Germany ready to safeguard its economy

Banking & Finance
| The European | 15th August 2018
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These days it is very common to read news of mergers and acquisitions while having a cup of coffee in the morning. China is on a buying spree, Americans want to get out of shackles of Trump’s economy, European businesses are merging for synergy and African businesses are being influenced by tailwinds of the western economy. However, recently one country has emerged in the global business landscape and is realising that businesses have direct impact on national security. Germany, the European Union powerhouse, is all set to protect itself from business takeovers that “might” affect its economic interests and resultantly impact its national defense policy.

Germany started keeping a close watch over its businesses since last year. Before that there were rudimentary checks. The shift in strategy took place after high profile takeovers by Chinese investors.

“Since the introduction of investment auditing in Germany in 2004, no acquisition has been prohibited,” the Federal Ministry for Economic Affairs and Energy says. Last year, the rules were tightened. “Since July 2017 (till Feb 2018), around 30 acquisitions have been audited — equivalent to around half of the revenue for the whole year”. (source: DW)

Concerns over China’s growing influence in Europe, not just economically but also politically, are dealt with in a new policy document from the Berlin-based Mercator Institute for China Studies (MERICS), titled: “Authoritarian Advance: Responding to China’s Growing Political Influence in Europe”. The report says that the EU should employ a “screening” mechanism, which prevents any Chinese investment that is deemed to ‘run against European interests’. They continued to say that: “while the EU should welcome foreign investment in general, it must be able to stop any state-driven takeover of companies in systemically important sectors”.

The seriousness of this matter can only be understood by looking at some important deals that matured (or were blocked) lately.

Last month, a German state bank bought a stake in a high-voltage grid operator “50Hertz” to prevent China’s state grid acquiring the shareholding. (source: Reuters)

China’s Advanced Technology & Materials (AT&M) acquired Cotesa (a leading manufacturer of high quality composite fiber components for aerospace and automotive industries) in May 2018 (source: Reuters). The German Ministry of Economics in December 2017 had launched a review of the deal. However, when the deal was executed it raised eyebrows as people questioned how important technology and know-how was being transferred to foreign countries.

One other notable acquisition (in 2016) by China was of KUKA (an industrial robot manufacturer). KUKA is a key player in Industry 4.0. Industry 4.0 is a name given to the current trend of automation and data exchange in manufacturing technologies. It includes cyber-physical systems, the Internet of things (IOT), cloud computing and cognitive computing. Industry 4.0 is commonly referred as the fourth industrial revolution. This shows that acquisition of KUKA was not a common business acquisition. Rather, it may be termed as “direct tech and knowledge transfer of the fourth industrial revolution” which, for any independent nation poses serious economical and political repercussions.

Until last year, Germany kept a general investment threshold for non-EU buyers at 25%. Any deviation from this criterion was scrutinized but was treated as acceptable most of the times. However, now a proposal to change the German Foreign Trade Ordinance is being coordinated with other ministries and a law that provides for more control could come into effect this year. (source: Die Welt, a German national daily newspaper)

Recently, German Economic Minister Peter Altmaier said, “When it comes to defense-related companies, critical infrastructure or certain areas of other civil security-related technologies such as IT security, we want to take a closer look in [the] future”. He further said, “Until now, we’ve only been able to make checks when at least 25% of a company’s shares have been acquired. Now we want to lower this threshold (to 15%) so we can review more acquisitions in sensitive economic sectors”.

What lies ahead?

Chancellor Angela Merkel commands a high respect in the EU. Her contribution towards the German economy can never be undermined. The post World-War-II era witnessed remarkable industrialization of Germany and it emerged as one of the leading global economies. It is expected that the proposed changes to German Foreign Trade Ordinance will be passed with a majority in The Bundestag, the German federal parliament.

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