Don’t expect protectionism from Germany

Germany is reviewing its powers to block foreign acquisitions after a spate of Chinese takeovers, but the government’s commitment to free trade beats its concerns about haemorrhaging strategic technologies and will limit any changes. A more hostile German tone towards Chinese takeovers set in last year when Berlin actively, though unsuccessfully, sought to line up a European offer to counter a Chinese bid for industrial robot maker Kuka.

Chancellor Angela Merkel had held up Kuka as an example of a cutting-edge German industrial company, telling workers on a visit to its Augsburg headquarters in 2015: “We can be proud that in Germany companies like Kuka, for example, are at home.” The takeover of Kuka by Chinese home appliance maker Midea hurt that pride. As a result, Berlin is reviewing its legal means of blocking foreign takeovers, while also pushing for European measures to safeguard key technologies.

The government review is being led by Economy Minister Sigmar Gabriel, whose centre-left Social Democrats (SPD) are the junior partner in Merkel’s ruling coalition with her conservative bloc. She is ultimately likely to rein him in. “If they change something, I don’t think it will be fundamental,” said Mikko Huotari at the Mercator Institute for China Studies (MERICS) in Berlin. “Nothing is going to happen if the chancellery does not push this.”

Merkel is deeply committed to free trade, adopting the motto “Shaping an Interconnected World” for Germany’s G20 presidency this year, with which she is aiming to resist U.S. President-elect Donald Trump’s protectionist instincts. Even during the Kuka takeover, Merkel stressed that Germany is generally open towards investments from China, though in return she said it expects that China opens up and offers the same investment conditions.

Since making those comments last June, Merkel has largely stayed out of the Chinese investment issue, leaving Gabriel to lead the review and ruffle feathers during a trip to Beijing in November, when he clashed with China’s trade minister. “We didn’t mince our words - on either side,” Gabriel told reporters after meeting the minister, when he pressed his concerns about Chinese companies buying German businesses while restricting German firms’ access to Chinese markets.

Hitting the brakes

Gabriel’s bluster is having a tangible impact: Chinese interest in a takeover of German lighting group Osram Licht AG has cooled amid signs of mounting political opposition here, two people familiar with the matter said. There is also greater scrutiny of M&A deals in China, where the authorities have begun checking some outbound investment projects as part of a crackdown on illegal crossborder currency deals due to concerns over increased pressure on China’s foreign exchange reserves and external payments.

These checks will make it harder for Chinese firms to justify takeovers of German targets unless there is a clear strategic fit, investment bankers say. “Both sides are stepping on the brakes a little,” said Berthold Fuerst, Deutsche Bank’s Germany co-head of corporate finance. Chinese firms withdrew four M&A deals in Germany last year, three of which had a combined value of $579 million, Thomson Reuters data shows. Data on the value of the fourth was not available.

In total, Chinese firms spent nearly $10 billion on 56 M&A deals here last year, Thomson Reuters data shows. Berlin is worried about losing strategic technologies, and trade unions are worried about jobs. While the German government reviews how it handles Chinese takeovers, investment bankers expect China-related deals here to cool off for a while. “Chinese corporate buyers can be expected to operate under the radar for a while and also work on deal alternatives, such as the acquisition of minority stakes,” said Barclays’ Germany chief Alexander Doll.

Behind the bluster... tinkering

Embarking on his review of government powers to block foreign takeovers, Gabriel said last June: “One cannot sacrifice German companies and German jobs on the altar of open markets.” Germany’s tool for restricting or blocking foreign takeovers is its Foreign Trade and Payments Act, or Aussenwirtschaftsgesetz. Yet Germany’s deep commitment to global free trade, from which it prospers, means major change is unlikely. German officials speak of an “adjustment” of the rules on foreign takeovers, rather than a “tightening”.

At present, the law only gives Berlin scope to intervene with “restrictions or obligations” in the event that an acquisition “endangers the public order or security of the Federal Republic of Germany”. It says such restrictions or obligations “can particularly be imposed” on military equipment, and with companies that produce IT technology products with “security functions to process classified state material”.

If the government were to interpret these criteria too widely, it would likely run up against resistance from the courts. Berlin has generally been ‘hands off’ about foreign acquisitions here. Of 338 government audits of foreign investments since 2008, only one has been initiated by the ministry. The others were all at the request of the foreign buyers, who wanted compliance clearance. One recent example of government intervention came in 2014, when Berlin imposed restrictions on BlackBerry’s acquisition of encryption technology firm Secusmart, only approving the deal after BlackBerry gave assurances confidential information would not be passed on to foreign spy agencies.

Berlin has yet to nix a Chinese takeover, though China’s Fujian Grand Chip Investment Fund dropped its bid for German chip equipment maker Aixtron last month after the United States blocked the deal on security grounds. Government sources, speaking on condition of anonymity, said the economy ministry could present proposals to change the rules on screening foreign takeovers before September’s federal election but it was unclear if these would be enacted by then.

Huotari at MERICS said Berlin could tighten the rules a bit: “What they might do is change the thresholds of when they look at things, and maybe add dual use goods to the lists of critical technologies.” Achieving a higher degree of scrutiny at EU level will also be difficult as France and Germany are the main countries concerned about hemorrhaging technological know-how to China. Other countries - eager for investment - have fewer concerns. Asked about how concerned China is about the extra attention Chinese acquisitions in Germany are now getting from Berlin, Chinese Foreign Ministry spokesman Geng Shuang said business deals between China and Germany were a “win-win”.

Business resistance

For many German businesses, China remains crucial. German automakers continue to enjoy success in the world’s largest car market. Data published by Volkswagen late last year showed Chinese demand will drive sales growth of its core brand in the coming months. But while the Chinese buy up firms with strategic technologies abroad, foreign auto brands are only allowed to manufacture cars in China through joint ventures with local partners, and typically are limited to two partners.

Furthermore, Beijing’s China 2025 plan calls for a progressive increase in domestic components in sectors such as advanced information technology and robotics. This means Germany’s export exposure to China, for years a source of economic strength, is turning into a risk for some sectors where the Chinese are becoming dominant. In recent years, Chinese companies have already unseated their German peers as the world’s biggest suppliers of solar cells.

Rather than a partner, German officials see China as a country with interests that it is seeking to promote - by acquiring know-how in technology and high-end engineering. “I have never sensed this so strongly before: China does not want any friends, nor partners, for China all that counts is their own interests,” one German delegate said during Gabriel’s November trip to China. Yet German business leaders are largely reluctant for their government to impede Chinese takeovers and acquisitions here. Many need the investment and find the Chinese reliable partners.

Putzmeister, a German maker of pumps for concrete, has seen its workers’ jobs secured and its sales rise nearly a third since Chinese competitor Sany bought it in 2012. “The experience with investors from China is consistently good,” said Thilo Brodtmann, chief of Germany’s VDMA engineering industry association. With industry in her ear, Merkel has asked her advisers to brief her on Chinese takeovers even as Gabriel leads his review. She is unlikely to stymie the investment inflow. One government source said: “We mustn’t throw the baby out with the bathwater.” —Reuters