by Ariella Rotenberg and Peng Di
Ariella Rotenberg is a research associate in U.S. foreign policy at the Council on Foreign Relations. Peng Di, a former intern for the global health program, also contributed to this post.
Just this week, the Obama administration announced publicly that it would retaliate against China for coordinating a cyber attack that resulted in the theft of over twenty million American’s personal information. While attention in the public sphere is currently focused on the administration’s policy reversal, over the course of the past few weeks many technology fiends, finance experts, and cybersecurity analysts turned their attention to the potential buyout of the Boise, Idaho-based Micron Technology Inc. by Chinese company Tsinghua Unigroup. Micron’s signature product is a memory chip that stores data in cell phones and computers—but it also manufactures high-performance flash memory products that are necessary for a variety of quick data functions ranging from online advertising to airplane technology. Tsinghua Unigroup is a Chinese state-owned company and the investment arm of Tsinghua University (the alma mater of President Xi Jinping and former President Hu Jintao). Over the course of the past couple years, Unigroup has gone on more than one acquisition spree in the semiconductor industry, acquiring companies such as Spreadtrum and RDA, positioning itself as a powerhouse in the sector. As the dust settles after the initial offer for Micron, however, several obstacles remain for the successful purchase.
If the deal were to go through, it would be the largest takeover of an American company by a Chinese one. The deal would give China the fifth-largest chipmaker by revenue and the ability to compete with industry leaders such as Samsung and SK Hynix Inc. The Chinese government has aimed for years to reduce or eliminate its dependence on foreign chip technology. Although Zhao Weiguo, chairman of Unigroup, said that his strategy was not driven by political agenda, many find the statement hard to believe given the fact that Tsinghua Unigroup received 10 billion yuan from the Chinese State this past February earmarked for investment in chip companies. There is no doubt that such a deal is currently ringing alarm bells at the Committee on Foreign Investment (CFIUS) that operates out of the U.S. Treasury Department—a panel that reviews foreign acquisitions of U.S. businesses and that the deal would face a long regulatory review should it reach final stages. It is a particularly prickly time for regulators when it comes to U.S. cybersecurity issues and the Chinese government given the recent buzz surrounding a large-scale cyber breach at the Office of Personnel Management that potentially hacked personal information of over 20 million Americans.
The CFIUS review process has produced varied results in the past. In January 2014, it approved Chinese-based Lenovo Group Ltd.’s acquisition of Motorola Mobility LLC from Google Inc. That acquisition followed the 2013 landmark $4.7 billion acquisition by Shuanghui International of U.S. pork-processor Smithfield Foods—what was at the time the largest ever acquisition by a Chinese company of a U.S. company. However in 2011, due to so-called national security concerns, CFIUS blocked Huawei, a Chinese telecommunications company, from buying 3Leaf Systems. Past precedent unfortunately does not offer a clear indication of whether or not the Micron deal would be approved, although given the sensitivity of the semiconductor industry, bets are it would be shelved.
The case of Tsinghua and Micron is representative of an increasing number of reviews by the CFIUS of Chinese investments as well as a general rise in Chinese foreign investment in the United States. According to the CFIUS annual report, the committee has reviewed more investments from China than from any other country (and has since 2012). The number of Chinese investments reviewed doubled between 2011 and 2012. This may be a result in the rise in sheer number of Chinese investments in the United States, and not necessarily a result of growing U.S. scrutiny of Chinese investment. Although it is likely a combination of the two. According to the recently-released Rhodium Group’s analysis, in the first half of 2015 Chinese firms spent a total of $6.4 billion on 88 foreign direct investment transactions in the United States. The employment impact of this foreign direct investment is enormous. Also according to Rhodium Group’s analysis, “the number of Americans employed by Chinese-owned subsidiaries has risen in tandem with recent growth in China’s U.S. investment…fewer than 2,000 12 years ago to more than 27,000 today.”
Therefore, the impact of blocking Chinese foreign direct investment in the United States willy nilly for the so-called sake of cybersecurity could be somewhat of a double-edged sword insofar as it could hurt job-growth prospects. Indeed there are those who would question whether the United States uses national security as a thin veil to simply protect local companies from international competition. As Chinese investment continues to grow as the forecasters predict, so too will the potential number of Americans working for Chinese majority-holding companies. The United States certainly has an interest in approving Chinese foreign direct investment in U.S. companies for that reason, particularly if such companies are failing in American hands and have the potential for turnaround with Chinese investment. Especially as job growth remains a central measure of the health of the U.S. economy. That is, of course, if the acquisition is truly not a serious threat to national security.
As we all know, the cybersecurity and resulting national security risks are very real—although most information regarding the reality of ongoing attacks remain tucked away under the purview of U.S. intelligence agencies and largely hidden from the view of the public. In other areas of national security, if a national actor was blatantly attempting to gain information personal in nature or of national security concern, the U.S. commercial interaction with that country would certainly suffer. The rules of the game when it comes to cybersecurity are, in this sense, mostly unwritten. It is in China’s interest, if state-owned companies are going to increasingly seek large acquisitions of U.S. companies, to do its part in increasing transparency regarding its goals, especially in areas of sensitive technology acquisitions. Knowing the reasonable concern of the U.S. government, Chinese state-owned businesses should enter into such offers with eyes wide open, ready to make a clear and believable case for why the acquisition is of exclusive commercial interest and will not be used in ways the U.S. government fears. Perhaps also on a larger scale, clearer and more accessible standards on technology transfer-related transactions may be necessary for future international trades. More available policy guidance would be helpful for companies and governments on both sides to use their judgment before actually make actions, therefore avoiding unnecessary losses and meanwhile maintain a fair market.