Germany is reviewing the country’s foreign trade regulation to limit outside access to its strategic technology by launching security probes prior to the takeover of German firms by non-European entities, particularly those from China, to protect strategic technologies and critical infrastructure projects.
Probes will be launched for the acquisition of 10% of a company in strategic or security-related sectors such as water, energy, telecommunications, finance, defence, and transportation. The German government has not specified exactly which industries will be included under the umbrella term “strategic technologies”, leaving the term intentionally vague for the time being.
Legislation giving the German government a veto over foreign mergers and acquisitions has been in place since 2004, but the threshold for government intervention has been lowered from 25% to 10%.
The new policy framework was first reported by the business daily Handelsblatt on December 16 and reflects a similar US policy, overseen by the Committee on Foreign Investment in the United States, which holds China’s FDI in check.
However, there are qualitative differences between the German-Chinese and the US-Chinese relationship. Germany is the only G7 economy with a trade surplus vis-à-vis China, particularly in industrial goods. In fact, China is Germany’s biggest trading partner, with a turnover that reached a peak of €200.71 billion in 2017.
China’s 2025 industrial vision
German companies are highly valued by China as they excel in high-value manufacturing as Beijing’s official policy is to have China emerge as a global leader in high-value industrial manufacturing by 2025.
For more than a decade, China’s Communist Party has targeted German companies, often medium-sized corporations, to scout their technology strategies. China’s state-owned companies now dominate the global market after acquiring concrete pumps market leader Putzmeister, mechanical engineering company Krauss-Maffei, offshore wind farm operator WindMW, waste management company EEW, and energy service provider Ista.
The most high-profile Chinese takeover in Germany was the 2016 acquisition of robotics manufacturer Kuka, which triggered a discussion about the need to defend German innovative companies. Earlier this year, Chinese carmaker, Geely, acquired just under 10% of iconic German brand Mercedes-Benz, which imbued the subject with political significance.
In July, the German federal government bought a minority stake in electricity transmission firm 50Hertz to thwart a Chinese takeover. That was followed a month later by a government veto of a Chinese bid for the takeover of machine-tool manufacturer Leifel Metal Spinning AG, which was seen as the beginning of a more assertively defensive strategy by Berlin.
Part of the issue at hand is that China is not open to similar strategic acquisitions. In its 2018 annual business confidence survey, the European Chamber of Commerce in China once again affirmed the widely held belief that the Chinese Communist Party under Xi Jinping continues to carry out policies that make China one of the most restrictive economies in the world.
No policy consensus
The timing of the new German policy appears to be part of a strategic coordination with Washington after a US delegation met last Friday with German foreign ministry officials in Berlin where the two sides discussed the American government’s drive to prevent the biggest telecommunications equipment manufacturer in the world, Huawei, from engaging in the development of 5G telecommunication networks in the West.
Germany’s concern, echoed by Washington, is that China retains technology transfer and joint venture requirements, which have long ceased to be appropriate as China is no longer an “emerging market.” In addition, there are concerns over Beijing’s sustained state subsidies.
Nonetheless, business groups are critical of Berlin’s new “protectionist” measures, not least of which the Chamber of Commerce and Industry and the Mechanical Engineering Industry Association. Both industrial stakeholders have made clear that such measures undermine the confidence of foreign investors into the German economy, and pointed out that the economy relies on open markets to maintain the biggest trade surplus in the world.