the German, French and Italian governments asked the European Commission to come up with an EU-wide mechanism for screening foreign investment. By September, the Commission came up with a proposal to assess investments according to their effect on critical infrastructure and technology, the security of important supplies and information and the investors’ government affiliations. Yet the proposal hasn’t become EU law yet because some member countries are hungry for Chinese investment and reluctant to submit to a common review process.

Perhaps that’s for the best. The EU proposal addresses security and competition concerns but not reciprocity ones. That could be justified on idealistic grounds: The EU, after all, is not Communist-run, and restrictions symmetrical to the Chinese ones wouldn’t make sense from the point of view of European values. From a practical point of view, however, any lack of reciprocity creates leverage in trade talks – something the Trump trade wars are making abundantly clear.

Both investors and targets need clarity about what can work and what can’t. The best way to deliver it would be for the EU to sign a bilateral investment treaty with China. Negotiations have been under way since 2013, but there’s no end in sight. In this context, there is perhaps some logic to the Leifeld acquisition ban. Germany has absorbed about a fifth of the total Chinese direct investment in the EU; after the U.K. leaves the bloc, it will be the number one destination for Chinese money within it. If Germany gets tough on acquisitions, it won’t be easy for Chinese firms to find equivalent targets elsewhere. So perhaps it’ll lend some new vigor to investment deal talks, especially as China and the EU find themselves allied in defending free trade from an increasingly protectionist U.S.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is a Bloomberg Opinion columnist covering European politics and business. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

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