The new crown pandemic is changing the world in a profound way. The European Commission is working on a bill to stop foreign state-owned companies from acquiring European companies, while Australia, Japan and India, three major Indo-Pacific countries, are joining forces to restructure their supply chains.
According to Bloomberg, the European Commission’s competition commissioner, Margrethe Vestager, is expected to present a draft legislation next Wednesday (May 5). The proposed new regulation does not directly mention China, but it is known that the bill is mainly in response to complaints from numerous European companies that Chinese state-owned enterprises receive state subsidies that they cannot match. Business groups in China have protested against the regulation, the newspaper noted.
The draft, obtained by Bloomberg, includes that companies with more than 500 million euros ($604 million) in revenue in Europe and that have received more than 50 million euros in subsidies from any one foreign country in the past three years will need EU approval to merge with an EU company.
The EU hopes that if a company is found to have unfairly benefited from foreign government subsidies, including unlimited state guarantees or lines of credit, thereby undercutting its European competitors, it will be able to impose a fine of up to 10 percent of its annual revenue.
The draft also warns that the EU can cancel a government contract awarded to a foreign company if the company gains an unfair advantage from its state subsidies. The bill provides that European officials can inspect the company’s offices outside Europe if the company allows it and if the foreign government is aware of it.
Indeed, prior to the New Coronavirus pandemic, Chinese companies were often behind acquisitions of European companies, often with the involvement of the Chinese state behind the scenes. Late last year, a study by Datenna BV, a Dutch consulting firm, found that Chinese state-owned holding companies were highly or moderately involved in about 40 percent of the 650 investments made by Chinese companies in Europe since 2010, including some in advanced technologies.
The study also found that in many European M&A cases, Chinese government influence is hidden under layers of ownership, complex shareholding structures and transactions through European subsidiaries. However, European governments lack a system as robust as the Committee on Foreign Investment in the United States (CFIUS) to review international acquisitions on national security grounds.
After the new crown pandemic, many European countries are facing the largest economic recession since World War II, making it more difficult to face various takeover situations and forcing the state to step in for protection. Last December, Germany blocked the acquisition of a company engaged in the development of satellite and radar technology in North Rhine-Westphalia, Germany, by Chinese missile manufacturer China Aerospace Science and Industry Corporation, on national security grounds.
In April, Italian Prime Minister Mario Draghi revealed that the Italian government had previously blocked a Chinese company from acquiring an Italian semiconductor company. He said he would expand the scope of state protection for Italian companies.
Japan, India and Australia are working together to counter China’s supply chain dominance in the Indo-Pacific region. Trade ministers from Japan, India and Australia held a video conference Tuesday (April 27) to officially launch a Supply Chain Resilience Initiative, which will meet once a year to share best practices on supply chain resilience and commit to holding Investment promotion activities to explore the possibilities of supply chain diversification. Support enhanced use of digital technology, trade and investment diversification.
Tuesday’s statement did not specifically mention China, with ministers from Japan, India and Australia saying only that “some supply chains have become vulnerable due to a range of factors” and that the virus pandemic “has exposed the vulnerability of supply chains globally and in the region.