Just as Taiwan is investigating XPEC Entertainment Inc, the German government has in the past week canceled permission it had granted a Chinese firm to make an acquisition in that nation.
Grand Chip Investment Fund (FGC) was seeking to purchase Germany’s Aixtron for 670 million euros (US$743 million). The decision to cancel was based not only on concerns about the acquisition process, but was also due to a warning issued by US intelligence agencies that China is playing games, trying to acquire the latest LED technology.
Aixtron is the world’s foremost LED chip equipment manufacturer, and Taiwan, South Korea and China are its main customers.
There are, of course, major differences between the Aixtron and XPEC cases. The situations in their respective countries are different, for example, and there are also differences in the levels of the companies’ respective technological competencies.
It is difficult to say with any certainty whether anything illegal actually took place in the acquisition processes. Nevertheless, it is useful to explore the similarities in the two cases.
The aspect that has attracted the most attention is that of alleged market manipulation.
According to a New York Times article, Aixtron’s stock price plummeted to nigh on half following the cancelation of a major order by Sanan Optoelectronics Co, one of Aixtron’s main Chinese customers. Not only are there financial links between Sanan and FGC, they share — in a state-owned enterprise — a stockholder, and therefore investment. There have been suggestions that Sanan pulled the order to suppress Aixtron’s stock price so that FGC would have an advantage in the acquisition.
In the same way, the XPEC case reeks of financial game-playing. It has been suggested that Chinese Internet tycoon Wang Ji (王佶), who has been named as the person funding the deal from behind the scenes and possibly even orchestrating the whole show, conspired to have XPEC chairman Aaron Hsu (許金龍) and former stockbroker Yang Jui-jen (楊瑞仁) inflate the share price by saying they were interested in acquiring XPEC, against the interests of the company’s many shareholders.
The Aixtron acquisition was initially given the go-ahead by German authorities in September, only for the decision to be retracted last month and another review ordered on the grounds that officials had received “previously unknown security-related information.”
US intelligence agencies reportedly provided the German government evidence that Aixtron’s products could potentially be put to military use, possibly to boost China’s nuclear program.
While the XPEC case lacks the technological component of the Aixtron acquisition, it is seen as an inroad for Chinese investors wanting to enter Taiwan’s gaming market.
Germany, with its advanced technology, tops the list of nations where Chinese investors want to make acquisitions, but has only recently drafted legislation allowing restrictions — when deemed necessary — on industrial acquisitions from outside of the EU on telecommunications, IT, military and utilities entities, particularly when Germany’s national interests or security are concerned.
The legislation is aimed at four areas: when the investment entails the industrial policy of foreign governments; when the investors are subsidized by foreign governments; when the buyer is part of a state-run sector of a foreign country; and when the country of the investor places restrictions on German companies that want enter into its market.
China’s market is deemed insufficiently deregulated with asymmetrical conditions of entry, the two factors most often criticized by Western companies. Also, given the economic reality in China, the vast majority of investors there fall within the scope of the German regulations.
At the same time, according to Germany’s Foreign Economic Law, the government has the option to initiate a review of an acquisition as soon as the investors obtain a 25 percent stake, the threshold at which they gain voting rights on the company board.
As Chinese investors try to buy up a string of German technology companies, such as KUKA Robotics Corp, a manufacturer of industrial robots, Berlin is concerned about advanced technology, intellectual property rights and technological secrets flowing the way of China.
The German Federal Ministry for Economic Affairs and Energy, which is responsible for the reviews, is to embark upon a meticulous investigation of the true identities and funding sources of investors. It will also investigate the real motivations of investors in acquisitions involving core technologies.
It is not only the German government: Last month the US Department of Defense issued a report in which it said that the military was concerned about computers and handheld devices produced by China’s Lenovo Group Ltd and how they could represent a security threat to the department’s supply chain.
About 27 percent of Lenovo’s shares are held by the Chinese Academy of Sciences (CAS), a state research institute. A member of the CAS, Zhou Zhixin (周志鑫), was recently named to a senior post in the Chinese military’s new Strategic Support Force, a unit in charge of space, cyber and electronic warfare.
In Australia, too, the government has blocked offers from Chinese investors for electricity distributors, citing national security concerns, and four ranching families have joined forces to stop Chinese buyers acquiring the sprawling Kidman cattle empire.
These examples demonstrate that there has already been quite a backlash against Chinese investment attempts in advanced economies around the world.
As China rises and seeks to develop its industrial and military technologies, supplementing its own research and development through espionage and cybertheft, and lately also commercial acquisitions and financial game-playing, the situation has led to almost universal concern. Nations around the world are adopting measures and drafting legislation to maintain national security, safeguard core technologies, bolster industrial development, and protect jobs and competitive advantages.
The nations have not had to face direct, sustained threats to national security from China, and yet they are still adopting increasingly stringent measures against Chinese investment. If those countries feel the need to be this vigilant, Taiwan needs to be even more so.
Taiwan has legislation in place to address the issue of Chinese investment, placing restrictions on everything involving economic monopolies or oligarchies, or anything that might be harmful to economic development or financial stability,as well as things that are politically, socially or culturally sensitive, or pose national security concerns.
However, it is imperative to emphasize that Taiwan does not lack an investment agenda of its own. It is difficult to know for sure what the previous government’s intentions were when it pushed the cross-strait service trade agreement.
It is worth looking at the German government’s approach, with its four conditions to evaluate investment and the rules on investigating the motivations of investors.
This lesson needs to be applied by officials here when evaluating interest among Chinese investors.
Translated by Paul Cooper
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