U.S. Companies Brace for Wider Scrutiny of Chinese Deals

The Senate and House, with the backing of the White House, are working on bipartisan legislation to broaden the authority of the Committee on Foreign Investment in the U.S., a multi-agency body that has oversight of deals that could lead to the transfer of sensitive technology to rival countries. The current CFIUS statute doesn’t single out any country, but in recent years, the committee has often been focused on deals involving China.

[ Heidi Vogt | January 29, 2018 | Wall Street Journal]

Currently, CFIUS can recommend the president block foreign entities from buying majority stakes in U.S. companies; the new bill would let the committee make similar recommendations for deals involving minority investments and joint ventures, along with transactions that it determines involve “emerging technologies.”

The scope of the proposed legislation is broad. China requires foreign investors to form ventures with local partners, and Washington law firms say they are receiving a surge in inquiries over what it might mean for the large number of U.S. firms active in China. The country’s huge size has made it a market of interest for companies ranging from auto makers like General Motors Corp. , technology companies like Cisco Systems Inc. or other manufacturers like Caterpillar Inc. —all of which have local ventures in China.

It isn’t clear how broadly the new law would be enforced. For now, the most vocal corporate opponents are a handful of U.S. companies that have determined the new law might crimp business prospects by requiring companies to get the blessing of CFIUS for some joint ventures that involve shared U.S. technology.

IBM Corp. , for instance, last year agreed with China’s Wanda Internet Technology to share the cloud computing technology used in its Watson artificial intelligence system. Behind the strategy is the belief that embedding IBM’s technology in China’s business infrastructure would steer Chinese customers toward IBM as they seek future growth.

Other large U.S. corporations, from  General Electric Co.  to  Microsoft Corp. , see China as a crucial market for similar reasons.

IBM, among others, has said the bill—known as the Foreign Investment Risk Review Modernization Act—would hurt U.S. companies’ ability to compete globally. “Foreign competitors that do not face similar regulatory restrictions will seize global market opportunities while American companies are left watching from the sidelines,” IBM’s vice president of government and regulatory affairs, Christopher Padilla, testified at a recent Senate hearing.

Supporters of the bill, who think it could be signed into law later this year, aren’t convinced. “I am concerned that some of the recent witnesses before the House and Senate have major financial conflicts of interest that prohibit an objective evaluation of the security threats we face,” Rep. Robert Pittenger (R., N.C.)—one of the drafters of the bill—said in an email.

“The business models for IBM, Microsoft, and GE, for example, have led to the transfer of military applicable technologies to China that have likely aided the modernization of the Chinese military and intelligence agencies,” said Mr. Pittenger. The bill’s supporters say it complements and strengthens export regulations rather than duplicating them.

IBM and other opponents, while acknowledging national-security concerns, have suggested existing export controls to counter China rather than expanding the reach of CFIUS. IBM didn’t respond to requests for comment.

In an email, GE said while it supports the idea of changes to CFIUS, “it’s also important that any reform support America’s historical leadership in attracting foreign investment, not duplicate existing and well-established export control regimes, and preserve the ability of American companies to compete globally.” The company declined an interview. Microsoft declined to comment.

Several security experts say China has been sidestepping controls by taking minority stakes in U.S. technology companies or entering joint licensing ventures.

“There’s a very sophisticated and well-organized plan [by China] to acquire the technology and the reality is there are people here who want to sell it,” said William Reinsch, who was the Commerce Department’s undersecretary for export administration under President Bill Clinton.

And for many who have watched China easily avail itself of gaps in the CFIUS review process, the bill is the minimum that can be done in a fight that is likely to get much bigger. CFIUS blocked 10 deals between 2014 and 2016 over national-security concerns; China in recent years has accounted for the largest number of reviewed transactions.

“There’s a big trade war shootout coming up with China that I think, frankly, is overdue,” said Adm. Dennis Blair, co-chair of the Commission on the Theft of American Intellectual Property and a former U.S. director of national intelligence. He said among the key technologies right now are those involving artificial intelligence, data mining and pattern recognition.

Supporters point to recent deals that they say deserve greater scrutiny because they give China access to critical technology, such as Advanced Micro Devices Inc.’s 2016 joint venture with China’s Tianjin Haiguang Advanced Technology Investment Co., which gave the company access to technology similar to that used by  Intel Corp. in its chips. Tianjin Haiguang didn’t respond to requests for comment.

AMD spokesman Drew Prairie said in an email that “some commentators have mischaracterized” the venture and that AMD received a “U.S. government classification confirming that the technology was not restricted for export”—a reference to Commerce Department export controls. As for the CFIUS overhaul bill, Mr. Prairie said AMD supports strengthened security but wants to make sure it doesn’t have “unintended consequences.” Dawning Information Industry Co. , the largest shareholder of Tianjin Haiguang, didn’t respond to an email.

Many businesses are also supportive of the bill, including software maker Oracle Corp. , telecommunications firm Ericsson Inc., steelmaker Nucor Corp. and railroad-car-equipment maker  Greenbrier Co s. Many say an expanded CFIUS would set needed ground rules for working with Chinese firms.

Even openly supporting the bill, some companies worry, could expose them to problems—not in the U.S. but in China. They don’t want to be blocked from entering deals in China, or prevented from selling products in its booming economy.

“We’re quiet about our support because of fear of retaliation,” said an executive at a large U.S. technology company.


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