Mergermarket, a leading U.S. mergers data reporter just published its global M&A report for 2018, revealing that investments from China in U.S. businesses fell by 95% as compared to 2016. A summary of the data in the Report shows the following:
1. Worldwide M&A activity was strong in 2018. “The transactions that did make it to the signing table reached USD 3.5tn worth of activity, ranking 2018 as the third-largest year on record by value. Average deal size saw its second-highest total value on record with USD 384.8m, just below the USD 400.3m peak reached in 2015.
2. Chinese investment in the U.S. virtually collapsed: “Chinese buys of US firms fell 94.6% to USD 3bn from a record USD 55.3bn in 2016.”
3. In response to being cut out of the United States, Chinese companies turned to Europe as a source of acquisition targets. “China’s bids in Europe increased 81.7% to USD 60.4bn from USD 33.2bn last year.”
Chinese companies did not lose interest in the United States. What happened is that the U.S. government’s security review system has made Chinese investment in any form of technology company virtually impossible. New legislation and regulations adopted in 2018 will make those investment barriers formal and permanent. These restrictions will survive any trade “deal” made on the current Section 301 tariff dispute with China. The investment restrictions have become part of the “new normal” in US-China economic relations.
How will this work? Foreign investment in the U.S. has long been controlled by the Committee on Foreign Investment in the United States (CFIUS) review process. This review procedure is managed by the Bureau of Industry and Security (BIS) of the Department of Commerce. In August of 2018, CFIUS’s jurisdiction was substantially expanded by the adoption of the Foreign Investment Risk Review Modernization Act (FIRRMA).
The new law expands CFIUS’s authority to review non-controlling investments by foreign companies (China) in U.S. companies that deal in critical and emerging technologies. As I previously reported in New Restrictions on High Tech Technology Transfers to China, BIS has begun rule-making to determine what specific technology will go on that list. The comment period for the rule making was extended to January 10, 2019 and as of right now, there are no reports on what exactly will go on the list.
BIS has though provided a listing of the general categories of technologies that will go on the list. I can simplify your review of this list (set forth below) by noting that it includes ANY form of technology in which a Chinese company would be interested.
1. Biotechnology, such as: (i) Nanobiology; (ii) Synthetic biology; (iii) Genomic and genetic engineering; or (iv) Neurotech
2. Artificial intelligence (AI) and machine learning technology, such as: (i) Neural networks and deep learning (e.g., brain modelling, time series prediction, classification); (ii) Evolution and genetic computation (e.g., genetic algorithms, genetic programming); (iii) Reinforcement learning; (iv)
3. Computer vision (e.g., object recognition, image understanding); (v) Expert systems (e.g., decision support systems, teaching systems); (vi) Speech and audio processing (e.g., speech recognition and production); (vii) Natural language processing (e.g., machine translation); (viii) Planning (e.g., scheduling, game playing); (ix) Audio and video manipulation technologies (e.g., voice cloning, deepfakes); (x) AI cloud technologies; or (xi) AI chipsets
4. Position, Navigation, and Timing (PNT) technology
5. Microprocessor technology, such as: (i) Systems-on-Chip (SoC); or (ii) Stacked Memory on Chip
6. Advanced computing technology, such as Memory-centric logic
Data analytics technology, such as: (i) Visualization; (ii) Automated analysis algorithms; or (iii) Context-aware computing
7. Quantum information and sensing technology, such as: (i) Quantum computing; (ii) Quantum encryption; or (iii) Quantum sensing
8. Logistics technology, such as: (i) Mobile electric power; (ii) Modeling and simulation; (iii) Total asset visibility; or (iv) Distribution-based Logistics Systems (DBLS)
9. Additive manufacturing (e.g., 3D printing)
10. Robotics, such as: (i) Micro-drone and micro-robotic systems; (ii) Swarming technology; (iii) Self-assembling robots; (iv) Molecular robotics; (v) Robot compliers; or (vi) Smart Dust
11. Brain-computer interfaces, such as: (i) Neural-controlled interfaces; (ii) Mind-machine interfaces; (iii) Direct neural interfaces; or (iv) Brain-machine interfaces
12. Hypersonics, such as: (i) Flight control algorithms; (ii) Propulsion technologies; (iii) Thermal protection systems; or (iv) Specialized materials (for structures, sensors, etc.)
13. Advanced materials, such as: (i) Adaptive camouflage; (ii) Functional textiles (e.g., advanced fiber and fabric technology); or (iii) Biomaterials
14. Advanced surveillance technologies, such as Faceprint and voiceprint technologies.
BIS reports that it is considering expanding this list to cover a separate category of “critical infrastructure.” Though no proposed rule on this category has been issued, it is assumed this will include telecommunications, power generation (nuclear power), utilities and transport (high speed rail).
As you can see from the above, the list includes virtually everything a Chinese company would want in the technology sector. Chinese companies are still free to purchase U.S. real estate as long as the building is not located next to the Trump Tower in Manhattan and so long as they can get the money out of China to do so. See Getting Money out of China to Buy a House: Not Your Issue. Chinese companies are also presumably free to purchase nail salons, massage parlors, movie studios, restaurants, retail stores, and hotels. But anything in the technology sector will be hands off. Note that it is not even required that CFIUS ultimately reject the transaction. The public notice required by the new rules and the extended period for review is enough to kill most business deals. This seems to be one of the motivations for the new regulations: kill the deal before CFIUS is required to make a politically motivated decision.
Chinese companies saw the writing on the wall and abandoned investment in the U.S. in 2018. With the new CIFIUS rules on investing in emerging technology, this situation will become permanent. For that reason, U.S. technology start ups looking for investments from China should for the most part plan to look elsewhere.
As discussed above, Chinese companies are now looking to Europe as a replacement for the U.S. market in tech company investments. In my next post (after I meet with a contingent of our Spain lawyers who will be in town) I will discuss the restrictions on investment from China coming on line in Europe.