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.
The Chinese will now know what’s inside them and how to switch them on and off.
-Alan Tonelson, U.S. Business and Industry Council
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 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.”
With additional reporting by Matthew Robertson
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