Aixtron and Ledvance: Climate Change for Chinese Investments in Germany?

Recent news about the German government intervening in two prominent acquisitions of German companies by Chinese investors has triggered a concern in the Chinese business community: Will Germany take a more protectionist stance towards Chinese investments in the future? This article explains the background to the German government interventions and gives an outlook on the future German investment climate for Chinese companies.

The Cases Aixtron and Ledvance

Fujian Grand Chip Investment Fund made a public takeover bid for all of the shares in German technology company Aixtron in May 2016. The takeover plans were subsequently notified to the German Ministry for Economic Affairs for an investment review. In September, the Ministry granted a so-called certificate of non-objection. In October, however, the Ministry withdrew the certificate of non-objection and initiated a re-examination of the transaction. The Ministry explained that it had received previously unknown information related to public safety. According to press reports, a US intelligence service warned the Ministry that China could use Aixtron chips for its nuclear program. The transaction is now on hold.

Ledvance is a business division of German lighting manufacturer Osram. A consortium led by Shenzen-based LED manufacturer M.L.S Electronics announced its plans to acquire Ledvance for more than EUR 400 million. The planned acquisition was notified to the German Ministry for Economic Affairs for an investment review. The Ministry reacted by initiating an in-depth review. This transaction, too, is now on hold.

In the run-up of a recent official visit to China, Germany's Minister of Economic Affairs Sigmar Gabriel publically called for a "level playing field" in foreign investments. He has also repeatedly criticized obstacles and discriminatory requirements for German companies when acquiring Chinese companies. Meanwhile in Brussels, European Union officials, supported by Germany, plan to maintain strict anti-dumping rules for Chinese imports despite China's now 15-year WTO membership.

Changes in the Climate for Chinese Investments in Germany Ahead?

Chinese companies have been very active in the German M&A market recently: In the first half of 2016 alone, Chinese companies paid more than EUR 10 billion (approx. CNY 74 billion) to acquire 37 German companies. Both figures show a sharp increase compared with 2015. Chinese investors are especially interested in industrial companies with strong technological competence.

The largest deal by far was the acquisition of robot-maker Kuka by Midea. In Germany, this deal caused public debates about the role of Chinese investments. Some commentators expressed their fear that Chinese companies might systematically buy up the "crown jewels" of the German industry and then transfer their know-how to China.

The recent developments also show that China's transition from the world's work bench to "Made in China 2025" has not gone unnoticed in Germany: The Chinese industry is considered a serious competitor to Germany's industry. In this context, the actions and speeches of Germany's Minister of Economic Affairs can be understood as aiming at establishing a fair competition between German and Chinese firms. As a social democrat, he seeks to tackle what he considers – in his own words – "foul play".

Regarding the cases Aixtron and Ledvance – they have not yet been decided. It is important to understand that the German government may only prohibit these acquisitions for reasons of public security. Any decision would be subject to review before German and European Union courts, too. Therefore, the danger that foreign investment reviews may be misused for industrial policy is limited. In previous cases, the German government has demonstrated a reasonable judgment and has reduced interventions to a minimum.

We expect Chinese investments to be more often a subject of German investment reviews in the future. This applies in particular to buyers owned or controlled by the Chinese state. Chinese investors should be aware of this and adapt their M&A timetables accordingly. In contrast, we do not see a significant change in the general climate for investments in Germany: As in the past, also in the future will Germany be open to Chinese investments. The exceptional cases Aixtron and Ledvance show how favourable the conditions for Chinese investments in Germany are in general.

As a practical matter, it is important for Chinese investors to adapt their M&A communication strategies: Chinese companies are often unknown to the German public. Many possible concerns can be prevented simply by opening up and highlighting a takeover's local benefits, particularly where German jobs are preserved.

Background: German Foreign Investment Reviews

Foreign investment reviews are common throughout the world: in China, the United States, Australia etc. The German framework for investment reviews consists of two different procedures: A sector-specific investment review and a general investment review. Both procedures aim to safeguard public security; an investment may not be prohibited for industrial policy or similar reasons.

The sector-specific investment review applies where:

  • The target is an existing German company.
  • 25% or more of the voting rights are acquired.
  • The investor is not a German resident.
  • The target's business activities are related to war weapons or IT security for classified information.

Such an acquisition must be notified by the investor to the German Ministry for Economic Affairs. The German government may only prohibit the acquisition or impose conditions on the acquisition if it endangers essential German security interests. Otherwise, an approval will be granted.

The general investment review applies where:

  • The target is an existing German company.
  • 25% or more of the voting rights are acquired.
  • The investor is not a resident of a European Union or European Free Trade Association member state.

For such an acquisition, the German Ministry for Economic Affairs may initiate a review within three months after the acquisition agreement has been concluded. The acquisition may only be prohibited if it endangers German public order or security. The Ministry clears acquisitions by issuing a certificate of non-objection.

An investor may also voluntarily notify such an acquisition to avoid uncertainty. We recommend a notification where the target's activities might possibly, even in the remotest way, raise German public order or security concerns. Prime examples are investments in critical infrastructure like telecommunication networks, electricity grids or fuel supply. We also recommend a voluntary application if the target's business activities relate to, for example, dual use goods, nuclear safety, surveillance technology or equipment for security forces. However, no definitive list exists of business activities that affect public order or security. Therefore, an investor has to assess the intervention risks on its own and – ideally – take expert advice.

If you have any questions regarding this matter please feel don't hesitate to contact Georg Philipp Cotta or Christoph Heinrich.


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