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Business Management

Watchdogs get tough on China's US investments

Not many who work outside tech, and even a fair few of those who do, will have heard of the Committee on Foreign Investment in the United States (CFIUS). Yet this inter-agency body, whose job it is to scrutinise whether M&A deals are a threat to national security, has just forced a Chinese firm to pull out of a $4bn investment in storage giant Western Digital (WD). Proponents will argue that it’s about time the US clamped down on a rampant China which has already shown itself more than happy to steal trade secrets by the backdoor.

But there is also a risk that this little known committee – whose decisions aren’t explained and can’t be challenged – threatens to harm the business interests of US tech companies. There may be a case for arguing that CFIUS needs to pick its battles more carefully over the coming years to avoid a full on digital Cold War with China.

Sticking its oar in

Western Digital wanted to sell a 15% stake in its company to Chinese state-backed Tsinghua Unisplendour for around $3.8bn. The latter’s decision to pull out came after CFIUS announced that it would be investigating the deal. Unsurprisingly WD shares fell over 7% as a result on the day, and although it is still pushing ahead with a deal to acquire rival SanDisk, it will be at a lower offer.  

Was CFIUS right to investigate the deal? At first sight, a 15% stake wouldn’t seem to warrant such intrusion, but reports say it would have made Tsinghua the largest investor in WD and entitled to a seat on the board. A more relevant question may be, would a seat at the board of a storage company really represent a national security risk to the US? After all, we’re not talking about telecoms infrastructure, encryption tech or semiconductors here. Well, Gartner research VP Joe Unsworth thinks yes.

“It is worth further scrutiny to determine if there is a national security risk because there are only three hard disk drive companies remaining in the world – [the others being] Toshiba in Japan and Seagate in the US,” he told me. 

“It is also worth investigation when Western Digital is buying SanDisk – one of two US NAND Flash memory makers – given how this memory technology also has strategic importance to China’s national interests.”

Tit-for-tat

When it comes to US-China relations the running story for some years now has been the decline of one superpower and the rise of another. And nowhere has this been more evident than in the growth of M&A activity by Chinese firms in the States. Reuters claims Chinese companies have been responsible for a whopping $23 billion in announced offers this year, although that’s not just tech related. It also claims that while CFIUS doesn’t often officially forbid deals, “several times a year it has informally urged companies to scrap merger plans and they have complied.”

On paper, the committee certainly appears to have been ramping up its activity. In January it refused to grant clearance for a multi-billion dollar sale by Philips of its Lumileds business to a consortium led by Chinese-funded GO Scale Capital. And in February Fairfield Semiconductor rejected a bid from China Resources Microelectronics and Hua Capital Management citing concerns it would be rejected by CFIUS. It would seem now that a mooted purchase of US chip giant Micron by Tsinghua Unigroup will almost certainly come under similar scrutiny.

“Just take a look at CFIUS references on Google,” Forrester principal analyst Richard Fichera told me in an email. “It appears that they are getting more active and more inclined to disallow deals than previously.”

A long history

National security concerns over Chinese tech M&A activity in the States stretch back even longer, of course, most notably to a House Intelligence Committee report of 2012 which recommended telecoms infrastructure firms Huawei and ZTE be effectively frozen out of the US market. The difference with CFIUS, though, is that its inner workings are said to be notoriously hard to fathom, and decisions cannot be challenged.

Yet it’s hard to argue against greater scrutiny of China tech deals when Beijing has already been shown to be more than willing to use fair means and foul to acquire IP and sensitive data to further economic and geo-political aims. Even though President Obama said the two sides had reached a “common understanding” to leave economically motivated cyber espionage alone, the attacks keep on coming. Acquiring IP through M&A could be viewed as just another method of achieving the same ends.

It’s also clear that at present the cards are stacked in China’s favour. It’s already made it difficult for US firms over there through fines, intimidation, antitrust investigations and censorship. Qualcomm and Microsoft are the most recent victims, while Google, Twitter, Facebook and others have had services outright blocked or banned.

This isn’t just a China issue, of course. The United Kingdom ran in a close second in terms of the number of national security filings its firms made with CFIUS in 2014 (21 versus 24), according to the New York Times. But it’s between the two superpowers of the US and China where the key global battle for tech supremacy will play out over the next decade.

The risk is that a harder line stance by CFIUS going forward will only escalate things to a stifling Sino-US digital Cold War, with consumers and enterprise technology users, as usual, trapped in the middle.

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Phil Muncaster

Phil Muncaster has been writing about technology since joining IT Week as a reporter in 2005. After leaving his post as news editor of online site V3 in 2012, Phil spent over two years covering the Asian tech scene from his base in Hong Kong. Now back in London, he always has one eye on what's happening out East.

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