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U.S. Officials Fear Chinese Predatory Acquisitions During Pandemic

7/2/2020
By Connie Lee

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The COVID-19 pandemic may open the door for China to acquire U.S. companies struggling during the economic downturn that has been wrought by the virus, lawmakers and officials are warning. 

Rep. Jim Banks, R-Ind., recently introduced a bill intended to mitigate the threat. “We fully expect these types of tactics and strategies to continue on the part of the Chinese,” Banks told National Defense. “This is a preventative measure to block these types of predatory acquisitions while America’s economy is on its knees due to the coronavirus.” 

The bill — known as the Restricting Predatory Acquisition During COVID-19 Act — would expand the number of potential acquisitions that are reviewed by the Committee on Foreign Investment in the United States and approved by the president. CFIUS is responsible for reviewing potential national security considerations of foreign investments in U.S. companies. 

Additionally, the legislation would prevent companies with ties to the Chinese government from owning more than 51 percent of shares in certain firms. 

These U.S. firms include critical infrastructure under the Defense Production Act of 1950; organizations engaged in production and dissemination of news media; or entities otherwise determined to be critical to national security, critical infrastructure, or culturally significant by the president, the legislation stated. 

Foreign acquisitions are national security concerns because they can lead to intellectual property theft, Banks said.

In recent years, Pentagon officials have worked to bolster the cybersecurity of its suppliers to prevent Chinese organizations from stealing important program information. The U.S. government has made other moves such as restricting equipment from Chinese telecommunications company Huawei. 

Banks said critical infrastructure companies within the national security realm will continue to be likely targets. 

“Often those acquisitions will occur — or get some ways down the process of the acquisition [before] becoming final — and then they rip off the IP, take it back to China and let those companies sort of dry up on the vine,” he said. “We fully anticipate that their tactics will continue.” 

Undersecretary of Defense Ellen Lord, the Pentagon’s top acquisition official, has also expressed concern over adversarial foreign investments during the pandemic. 

“It presents a greater attack surface, if you will, as there is uncertainty especially with small businesses as to whether their contracts will continue,” she said during a Pentagon press briefing in March. “We want to, basically, mitigate that uncertainty.” 

Former Deputy Assistant Secretary of Defense for Industrial Policy Jennifer Santos said tools such as the Committee on Foreign Investment in the United States will be “more important than ever.” Santos departed her position at the Pentagon in May, and will move over to a new role in the Navy.

Additionally, the Defense Department has been holding virtual events under the Trusted Capital Marketplace program, which aims to help defense companies find funding from trustworthy sources.  

“This program has been launched to get to the left of CFIUS by ensuring that critical companies are able to access clean capital that assists their commercialization,” Santos said during the briefing. 

The Small Business Administration has so far allocated over $350 billion to small businesses in the United States, Lord said in April. The program was part of the $2 trillion Coronavirus Aid, Relief and Economic Security, or CARES Act, passed in March.

The Defense Department’s Office of Small Business Programs has also been holding webinars warning companies about possible foreign investment during the pandemic, she said.

“The foreign investment issue is something that I have been tracking for the last couple years,” Lord said. “There is no question that we have adversarial capital coming into our markets for nefarious means.” 

Other countries have been preparing themselves for potential company acquisitions by China during the pandemic as well, according to GlobalData, a United Kingdom-based data and analytics firm. For instance, India updated its foreign direct investment policies in April to require government approval for all investments from countries along its borders. Germany, Spain, France and Italy have also passed rules to prevent “hostile takeovers and investments,” GlolbalData said. 

“Chinese companies’ acquisition of distressed foreign assets at much cheaper price[s] during [the] COVID-19 pandemic remains an area of concern with governments across several countries tightening their foreign direct investment policies,” Aurojyoti Bose, lead analyst at the organization, said in a news release.  

From January to April 2020, China announced 57 outbound mergers and acquisitions worth $9.9 billion and 145 outbound investments worth $4.5 billion, according to GlobalData. Nations where those key investments were made included the United States, India, the United Kingdom, Hong Kong, Japan, France, Germany, South Korea and Australia. 

To address multiple concerns involving China, Republican lawmakers formed a China task force in May. The task force is divided into five subcommittees to handle various issues such as those related to technology, propaganda and surveillance, Banks said. 

“There are a lot of other issues we have to address, like empowering CFIUS to be a more effective adjudicator of these types of investments,” he said.  

However, Banks’ bill and other legislation being put through the China task force does not currently have bipartisan support. Banks noted that the ongoing pandemic is delaying potential votes in Congress, and if the GOP is unable to move legislation forward, it may look at inserting language regarding Chinese acquisitions into the fiscal year 2021 National Defense Authorization Act. 

“I do sense there’s a window of opportunity here to address some major issues that have been on the back burner for far too long,” he said. “The NDAA presents an opportunity for us to raise this legislation and a lot of other issues.” 

The task force is putting together a report to address Chinese threats, he noted, which is slated for release in October. 

“Hopefully, that will be post-NDAA,” he said. “I see the upcoming NDAA as the holy grail of tackling the China threat in the near future or for many years to come.” 

If China does push to take advantage of the downturn in the economy, it will likely target companies that are “not well known, are not glamorous,” but are key parts of the defense industry, said Elisabeth Braw, director of the Modern Deterrence Project at the Royal United Services Institute, a London-based think tank.

For example, there may be a company that specializes in a key part for a tank or an aircraft such as the F-35, she said.

“If something happens to them, that can’t be made anymore,” she said in an interview. “Supply chains are incredibly fragile.”  

China tends to purchase companies that will help it meet its strategic aspirations, such as those outlined in its “Made in China 2025” plan, she noted. The policy outlines Beijing’s intention to improve its manufacturing presence in high-tech fields.  

Additionally, China has been known to attempt to retaliate against countries that make moves that upset Beijing, she noted. 

“When a country is planning to do something that China doesn’t like, then they send an ambassador or a foreign ministry spokesperson who says, ‘Oh yeah, there will be consequences,’” she said. This occurred in 2010 when Norway awarded a Nobel Peace Prize to a Chinese dissident, she noted. 

Chinese state media outlet The Global Times said in a May article that U.S. officials involved in legislation against China may be added to Beijing’s sanctions list. This may include sanctions against Missouri Attorney General Eric Schmitt for filing a lawsuit against Beijing for damages caused by the pandemic. The sanctions list includes at least four congressmen, according to the article. 

“China won’t just strike back symbolically, but will impose countermeasures that will make them feel the pain,” the state media article said. 
Banks said he would not be intimidated to back off by Chinese propaganda.

“In fact, at a time like this, it’s time to ratchet up the pressure,” he said. “My constituents know full well what China has done to our economy to take our jobs, steal our intellectual property, [as well as] the military threat that China poses.” 

Banks’ bill would also limit Chinese firms from purchasing U.S. media companies. “The big picture here is that if the totalitarian regime of China is able to purchase Western media, which traditionally has been open and fair, and they broadcast their propaganda in the United States of America, that’s a dangerous path forward on their part,” he said. 

Additionally, the United States needs to be cognizant about using cell phone apps owned by Chinese companies, he said. Beijing has pushed to expand its influence by developing or acquiring companies such as TikTok and Grindr, a popular dating app, he noted. 

“Before you download an app, …  you should know the origin of the app [and] who controls it,” Banks said. 

One way to prevent China from expanding its reach into U.S. industry would be to reduce the United States’ dependence on Chinese suppliers, Braw noted. 

“U.S. companies can prepare by not using a single-source supply chain in China,” she said. “The way in which China would retaliate against the U.S. would be to harm the U.S. economy. And if U.S. companies are not completely dependent on Chinese suppliers, then it wouldn’t be effective — it would be much more limited.” 

Braw said if Chinese organizations plan to take advantage of the pandemic to facilitate acquisitions, they will likely do so later down the line when U.S. companies begin running out of resources, which could happen between six months to a year from now. 

“Most companies have some sort of cash reserves, or some sort of government support,” Braw said. However, as time goes on “many companies will have used up that reserve or there won’t be government support anymore. And that’s when … [the] crisis will begin, or this trend of predatory acquisitions will become visible.”

Topics: Global Defense Market

Comments (1)

Re: U.S. Officials Fear Chinese Predatory Acquisitions During Pandemic

The article has a lot vague generalities and sound bites, but it is hard to tell if there is any meat to the threat. How many companies, and what were they, that have been taken over in this way? What companies are at risk? Are the Chinese mergers and investment in the last few months unusual? Versus what? What sanctions were threatened on Mr. Schmitt, and what effect does it have?

Charles Weis at 2:05 PM
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