The CFIUS, the American policeman of foreign acquisitions, is sounding the alarm on Chinese-led investments in start-ups and funds. The United States calls on its allies to stand up.
Vetos on Huawei equipment in Europe, Australia, Japan, arrest in Canada of the number 2 of the Chinese telecoms giant, intelligence blackmail with Germany … The United States is further increasing pressure on foreign governments so that they are toughening their tone against China.
Meeting in mid-March with some sixty OECD countries in a closed-door working group on national security issues and foreign acquisitions, the American gendarme, the CFIUS pointed to a new threat emerging from the Middle Empire : the investment of Chinese groups in start-ups in Silicon Valley and private equity funds. A way for China, point the United States, to circumvent the obstacle of controls on the acquisitions of mature companies very well identified by the national supervisory bodies.
Investments under the radar
These transactions are beyond their control despite the tightening of the measures decided on last summer. “Start-ups or research and innovation projects are outside our usual control. This can pose security problems just like other companies ”, explain people close to CFIUS.
The supervisory body is thus stepping up its collaboration with the trade department to systematically identify these operations under the radar and intends to strengthen “its decisions last summer”. The CFIUS has even created a dedicated office to fulfill this mission.
US tightens control over minority tickets
The CFIUS (Committee on Foreign Investment in the United States), the body overseeing foreign acquisitions, has obtained a new mandate to oversee investments of less than 10% “active”. However, most minority investments in venture capital are dormant, not to mention the acquisition of financial stakes in innovative laboratories, like Alibaba in the United States, Russia, Israel or Singapore. In November, the committee therefore launched a pilot program to target all technologies deemed critical, ranging from robotics, to artificial intelligence, and data analysis, regardless of the shareholding threshold.
The United States are backing up their alert with studies by the OECD and the American firm Rhodium Group. Traditional Chinese foreign acquisitions collapsed by 84% last year across the Atlantic, to $ 4.8 billion (compared to $ 29 billion in 2017 and $ 46 billion in 2016).
Fall in acquisitions in the United States
At the same time, Chinese investment in venture capital in the United States peaked in 2018, at $ 3.3 billion, with venture funds from the Middle Empire coming in at 260 rounds of table. Chinese funds have invested in Uber, Lyft, but also more sensitive technologies such as Barefoot, a start-up that manufactures programmable switches for computer networks, or the young voice recognition growth AISense.
Pressure from the authorities is starting to be felt, however. Peter Kuo, whose company Silicon Valley Global connects Chinese investors to American start-ups, was unable to match any Chinese last year, Reuters reported. Entrepreneurs prefer to abandon the use of Chinese investors and access to the world’s second-largest economy.
Or “If these investments now avoid the United States, this could have a carry-over effect to Europe”, says Agatha Kratz, associate director of the Rhodium Group research firm. The United States is therefore trying to mobilize its allies. But this outcry does not convince everyone.
Risk of reflux to Europe
France maintains a fundamental principle of openness despite a strengthened legislative framework. ” How far are you going to go down to review a stake, or expand the number of critical areas?, wonders for his part a representative of the Swiss authorities. We can find all the arguments for this multiplication of controls, it’s a little worrying ».
A close friend of Israeli institutions, great champions of tech and cybersecurity, abounds: “If you are a G7 country, tightening controls is not a problem. On the other hand, the question arises for the smaller economies which depend on foreign investment ”.