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Chinese Companies Investing in The U.S. Tech Sector, CFIUS Remarks Threat To National Security

The U.S. is not the only country toughening screening measures for foreign investment. In December, the European Union proposed a new regulation for members to adopt “CFIUS-like” foreign investment review processes.

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This from March 27, 2019, shows the Grindr icon on a phone. This week, the Committee for Investment in the United States reportedly directed Beijing Kunlun Tech to divest itself of Grindr, a gay dating app, because of concern the data it collects could be used for blackmail. Pixabay

For decades, it was virtually unknown outside a small circle of investors, corporate lawyers and government officials.

But in recent years, the small interagency body known as the Committee for Investment in the United States has grown in prominence, propelled by a U.S. desire to use it as an instrument of national security and foreign policy.

This week, the panel made headlines after it reportedly directed Chinese gaming company Beijing Kunlun Tech to divest itself of Grindr, a popular gay dating app, because of concern the user data it collects could be used to blackmail military and intelligence personnel.

Operating out of the Treasury Department, the nine-member CFIUS (pronounced Cy-fius) reviews foreign investments in U.S. businesses to determine whether they pose a national security threat.

Notification was voluntary

Until last year, notifying the panel about such investments was voluntary, something Kunlun and California-based Grindr took advantage of when they closed a deal in 2016.

But given growing U.S. concern about Chinese companies with ties to Beijing buying businesses in sensitive U.S. industries, the committee’s rare intervention to undo the deal was hardly a surprise, said Harry Broadman, a former CFIUS member.

“I think anyone who was surprised by the decision really didn’t understand the legislative history, legislative landscape and the politics” of CFIUS, said Broadman, who is now a partner and chair of the emerging markets practice at consulting firm Berkley Research Group.

The action by CFIUS is the latest in a series aimed at Chinese companies investing in the U.S. tech sector and comes as the Trump administration wages a global campaign against telecom giant Huawei Technologies and remains locked in a trade dispute with Beijing. The U.S. says the state-linked company could gain access to critical telecom infrastructure and is urging allies to bar it from participating in their new 5G networks.

Technologies now subject to CFIUS review
Technologies now subject to CFIUS review. VOA

While the administration has yet to formulate a policy on Huawei, the world’s largest supplier of telecom equipment, the latest CFIUS action underscores how the U.S. is increasingly turning to the body to restrict Chinese investments across a broad swath of U.S. technology companies.

“CFIUS is one of the few tools that the government has that can be used on a case-by-case basis to try to untangle [a] web of dependencies and solve potential national security issues, and the government has become increasingly willing to use that tool more aggressively,” said Joshua Gruenspecht, an attorney at Wilson Sonsini Goodrich & Rosati in Washington, who represents companies before the committee.

CFIUS’s history has long been intertwined with politics and periodic public backlash against foreign investment in the U.S.

OPEC investments

In 1975 it was congressional concern over the Organization of the Petroleum Exporting Countries (OPEC) investments in U.S. stocks and bonds that led President Gerald Ford to set up the committee through an executive order. It was tasked with monitoring the impact of foreign investment in the United States but had little other authority.

In the years that followed, backlash against foreign acquisitions of certain U.S. firms led Congress to beef up the agency.

In 1988, spurred in part by a Japanese attempt to buy a U.S. semiconductor firm, Congress enshrined CFIUS in law, granting the president the authority to block mergers and acquisitions that threatened national security.

In 2007, outrage over CFIUS’s decision to approve the sale of management operations of six key U.S. ports to a Dubai port operator led Congress to pass new legislation, broadening the definition of national security and requiring greater scrutiny by CFIUS of certain types of foreign direct investment, according to the Congressional Research Service.

But by far the biggest change to how CFIUS reviews and approves foreign transactions came last summer when Congress passed the Foreign Investment Risk Review Modernization Act of 2018.

Slated to be fully implemented in 2020, the new law vastly expanded CFIUS’s jurisdiction and authority, requiring foreign companies that take even a non-controlling stake in a sensitive U.S. business to get the committee’s clearance.

While the new law did not mention China by name, concern about Chinese investments and national security dominated the debate that led to its enactment.

“There is no mistake that both the congressional intent and the executive intent has a clear eye on the role of China in the transactions,” Broadman said.

Threats to ‘technological superiority’

Under interim rules issued by the Treasury Department last fall, investments in U.S. businesses that develop and manufacture “critical technologies” in one or more of 27 designated industries are now subject to review by CFIUS. Most of the covered technologies are already subject to U.S. export controls. The designated industries are sectors where foreign investment “threatens to undermine U.S. technological superiority that is critical to U.S. national security,” according to the Treasury Department. They range from semiconductor machinery to aircraft manufacturing.

The new regulations mean that foreign companies seeking to invest in any of these technologies and industries must notify CFIUS at least 45 days prior to closing a deal. CFIUS will then have 30 days to clear the deal, propose a conditional approval or reject it outright. If parties to a transaction do not withdraw in response to CFIUS’s concerns, the president will be given 15 days to block it.

Transactions blocked by presidents
Transactions blocked by presidents. VOA

To date, U.S. presidents have blocked five deals — four of them involving Chinese companies. One was blocked by the late President George H.W. Bush in 1990, two by former President Barack Obama in 2012 and 2016, and two by President Donald Trump.

The number is deceptively small. A far greater number of deals are simply withdrawn by parties after they don’t get timely clearance or CFIUS opens a formal investigation. According to the Treasury Department, of the 942 notices of transactions filed with CFIUS between 2009 and 2016, 107 were withdrawn during the review or after an investigation.

In recent years, CFIUS has reviewed between 200 and 250 cases per year, according to Gruenspecht. But the number is likely to exceed 2,000 a year under the new CFIUS regime, he added.

The tighter scrutiny has raised questions about whether the new law strikes the right balance between encouraging foreign investment and protecting national security.

“I think the short answer is it’s too early to tell,” Gruenspecht said. However, he added, if the new law “becomes a recipe for taking foreign investment off the table for whole realms of new emerging technology, that crosses a lot of boundaries.”

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Concern in Europe

The U.S. is not the only country toughening screening measures for foreign investment. In December, the European Union proposed a new regulation for members to adopt “CFIUS-like” foreign investment review processes.

Gruenspecht said that while foreign investors are not “thrilled” about the additional CFIUS scrutiny, “a lot of Western nations are also saying, actually, ‘We totally understand the rational behind CFIUS and we’re looking to implement our own internal versions of CFIUS ourselves.’ ” (VOA)

Next Story

Here’s how China Invaded India with Its Technology

Chinese invasion decimates Indian mobile players, automakers next?

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China has slowly but strategically spread its roots in the Indian IT/technology and allied sectors in India. Pixabay

BY NISHANT ARORA

The Great Wall has slowly but strategically spread its roots in the Indian IT/technology and allied sectors in India, and there is no stopping the dragon which has only grown fierce — threatening industries after industries across the spectrum as India celebrates its 71th Republic Day.

From smartphones to automobile/electric vehicles, from digital payments and consumer electronics to social media, Chinese companies have created massive ripples in the country in the last couple of years, while American giants like Amazon and Facebook/WhatsApp face the political heat.

China, which is a fastest-growing trillion-dollar economy with a current GDP of $14.14 trillion is on the path to become a $20 trillion economy by 2024 and India is its “sweet spot” — with millions of consumers buying Chinese goods which has decimated domestic players in certain sectors.

Technology
Xiaomi, a Chinese company has also established itself well in the country. Pixabay

Take the case of smartphone industry. According to Hong Kong-based Counterpoint Research, Chinese smartphone brands captured 72 per cent of the market in 2019 compared to 60 per cent a year ago.

Behemoth like the BBK Group (the parent company of OPPO, Vivo, Realme and OnePlus brands) captured 37 per cent market share while Xiaomi (along with Redmi and POCO brands) came second at 28 per cent.

Led by Xiaomi and BBK Group, the Chinese brands have invested heavily in manufacturing devices and accessories in India.

Xiaomi currently has seven smartphone manufacturing plants in India in partnership with Taiwanese multinational electronics company Foxconn and Singapore-based technological manufacturer Flex Ltd.

More than 99 per cent of smartphones that are sold in India are manufactured locally. Across these seven plants, Xiaomi has employed more than 25,000 people.

Xiaomi also locally sources and assembles PCBA (Printed Circuit Board Assembly) in India. It has invested in setting up smart TV manufacturing plant in partnership with Dixon Technologies in Tirupati, Andhra Pradesh. The company last year infused Rs 3,500 crore into its Indian business unit.

Vivo has committed Rs 7,500 crore as part of its India expansion plan while Chinese company TCL is investing Rs 2,200 crore in Tirupati for plants that will produce mobile handsets and TV screens.

Amid the onslaught, where do you see domestic players like Micromax, Intex, Lava and Karbonn (known as ‘MILK’ brand)?

According to Navkendar Singh, Research Director, IDC India, while we cannot rule out any player making a comeback, especially in such a dynamic market like India, it looks nearly impossible for Indian mobile phones brands to win back any relevant portion of the market.

“China-based brands have been in India for almost 5 years plus now. In this time, apart from snatching the market share almost entirely from the other brands, they have gained immense knowledge about the workings of the India market in terms of consumer thinking, preferences, channel dynamics and marketing interventions,” Singh told IANS.

The Chinese brands are continuously committing resources and investments in all these key areas.

Technology
As China keeps introducing its technology in India, automobile makers will be affected. Pixabay

“Moreover, with more than 3/4th of the market being with 5 players, it is becoming increasingly challenging for any new or old brands like Indian brands to attempt any sustained comeback,” Singh elaborated.

So what are the options for the Indian smartphone players?

“Indian brands can surely look at the feature phone segment, where almost all major China-based brands have chosen to stay away from (expect Shenzhen-based Transsion Group which is the leader). Also, their brand salience remains strong with that consumer segment and Tier II and III markets,” said the IDC executive.

Cut to the Auto Expo 2020 and you will have a better understanding of how Chinese companies muscle their ways.

Top Chinese firms such as SAIC (owner of MG Motors), BYD (maker of electric buses and batteries), Great Wall (which is the biggest SUV maker in China) and FAW Haima, among others, have reserved nearly 20 per cent space in the annual jamboree of carmakers and industry leaders, at a time when the Indian automobile industry is going through a severe slowdown.

Bucking the slowdown trend, SAIC has recorded healthy sales ever since it launched the Hector SUV. At present, the carmaker’s first offering SUV Hector has an order book of 20,000 bookings. It has till date sold nearly 16,000 units of Hector since its launch in July 2019.

The Chinese automobile major has now launched its first electric offering called ZS EV, at a starting price of Rs 20.88 lakh. The company said that it has secured an overwhelming response for the new-age electric SUV, with over 2,800 bookings in 27 days.

To let its EVs run smoothly in India, MG Motor India is building a five-way EV charging ecosystem in association with major domain players.

China’s leading EV company, Sunra, has expressed interest in setting up a factory in the country as it sees India emerging as the world’s biggest market for electric bikes in the next four to five years.

The EV firm has partnered with 16 private companies in Delhi. Nearly six e-bike models of Sunra are under the Automotive Research Association of India (ARAI) test and two of its models are available in some of the showrooms.

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According to a TechSci Research report, electric vehicle market in India is forecast to reach nearly $2 billion by the financial year 2023.

As the Indian government firms up its EV plans, Chinese companies have already set their eyes on the EV sector roadmap in the country. (IANS)

One response to “Here’s how China Invaded India with Its Technology”

  1. This is a win-win relationship.Is India losing anything? Indians get job, foreign investments, latest technology from China. Do you think local Indian companies have the latest technology? Of course not. Its time for India to open up more, absorb these technologies and then go for home grown solutions. In short do to China what Chinese did to West.