Fordham Law

A123 Systems Acquisition Triggers Security Concerns

CBLA Panel Discussion in The Epoch Times, January 31, 2013

Media Source

By Valentin Schmid
When a Chinese company buys a business in the United States, it is rarely a simple matter of price and business fit. National security concerns regularly intrude, as in the recent case of the Wanxiang Group, a Chinese industrial conglomerate with close ties to the Chinese Communist Party, buying A123 Systems, a U.S. battery maker that supplied key technology, some of it funded by taxpayers, to the military.
“The approved sale marks yet another step in the coordinated strategy by foreign countries to acquire leading US companies who are researching, developing and producing critical technologies,” Dean Popps, a former Army acquisition executive and co-chair of the Strategic Materials Advisory Council, a lobbying group, said Jan. 29.
A123 Systems Inc. makes advanced battery systems for use in automobiles, the electrical grid, as well as commercial and military applications. It had filed for bankruptcy in October 2012, having previously received a federal grant of $249.1 million.
China’s largest auto-parts maker Wanxiang, which had tried and failed to acquire the company before it filed for bankruptcy, won a court bidding process last December. Its offer of $256.6 million trumped competitive bids from U.S. Johnson Controls and Germany’s Siemens AG.
Republican Rep. Marsha Blackburn was also concerned about the sensitive technological assets that A123 developed and that might fall into the hands of the Chinese government.
“The Obama Administration, through a body known as the Committee on Foreign Investment in the United States (CFIUS), can—and should—block the sale to Wanxiang on the grounds that it would harm U.S. interests,” she wrote on The Hill’s Congress blog in December.
CFIUS approved the transaction Jan. 29, partly because the sale was modified to pre-empt concern by the regulatory body. A123 System’s military contracting business supplies batteries for soldiers, vehicles, and unmanned aircraft. To pre-empt any concern, the military contracting business was sold to Navitas System, a small battery maker from Illinois, for $2.2 million.
Wanxiang can now complete the acquisition of the $459.8 million in assets the Waltham, Mass.-based company owns. Splitting off the contracting business, however, does not allay the fears of critics of the transaction.
Technology for Civilian and Military Use Similar
“We live in a world where military procurement, especially of electronic systems, is dominated by dual-use products. Not that everything is off the shelf, there are certainly specialized versions of products and components produced for defense specific purposes, but they’re not so very different,” Alan Tonelson, a research fellow at the think tank U.S. Business and Industry Council told The Epoch Times.
He is concerned that the civilian technology also contains the nucleus of the technology used in military systems. On top, even some of the civilian technology applications might be critical to national interests.
“A123 is making equipment that’s going to be useful for these new smart grid power systems that [the United States] is going to depend on so heavily for its electricity; and the Chinese will now know what’s inside them and how to switch them on and off. Letting that knowledge transfer essentially to the Chinese government. And I have to assume that anything known of a significant nature of a Chinese corporation is soon known by the Chinese government,” Tonelson says.
Given the close relations, Lu Guanqiu, the president of the board of Wanxiang has to the Chinese Communist Party (CCP), this suspicion is not unfounded. Lu, who is ranked number 33 on Forbes’s Mainland China Rich List with assets of $1.87 billion, is also chief political comissar (commissioner) at Wanxiang. While some business people hold these titles pro forma, Lu is engaged in Party activities.
According to Chinese media, Wanxiang is said to have an “advanced Party branch,” the CCP body that Lu heads within the organization, and “outstanding Party workers.” He attended political meetings in Beijing in the past and frequently espouses Communist theories at gatherings with other company Party members.
Alan Tonelson thinks that the CFIUS disregarded these issues because it focuses more on investment income and a false understanding of security, “They take a very narrow definition, namely transactions that have to do with military specific systems,” he says.
Foreign Direct Investment is Desirable
Excluding security concerns, this focus on foreign direct investment (FDI) is actually desirable, says Selig Sacks Esq. co-chair of the U.S./China corporate practice at Foley & Lardner LLP.
“If you look historically, FDI has worked in countries, it has created more jobs, it has increased the amount of research and development, it has sponsored innovation, it has allowed for industries to be developed. … FDI is a resource to be treasured. It would be unfortunate if the United States would be losing out to Europe and elsewhere on FDI that would be coming into the United States,” he commented at a panel discussion hosted by Fordham Law school Jan. 28.
He believes that Chinese companies can learn to become good corporate citizens in the United States and care about jobs and the community. In turn, production and jobs can be boosted domestically. “There will be an enormous influx of Chinese capital into the United States,” which in 2012 increased 41 percent to $6.5 billion.
Euan Rellie, founder and senior managing director at investment bank Business Development Asia LLC, who also spoke at the Fordham event, agrees. “I think it will become a flood before too long,” and explains that Chinese companies are trying to build their brands in the United States. “Chinese companies have on the whole not succeeded in building global brands,” something the United States is “very good at.”
He also thinks that Wanxiang has an advantage over other Chinese companies, having built up a bilingual and bicultural workforce. “They know how U.S. M&A deals work,” he says.
Nonetheless, both Selig and Rellie provide words of caution about sensitive technologies. “There is still a lot of sensitivity among certain industries, anything technology or telecom related seems to be highly sensitive,” says Rellie, while Selig advises to “Isolate military applications from civilian [uses],” just like it has been done with A123 Systems. “American companies have to be sensitive to these security concerns,” he concludes.
Evidence That Chinese Companies are Targeting Sensitive Assets
While foreign direct investment is desirable, there is substantial evidence that Chinese companies go for sensitive U.S. assets.
“The U.S. Intelligence Community (‘USIC’) judges with moderate confidence that there is likely a coordinated strategy among one or more foreign governments or companies to acquire U.S. companies involved in research, development, or production of critical technologies for which the United States is a leading producer,” says the CFIUS annual report.
In 2010, CFIUS issued a recommendation to block the sale of 3Leaf Systems to Chinese telecommunication equipment company Huawei. 3Leaf created a technology that could make combine the computing power of several computers.
Another deal that fell through due to security concerns was the $1.8 billion acquisition of Hawker Beechcraft by Superior Aviation of Beijing Co. Hawker’s defense business was supposed to be sold separately to mitigate these concerns, but this created insurmountable problems concerning the company’s union labor force.
Alan Tonelson does not think that the administration is taking the threat of technology transfer and its consequences serious. “Just last week in his second Inaugural Address, the President declared that ‘We cannot cede to other nations the technology that will power new jobs and new industries – we must claim its promise.’ The President thought well enough of A123 and its potential to support it with more than $130 million in federal subsidies. Now he’s handing it on a silver platter to Beijing.”