A Protective Shield for German Companies

German legislators are discussing measures to block acquisitions by foreign investors.

The German government intends to complicate acquisitions of German companies by foreign investors, the daily newspaper Handelsblatt reports exclusively. The discussion was triggered after the Chinese investor Midea reached for a bigger share of German robotics manufacturer Kuka. A general discontent among the German public about an increasing number of Chinese investors is fueled by Germany’s Minister of Economics, Sigmar Gabriel (SPD). He prefers a “European solution” as he is worried about an illicit transfer of know-how to China. During her China trip, Chancellor, Angela Merkel, also expressed her concern about unfair competitive conditions for German investors in China. A healthy Sino-German investment partnership must also depend on reciprocity. Meanwhile, the German government is discussing possible solutions, claims Handelsblatt: if Chinese companies are suspected to pursue political rather than economic goals, as suggested by some due to China’s massive state-driven investment aids, the German government should dispose of an instrument to stop such acquisitions.

In practice, such an instrument would mean the tightening of the Foreign Trade and Payments Act (AWG). After its most recent amendment in 2009, the German government is able to veto foreign acquisitions of more than 25% in strategically significant sectors, such as defense and energy. However, there are currently no concrete plans to extent the law to other sectors, as concerns grow that other markets would respond with similar measures. This, legislators worry, would particularly hurt the German export sector, which is highly dependent on outward foreign direct investment (FDI).

Gabriel’s recent call for more protectionist measures came across rather surprising vis-à-vis a speech he gave during the inauguration of the Chinese Chamber of Commerce in January 2014. At the ceremony, Gabriel explicitly welcomed Chinese investment and stressed its importance for a future intensification of the Sino-German bilateral trading partnership.[1]

So, are the German concerns justified? Indeed, Chinese FDI in Germany has increased significantly. A study by Bertelsmann Foundation has noticed an annual growth rate of 66%[2]. With total assets of less than 1%, however, Chinese investors have yet to play a dominant role with regards to FDI stock in absolute terms. After the UK and Luxemburg, where the respective financial services sectors were the investors’ target of choice, Germany ranks third as European investment destination.[3] So far, particularly companies from the high-tech sector have been acquired, such as Medion or the Munich-based manufacturer KraussMaffai in the beginning of 2016.

The mid- and long-term effects of such acquisitions have yet to be assessed since most of them have only recently taken place. It is possible that both sides could profit though. While there might be a growing number of high-skilled jobs in Germany, less-skilled jobs and production processes may be outsourced to China. In the long run, there will be transfer of know-how. However, Germany’s exporters would profit from the parent companies’ dense networks and distribution channels and the markets’ increasing interconnectivity.

The German public’s reservation about Chinese outward FDI is probably. However, Chinese investors must do more than promise to pursue economic goals in order to allay German stakeholders’ concerns.  There is no question on either side about the significance of bilateral economic ties. It will be a bold task for politicians to find the right balance between protective measures and the establishment of a level playing field. The future will show to what extent the vast opportunities are seized or if too much protectionism will result in mutual compartmentalization.

[1] http://www.bmwi.de/DE/Themen/aussenwirtschaft,did=616224.html

[2] https://www.bertelsmann-stiftung.de/fileadmin/files/user_upload/Asia_Policy_Brief_2014_03_e.pdf

[3] https://www.bertelsmann-stiftung.de/fileadmin/files/user_upload/Asia_Policy_Brief_2014_03_e.pdf

Author

Benjamin Matthes

Benjamin is summer associate at Interel Deutschland. He is a master's student at Georgetown’s School of Foreign Service in Washington DC.

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