Political Barrier in High-tech industry

To be more economic competitive in the future, acquiring more technologies is one of the goal of Chinas
overseas acquisition. However, seeing the rising Chinese economic strength, some countries fear that China
as one of the biggest economy will threaten their interest of their countries. This phenomenon is becoming
popular in the high-tech industry. In Germany, there is a government paper for reviewing investment at the
European Union level. The paper predicts wide-reaching rights for the EU and national governments to
prohibit foreign takeovers. (Sources: Reuters) It is a rare move for EU because the EUs past primary
concern is whether it will cause monopoly instead of national security. It shows that the European Union is
planning the restrict China investment to acquire the core technologies which may affect their national
interest.
Not only the EU is going to restrict Chinas acquisition, the United States has also taken measure to prevent
foreign investment. In United States, there is an institution called the Committee on Foreign Investment in
the United States (Cfius). Cfius has the authority that giving recommendation on foreign investment which
related to national security. The primary concern of Cfius is that technology or funds from an acquired US
business might be transferred to a country which is sanctioned. It means China, as a major acquirer of High-
Tech industry, will face a fierce restriction on acquisition, due to the recent conflict with the US, such as the
territorial disputes in the South China Sea.
We can see that Western countries are prohibiting China to acquire companies with strategic interest. China
have to invest more and bear more risk in order to acquire the technology they needed.

Case Study: Fairchild semiconductor

In 2015, Fairchild semiconductor has received an acquisition proposal from Hua Capital Management Ltd,
with $21.7 per share, which is the highest price among its competitors. Semiconductor is the cutting-edge
technologies which can be used in military systems. Therefore, the proposal has drawn the attention to the
Cfius, which has authority to recommand against foreign deals related to national securities. After Fairchild
has shown concern for not being apporval from Cfius, Hua Capital agreed to pay $108 million termination
fee if the deal is not approved. Hua also increased the offer to $22 per share.
However, these measures cannot help Hua Capital make the deal with Fairchild. The Fairchild board said in
a regulatory filing that the offer was attractive but there was non-negligible risk of a failure to obtain Cfius
approval. Therefore, Fairchild announced the agreement with ON Semiconductor Corporation for $20 per
share, instead making the deal with Hua Capital. After the announcement from Fairchild, share of ON
Semiconductor has increased up more than 6% and share of Fairchild has dropped 3% on the next day. This
example shows that political factor is prohibiting Hua Capital from getting into the industry of
semiconductor, even Hua capital offer a better price for acquisition.

Case Study: Philips

In January of 2016, Philips announced that it would terminate a $2.9 billion deal with China made in March
of 2015, which is selling a majority stoke of Lumileds, a company focus on auto and light-emitting diode
components. Philips addressed that Cfius did not approve the acquisition. The reason why Cfius offer a
negative review is that Lumileds has knowledge of advanced semiconductor called gallium nitride. Gallium
nitride is a material that can be used in military and civilian ways. Cfius has a concern that Gallium nitride
can be used for upgrading Chinas radar system. Therefore, Philipss deal with GO Scale Capital and GSR
Ventures, investors from China, has been disapproved by Cfius. The case shows that there is huge political
risk for China that the acquisition can be prohibited, due to nation security reason.

Soruces:
Diane Bartz and Liana B. Baker (2016,Feburary) Fairchild rejects Chinese offer on U.S. regulatory fears
Thomson Reuters, Retrieved from: http://www.reuters.com/article/us-fairchild-semico-m-a-
idUSKCN0VP1O8

Keith Bradsher and Paul Mozur (2016,Feburary) Political Backlash Grows in Washington to Chinese
Takeovers- the New York Times, Retrieved from: http://cn.nytimes.com/business/20160218/c18db-chips/en-
us/

Paul Mozur and Jane Perlez (2016,Feburary) Concern Grows in U.S. Over Chinas Drive to Make Chips
the New York Times, Retrieved from: http://www.nytimes.com/2016/02/05/technology/concern-grows-in-
us-over-chinas-drive-to-make-chips.html