MULTINATIONALS: More Transparency Needed for National Security Claims

Bottom line: Washington and Beijing risk seriously hindering global trade and M&A in high-tech products in the name of national security, and should be more transparent when blocking deals and trade over such concerns.

National security vetoes look increasingly protectionist

The national security debate was in 2 major headlines last week, as word emerged that Washington might consider blocking proposed major acquisitions of US companies by Chinese construction equipment giant Zoomlion (HKEx: 1157; Shenzhen: 000157) and memory chip maker Tsinghua Unisplendour. While neither deal has been vetoed yet, the talk comes less than a year after several Washington politicians expressed reservations that ultimately killed another deal by a Chinese company to purchase leading US memory chip maker Micron (Nasdaq: MU).

With the US entering an election year, the likelihood of more deals being killed for similar reasons could grow due to opposition from politicians seeking to curry favor from voters. The growing noise from Washington comes against a backdrop of similar moves by Beijing, which last year rolled out a new national security law that foreign technology firms said was overly invasive and discriminates against them.
National security is a valid concern for any country, and all nations should have the right to take measures to protect their own interests. But Washington and Beijing should also try to be more transparent when making their decisions, which are often cloaked in secrecy with little explanation for why they believe certain companies, products or acquisitions may compromise national security.

The national security debate that has spread into the corporate realms in both China and the US dates back to 2013, when Washington banned the import of telecoms networking equipment made by rising Chinese giant Huawei. Washington officials cited their belief that Huawei is closely tied to Beijing, which might use the company’s equipment for spying if it was installed in US telecoms networks, even though there was no evidence of such abuse.

The Edward Snowden scandal just months later further heightened tensions, after the former government contractor revealed a massive electronic snooping program by Washington that targeted everyone from US allies to Huawei and other Chinese targets. After that Beijing took moves to restrict the sale of foreign technology to government agencies and big state-run companies, even though again there was no evidence that products from Cisco (Nasdaq: CSCO), IBM (NYSE: IBM), HP (NYSE: HPQ) and other global technology giants posed any unusual risk to national security.

Beijing formalized many of those restrictions last year by implementing a new national security law that effectively forced foreign technology companies to enter joint ventures controlled by local partners if they wanted to continue selling to government entities and big state run companies.

New Milestone

Last year the tensions crossed yet another milestone when 2 powerful US senators expressed concerns about a potential deal that would have seen Tsinghua Unigroup purchase leading US memory chip maker Micron for $23 billion. Advocates of the deal pointed out that most of Micron’s technology was already available throughout the world, and no evidence was ever presented to show why such a deal would compromise US national security.

Now the tensions could kill 2 more deals, as growing signs emerge that the Committee on Foreign Investment in the United States (CFIUS), the Washington agency that reviews all cross-border deals for national security concerns, might review and block recently proposed purchases by Tsinghua Unisplendour and Zoomlion. The first deal had Beijing-based Unisplendour announce last fall it would buy 15 percent of US hard drive giant Western Digital (Nasdaq: WDC) for $3.8 billion. The second has Hunan-based Zoomlion pursuing a $3.3 billion purchase of Terex (NYSE: TEX), a US maker of cranes used for building construction and port operations.

In the Unisplendour case, CFIUS recently indicated it may decide it has jurisdiction to review the case, even though Western Digital previously said it believes the deal should not require a national security review. (English article) In the other case, sources working on the deal said last week they are moving ahead with consideration of Zoomlion’s unsolicited bid for Terex, even as they worry that CFIUS may ultimately block such a deal. (English article)

Those 2 latest developments come just weeks after Dutch electronics giant Philips (Amsterdam: PHG) was forced to scrap a planned $3.3 billion sale of its lighting business to a consortium backed by Chinese investors due to objections by CFIUS.

This growing hand of governments in cross-border commerce is a worrisome trend that could significantly impact global development of the important high-technology sector. National security is certainly a valid concern, but shouldn’t be used as an excuse for moves that sometimes looks suspiciously protectionist. Accordingly, both Washington and Beijing should try to be more transparent and clearly explain the rationale behind their decisions when they cite national security risks for blocking deals and making decisions that hinder cross-border trade.

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