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Business deals

Germany toughens stance on Chinese investment

Beijing's sweeteners for BMW and BASF prove insufficient to offset security fears

Although Germany previously allowed China’s Yantai Taihai Group to buy another supplier to the nuclear industry, the government has blocked it from buying Leifeld Metal Spinning. (Photo by Jens Kastner)

HAMBURG, Germany -- Germany's move to block a Chinese company from buying a local producer of specialized machinery tools is the latest sign that Berlin is toughening its stance on Chinese investments into strategic and security-related sectors.

Wednesday's decision to forbid Yantai Taihai Group from buying Leifeld Metal Spinning, whose machines produce high-specification metals for aerospace, nuclear and other applications, on security grounds marks the first time Berlin has stopped a Chinese acquisition since the government's screening powers were strengthened last year. The cabinet acted even though Yantai Taihai had canceled the deal hours earlier in the face of the government's signaled opposition.

The collapse of the sale came just five days after state-owned development bank KfW stepped in to acquire a 20% stake in local power network operator 50Hertz Transmission that State Grid Corp. of China was seeking.

Berlin has in recent years grudgingly watched as Chinese investors scooped up a number of industrial crown jewels, most prominently robotics maker Kuka, which was bought by Chinese appliance maker Midea Group in 2016 for 4.5 billion euros ($5.27 billion). Alarm was raised further after carmaker Zhejiang Geely Holding Group revealed in February that it had built a 9.7% stake in Daimler, making it the top shareholder of the owner of the Mercedes brand .

"China's strategic goals in the acquisitions have become more obvious over time," said Christian Schmidkonz, who researches China as a professor of international business at Munich Business School. "Geely's unexpected entry into Daimler has ultimately fueled suspicion of the investment goals and power of Chinese companies that are involved in the national 'Made in China 2025' master plan."

Germany's toughening stance comes despite warm words between Chancellor Angela Merkel and Chinese Premier Li Keqiang during Li's visit to Berlin last month. Amid rising trade tensions between the U.S. and both nations, China has been seeking to keep Europe's doors open to high-tech acquisitions and has recently doled out special privileges to German companies.

During Li's visit, he and Merkel signed around 20 agreements, including one allowing German chemical producer BASF to invest $10 billion to construct a factory in Guangdong Province that will be the first wholly owned by a foreign chemical maker. BMW meanwhile received approval to become the first foreign automaker to hold a 75% stake in a Chinese production joint venture, following Beijing's removal of a cap on foreign ownership in the sector.

"This shows that China's market opening in these areas isn't just talk, but action," Merkel said at a joint news conference with Li.

Germany's takeover rules were strengthened in July 2017, giving the government the right to veto not only defense-related foreign investments by non-EU companies but also those involving "critical infrastructure," including electricity supply. The Merkel administration also pushed for new EU-level controls on foreign takeovers.

Under its old rules, the German economist ministry had already moved in late 2016 to block the 675 million euro purchase of semiconductor equipment maker Aixtron by China's Fujian Grand Chip by withdrawing its approval for the deal on national security grounds.

According to research by accounting firm EY, there were 22 Chinese merger and acquisition deals in Germany in the first half of 2018, down from 26 a year earlier. Yantai Taihai has been among the dealmakers, buying Duisburg Tubes Production, an insolvent producer of zirconium tubes for the nuclear industry, late last year.

In conjunction with last week's KfW move to stop State Grid's purchase of the 50Hertz stake, Germany's finance and economy ministries issued a statement saying, "For security reasons, the German government has a strong interest in protecting critical energy infrastructure."

50Hertz's expertise in operating "electrical superhighways" that facilitate the integration of renewable power into the mainline transmission grids is said to have been of particular interest to Chinese economic planners. According to Handelsblatt newspaper, Beijing-based State Grid, the world's second-largest company by revenue, bid nearly 1 billion euros for the 20% stake.

The stake is being sold by Australian investment fund manager IFM Investors. In March, IFM had sold to KfW a previous 20% stake in 50Hertz that State Grid had sought.

Daniel Bauer, chairman of shareholder association Schutzgemeinschaft der Kapitalanleger, backs Berlin's interventions, arguing that China needs to go further with its opening measures.

"Both Leifeld and 50Hertz are companies relevant for national security, and China clearly upholds access limitations on the investment and marketing of German products," he said. "China must level the playing field significantly more for the German side to consider whether to allow such Chinese takeovers, and I hope this will be the case soon."

Others in Germany are worried that the failed deals will drive Chinese investors elsewhere.

"The government should come up with very clear explanations of why it stepped in because otherwise it really creates the impression of selectively putting investors from China at a disadvantage," said Volker Treier, deputy chief executive of the Association of German Chambers of Commerce.

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