Mergers & Acquisitions

China must play fair in acquiring foreign assets and technology

Michael Clauss says a Chinese company’s offer to buy a top robotics maker in Germany has amplified criticism of unfair competition, as state-backed Chinese firms are shielded from competitors and have access to huge funds

PUBLISHED : Tuesday, 07 June, 2016, 3:47pm
UPDATED : Wednesday, 02 November, 2016, 12:42am

The unsolicited takeover bid for Kuka, a German company with a multibillion-dollar turnover that successfully delivers industrial robots and other hi-tech automation solutions around the world, has stirred a controversial debate in Germany and Europe. A similar debate is also taking place in many other industrialised countries, not least the United States, which conducted its eighth US-China Strategic and Economic Dialogue this week. Just days after that meeting, German Chancellor Angela Merkel will lead her cabinet colleagues for the fourth round of the Germany-China intergovernmental consultations.

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Why is there even a debate, and why is it happening now? Germany is a global leader in openness towards foreign investment. Foreign takeovers are not subject to special scrutiny, let alone restrictions. The only restrictions we have are extremely narrowly defined and relate to security risks, usually with military relevance. There is a strong traditional consensus that this openness has been a major factor in keeping Germany’s manufacturing sector globally competitive – by subjecting it to relentless competition.

It’s in China’s own interest to level the playing field for foreign companies

Chinese investments, in particular, are warmly welcomed, even by trade unions: Chinese investors have a good record in maintaining and even increasing employment.

With the Kuka takeover bid, we now see different views emerge. Some are even mulling a possible European counter-offer. What are their concerns? They can be summarised by the acronym “Aittac” – that is, asymmetric investment, technology transfer and competition.

Asymmetric investment: Germany and others maintain an open investment environment, while China has not made any tangible progress towards further opening. Joint venture obligations have not been lifted, financial services are tightly closed to foreign investors, which hold a market share of about 2 per cent, and so-called “negative lists” for foreign investment, though often talked about, are not materialising. Protectionism is on the rise and the burgeoning bureaucracy of licensing appears to be a tool of choice: A US$30 million factory by a pharmaceutical company is now under severe threat because of discriminatory licensing practices.

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Asymmetric technology transfer: Unlike Chinese companies in Germany, our companies are under growing pressure to hand over technology. Handing over core technology seems to be the entry ticket into China’s promising electric vehicle market. The same applies to information technology solutions for the financial sector. Market access in exchange for technology, often directly delivered to state-owned enterprises or to state authorities, is not in line with World Trade Organisation rules.

If Germany and other fully industrialised countries were to operate this way, the global investment market would probably collapse.

Is China making life difficult for foreign companies?

Asymmetric competition: Chinese acquisitions of foreign companies are so successful because the Chinese bidder often offers a price far above any other competitors. At first sight, there seems to be nothing wrong with that. It belongs to the established rules of the game that the highest bidder wins the deal. But what if the playing field is tilted? It is surprising to see that even heavily indebted state enterprises seem to have ready cash in hand to make acquisitions at astronomical prices that do not seem to make business sense to outsiders. Both Chinese state enterprises and private companies can count on easy credit by China’s state-owned banks for their strategic investments.

I see a growing need for China to take urgent steps towards further opening its economy to the outside world. This would not only be fully in line with its current plans for supply-side structural reform, it is even a condition for these reforms to succeed. And it would help a lot to keep the world open for business.

Michael Clauss is the German ambassador to China