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Business deals

China to create 'IT aircraft carrier' through tech megamerger

State-owned military suppliers CETC and Potevio prepare for US sanctions

A CETC booth at an expo in China: The state-owned company logged revenue of $35.3 billion in 2019. (Photo courtesy of China Electronic Technology Group Corp.)

BEIJING -- China Electronics Technology Group looks to absorb a fellow state-owned enterprise and create what would be the country's third-largest information technology company, with annual revenue topping $50 billion.

The target is China Putian Information Industry Group, better known as Potevio. Both China Electronics (CETC) and Potevio are among China's so-called central companies -- a set of fewer than 100 enterprises directly controlled by the central government -- and suppliers to the military.

The merger is intended to bolster CETC's resilience to U.S. sanctions targeting group companies including Hikvision, the world's top maker of security cameras.

Eastern Communications, a publicly listed subsidiary of Potevio, said Wednesday night that the parent had informed it of a planned reorganization that would see Potevio absorbed into CETC. Authorities have yet to give the green light, according to Eastern Communications, and no time frame was provided.

One Chinese media report said the deal would create an "IT aircraft carrier." The two companies' total annual revenue of $53 billion in 2019 would put the combined entity behind only Huawei Technologies and Lenovo Group in China's IT industry.

CETC, which logged 227.6 billion yuan ($35.3 billion at current rates) in revenue that year, is said to be the only information technology supplier able to meet the armed forces' full range of needs, including networks, IT infrastructure and electronic equipment such as radar.

The company also handles electronic parts and systems for missiles and reportedly produced key components for satellites in the Beidou network, China's answer to the U.S. Global Positioning System. Its operations cover a wide variety of fields, including semiconductors and antennas for fifth-generation wireless infrastructure as well as equipment for autonomous-driving technology.

CETC is said to be the only IT supplier able to meet the Chinese armed forces' full range of needs.   © Kyodo

Potevio's strengths involve wireless communications and security. It supplies telecommunications systems to China's military as well as to public security and police, along with semiconductors for government networks and security and energy systems using 5G technology. The company reported 116.4 billion yuan in revenue in 2019.

The U.S. has taken aim at what it sees as vulnerabilities in China's tech sector. Washington restricted exports to CETC and subsidiaries in 2018 amid concerns about American products being used in Chinese military activities, and some group companies were hit with what amounted to a ban in 2020. Hikvision has been targeted by sanctions as well.

China seeks to make the sector more self-reliant in response. Beijing's new five-year plan starting this year calls for "focusing on development of important technologies" in high-tech fields, Hao Peng, chairman of the State-owned Assets Supervision and Administration Commission, told reporters Tuesday. SASAC oversees China's state-owned enterprises.

"We will reorganize and integrate [companies] in key areas to improve competitiveness," Hao said. State-owned companies like CETC are at the forefront of this effort.

The "dual circulation" strategy for economic growth set out by President Xi Jinping's government in July entails building up domestic supply chains for key industries to ensure the economy can keep running without depending on imports from the U.S. or elsewhere.

Cutting-edge fields including 5G and other telecommunications, aerospace and autonomous driving are seen as top priorities. Beijing came out with policies last year to support the semiconductor industry, and in January announced a plan to expand the market for electronic components -- an important foundation for the tech sector -- by about 20% from 2019 levels by 2023.

Meanwhile, the U.S. is working to reduce its reliance on China in the high-tech sector. President Joe Biden signed an executive order Wednesday to secure supply chains for strategic products like semiconductors. He aims to identify vulnerabilities in existing supply chains and address them through diversification and increased American output.

Washington also is urging its partners to shift away from Chinese tech. Beijing is expected to accelerate its own efforts to decouple from the U.S. in response.

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