Chinese companies increasingly are looking to the United States not just as an export market, but also as a place to set up business. While labor costs remain higher in the United States, many other costs are lower and U.S. production allows companies to serve their customers better, take advantage of Buy American provisions in government contracting, and avoid trade barriers. Bloomberg, in a December 2010 article titled Chinese Companies Expand to U.S. Soil and Markets, reported that Chinese companies invested $2.81 billion in U.S. projects or acquisitions during the first nine months of 2010. CNN Money reported that in 2010 Chinese companies acquired or announced they were establishing more than 50 companies.
Direct Chinese investment in the United States would likely be even greater were it not for press reports that have created the impression that the United States is hostile to investment from China. The press is full of terms such as CFIUS (the Committee on Foreign Investment in the United States) and FINSA (the Foreign Investment National Security Act), and tales of Chinese companies forced to abandon planned acquisitions of U.S. companies. Some Chinese companies have been forced to abandon their acquisition plans. However, each of those celebrated cases presented unique circumstances that would not exist for the vast majority of Chinese companies who may wish to set up operations in the United States. The reality is that the United States remains one of the world’s economies most open to foreign investment, including from China.
With a few very limited exceptions, such as airlines, foreigners are as free to invest in greenfield projects that create new businesses in the United States on the same basis as Americans. Recent Chinese greenfield investments in the United States include a $1 billion steel pipe mill that Tianjin Pipe is planning to build this year near Corpus Christi, Texas; Suntech Power Holdings’ solar panel assembly plant in Arizona; and American Yoncheng Gravure Cylinder plant in Spartanburg, South Carolina. These and many other Chinese greenfield investments have not faced any significant opposition and in many cases have been able to benefit from state and local government investment incentives.
The United States does have procedures for reviewing certain foreign acquisitions of existing businesses under FINSA, conducted by CFIUS. However, as the U.S. Treasury Department noted when it published its guidance on the CFIUS process in December 2008, “CFIUS focuses solely on any genuine national security concerns raised by a covered transaction, not on other national interests.”
The President of the United States may order the divestment of a foreigner’s controlling interest in a U.S. business should he determine that such control threatens U.S. “national security.” The CFIUS review system works through voluntary filings by those parties to proposed transactions who seek to take advantage of the safe harbor that a CFIUS approval prior to an acquisition provides. The safe harbor prevents the President from undoing the deal pursuant to his authority under FINSA.
The CFIUS process is disciplined by the authority FINSA provides CFIUS to self-initiate a review as to whether any “covered transaction” threatens U.S. national security at any time. That authority is seldom used, but its existence means that foreign acquirers should give serious consideration to voluntary CFIUS filings before any national security questions may be asked.
For most companies, CFIUS review takes only thirty days. By seeking it voluntarily before the acquisition is consummated, the foreign acquirer can obtain assurance that its investment would not be destroyed by a CFIUS review, perhaps years after the acquisition. For a small number of companies, CFIUS review may become an additional forty-five day in-depth investigation. Even at this stage, however, most acquisitions are approved, although often with conditions.
A handful of Chinese acquisitions of existing U.S. businesses have been stopped either as a result of the CFIUS review process, or as a result of intense political opposition. However, in each of those cases, circumstances unique to the particular transaction, and not any hostility to Chinese investment in general, are what caused the transaction to fail. For example, when Northwest Non Ferrous International Investment Co., Ltd. dropped its plans to acquire a Nevada mining company, the reason for the unfavorable CFIUS review was the extremely sensitive nature of U.S. military installations that were adjacent to the mines to be acquired. (See The United States Remains Open To Chinese Investment). Had those mines been located elsewhere, the acquisition likely would have sailed through with little opposition. There was no objection to Chinese acquisition of gold mines. The objection was to the proximity to military installations.
Another deal effectively blocked by a CFIUS review was the proposed acquisition in 2007 by Huawei Technologies Co. Ltd. (“Huawei”) of a significant ownership stake in 3Com Corporation. Two major concerns reportedly led CFIUS agencies to oppose the deal. The first was the inclusion in the deal of 3Com’s subsidiary Tipping Point, which sells network-based intrusion prevention equipment used by the Pentagon and U.S. intelligence agencies. The second was specific to Huawei. There were allegations in the press that Huawei had engaged in corporate espionage and intellectual property theft and was involved in high tech exports to Saddam Hussein’s regime and the Taliban. The combination of mission critical U.S. military technology and an acquirer with a particularly bad reputation from the perspective of U.S. national security interests caused that deal to fail, not any general opposition to Chinese companies acquiring specific U.S. businesses.
China National Offshore Oil Corporation’s (“CNOOC”) attempted acquisition in 2005 of Unocal, a U.S. energy company, was halted by congressional and public opposition before it could undergo a CFIUS review. That opposition arose because of concerns that critical energy supplies would pass out of US control. The fact that CNOOC is a Chinese state-owned enterprise did heighten those concerns. But it was the concern over access to critical energy supplies, and not anti-Chinese animus, that drove the opposition to that deal. Very few businesses that Chinese companies may seek to acquire will present these types of concerns. And, in hindsight, many observers think that, had CNOOC not pulled out, CFIUS would have approved. Unfortunately, CNOOC did not stay involved long enough to find out.
The United States remains committed to an open investment environment and treating foreign investors, including those from China, on an equal footing with their domestic competition in the vast majority of cases where the foreign investment does not threaten to impair the national security of the United States. It was for this reason that Congress set the initial CFIUS review deadline at thirty days, to coincide with the thirty day antitrust review period under the Hart-Scott-Rodino procedures.
Even after the implementation of FINSA, most cross-border mergers and acquisitions do not require a CFIUS review. Nevertheless, CFIUS national security reviews of proposed acquisitions of U.S. businesses are going to be a crucial part of the transaction for many foreign investments in existing U.S. businesses.
The most important considerations for success in a CFIUS review are understanding in advance the institutional and other concerns of the CFIUS member agencies, and creative thinking about how to demonstrate that those concerns are not threatened, or to mitigate them. In most cases early attention to the CFIUS process and to the legitimate concerns of the member agencies can ensure smooth and timely proceedings that result in CFIUS clearance without restrictions, or on terms that preserve the value of the transaction for all parties. Voluntary review, taking advantage of the law’s safe harbor provision, likely would have helped Chinese enterprises in all of the failed transactions, and sensitivity to possible political concerns would have contained the fallout and bruised feelings in those instances where national security legitimately prevailed.
To say the outcomes of such cases in China would have been no different or worse would not be good enough. The United States is not deliberately discriminating against foreign, nor specifically Chinese, investment, but like any sovereign it is mindful of its sovereignty, and its security.
Finally, CFIUS approval is not always the end of the story. It is important to pay attention to potential concerns of Congress and the general public. The law may authorize execution of a project. Popular opinion translated in Congress can still stop one.