At the beginning of July, the federal government did not approve the acquisition of MAN Energy Solutions, Volkswagen’s gas and diesel turbine division, by a Chinese buyer. The reason was security concerns regarding the buyer, a subsidiary of China State Shipbuilding Corp, which, among other things, builds warships for the Chinese navy. There was too much concern that German technology would be used to modernize the world’s largest war fleet. There were a number of other rejections, most of which concerned Chinese investments. This could give the impression that investment controls are increasingly being used as a means of economic decoupling from trading partner China. But the impression is deceptive: only things that have a clear connection to critical infrastructure or technology, armaments or the particularly sensitive semiconductor industry are actually prohibited. The majority of the investment projects are approved. The geopolitical and trade policy situation between Germany and China is tense. The Covid pandemic has shown many people the vulnerability of international supply chains and the value of economic autonomy. A climate that is increasingly critical of globalization is emerging among the population, with demands for greater control of direct investments from non-EU countries at its center. The focus is always on China. The Middle Kingdom is striving to influence international trade with ambitious programs such as “Made in China 2025” or the New Silk Road (Belt and Road Initiative, BRI). At the same time, the country is attempting to position itself as a technology leader in future and key technologies. In the West, this is met with suspicion – and occasionally leads to interventions by the authorities. Their focus on investment projects of Chinese origin cannot be dismissed. Almost all publicly known prohibition orders have so far affected Chinese buyers: the planned takeovers of the satellite technology company IMST, Heyer Medical AG, a production site of the semiconductor manufacturer Elmos, the stake in the Hamburg port terminal Tollerort – and now also MAN Energy Solutions. Other investment projects of Chinese origin were withdrawn in order to avoid a ban, such as the acquisition of Leifeld Metal Spinning GmbH, the semiconductor manufacturer Aixtron and ERS Electronic, which also operates in the semiconductor sector.
The impact of this decision-making practice on the investment climate is difficult to estimate. According to a study by the Mercator Institute for China Studies, Chinese direct investment in European companies will have reached its lowest level since 2010 in 2023. But the investment volume from other third countries has also fallen, which is probably due to the weakened global economy. Nevertheless, two developments are noteworthy: Chinese direct investments in Europe are increasingly concentrated on the politically friendly partner Hungary (2023: 44 percent of investments in Europe). The proportion of so-called greenfield investments, i.e. the establishment of a completely new business operation “on a greenfield site”, has also increased significantly, especially in the area of battery cell production. This form of direct investment is not subject to investment controls in most EU member states. A picture of isolation from China could easily be drawn. But the annual case numbers published by the Ministry of Economic Affairs tell a different story. In the past three years, measures restricting employment were ordered in less than five percent of the audit cases, i.e. bans were issued, employment was subject to additional provisions or other orders were made. The number of “real” bans is in the low single-digit range every year. Compared to the total of 95 test procedures with Chinese buyers during this period, it becomes clear: the vast majority of Chinese direct investments in Germany are released. If one takes into account the large number of direct investments that are not subject to registration requirements and for which no voluntary application has been submitted, the proportion is likely to continue to rise. According to figures from Germany Trade & Invest, the 257 audit procedures in 2023 were compared to 1,783 direct investment projects in Germany.
The list of successful takeover and investment projects by Chinese buyers in recent years is correspondingly long, and it includes innovative industries, high-tech companies and national champions alike. Examples include the acquisition of the heart-lung machine manufacturer Hemovent, the stake in Heidelberg Pharma and the takeover of two Osram business divisions by Chinese companies. Prohibitions have so far been limited to cases in which the investment target operates critical infrastructure, is active in the particularly sensitive semiconductor industry or the transaction has a military connection. Aside from the few but high-profile bans, economic relations between China and Germany remain as strong as ever. This is also evident in direct investments from Germany to China, which reached a record value of 11.5 billion euros in 2022. In 2021, 46 percent of all European direct investments in China came from Germany.Foreign investments increase prosperityThe increasingly discussed question of how desirable it is for third countries to influence the domestic economy should not obscure the fact that globalized trade and cross-border direct investments open up growth opportunities and contribute to prosperity. Constellations can be observed more and more frequently on the market in which German technology leaders alone cannot develop sufficiently large sales markets if they cannot also operate on neighboring low-tech and high-volume markets at competitive costs. The competitive pressure from companies from countries with cheaper production costs is great, but a sale or the establishment of joint ventures in cutting-edge technology areas offers the opportunity to preserve values and maintain value creation in the country. The takeover ban on MAN Energy Solutions can serve as an example of this: due to the lack of an alternative buyer, Volkswagen was forced to give up the business area and stop production in Germany.More on the topicMeanwhile, new reform projects from national and EU lawmakers are on the horizon. The draft of a new EU screening regulation presented in January for the first time provides for the obligation for all member states to set up a mechanism for screening direct investments from third countries, which provides for certain minimum requirements for the procedure and the screening criteria to be taken into account. The cooperation mechanism between Member States can in future also be initiated without the initiative of the target state, and Member States must justify why they do not follow the recommendations of other Member States or the Commission in their decision. The mechanism could, for example, enable the Commission and the other member states to have greater influence on direct investments in Hungary. The prospect of a cautious easing in Germany was last seen in a report in September 2023, in which the Ministry of Economic Affairs evaluated the stricter investment controls. There is a significantly higher number of exams, although the number of bans remains consistently low. It can be concluded from this that “the legal changes have led to an increased burden on the administration and the economy, but not necessary from a security perspective.”
Dr. Frank Röhling and Dr. Uwe Salaschek
Frank Röhling and Uwe Salaschek are lawyers at Freshfields Bruckhaus Deringer in Berlin. You advise domestic and foreign clients on antitrust and investment control issues and are regularly involved in transactions with Chinese buyers that are reported to the Federal Ministry of Economics. Images: Private