Showdown Looms as U.S. Questions Chinese Deal for Aixtron

The United States will continue to carefully scrutinize Chinese deals — and may act quickly to kill them for national security reasons.

By PAUL MOZUR

The headquarters of Aixtron in Herzogenrath, Germany, last month. 

HONG KONG — A Chinese company is setting up a rare and potentially tone-setting showdown with the American government over its deal to buy a high-tech firm that the United States says could impact national security.
The showdown involves Aixtron, a German semiconductor firm being acquired by a Chinese company, Fujian Grand Chip. 

In a statement on Friday, Aixtron said an American security panel that advises the White House on foreign deals had recommended the two sides drop their plan, citing unspecified national security concerns.
Normally, a recommendation like that would be enough to persuade the companies to scotch their plans. 

But in its statement, Aixtron said it and its Chinese suitor would do something unusual: They would appeal to Barack Obama directly to approve the deal.
Chinese and German companies “plan to continue to actively engage in further discussions to explore means of mitigation that may be amenable” to the White House and the American security panel, according to the Aixtron statement.
Mr. Obama has 15 days to decide the fate of the deal, though most likely Mr. Obama will scupper it given presidents usually follow the recommendations of the panel. 

If the deal is struck down, it would send the message that the United States will continue to carefully scrutinize similar deals — and may act quickly to kill them for national security reasons.
The unusual move is sure to spotlight the growing tensions between the United States and China over the latter country’s ambitions to become a power in microchips. 

While China has made major advancements in technology and computers in recent years, its chip industry is in its infancy, and it still relies on foreign companies for the chips that power even sensitive systems.
The move will also shine a light on the shadowy security panel that recommended the deal be dropped. 

The panel — called the Committee on Foreign Investment in the United States, and commonly known as Cfius — has been increasingly at odds with an expansive new Chinese effort to spend billions acquiring foreign high-tech companies.
The panel is composed of representatives from major departments and intelligence agencies like Commerce and Justice and the Central Intelligence Agency. 

Cfius has the power to review any deal that could impact American national security, and either come up with ways to mitigate that impact or recommend the president block the deal. 

While the Aixtron deal does not involve an American company, Aixtron itself does considerable business in the United States, and lack of American approval would shut that business off.
Beijing has highlighted its intentions of catching up to the rest of the world in semiconductors. 

It has spent hugely to help fund efforts by private Chinese companies and state-run national champions to acquire foreign firms that make microchips, the brains of everything from supercomputers to smartphones to guided missiles.
But Cfius reviews or concerns about them have derailed a number of proposed Chinese acquisitions of chip makers around the world. 

Earlier this year a group of Chinese investors abandoned plans to spend $2.9 billion on a majority stake in a business owned by Philips of the Netherlands after Cfius noted the business specialized in a material key to making semiconductors.
In the case of Aixtron, the companies are asking Mr. Obama to decide directly — a move that has been made only twice before. 

In 1990 President George H.W. Bush canceled the sale of an aviation company to Chinese bidders. 

In 2012 President Obama forced a Chinese firm to divest from a wind project deemed too close to a Navy facility in Oregon.
The continuing Aixtron saga is a study in how difficult it can be to track which Chinese investments are private and which are state led.

In October, The New York Times highlighted how a Chinese customer that dropped a large order — in turn crashing Aixtron’s shares — had a relationship with the acquirer, Fujian Grand Chip, through government investment funds.
The connection illustrate the blurred lines between Chinese industrial policy and the constellation of privately owned but state-supported companies that have been tasked with acquiring new Chinese technological capabilities.

In a surprise move last month, German authorities withdrew approval for the takeover without specifying a reason.
Because Cfius decisions are considered confidential, the regulator did not say what concerns it had with the acquisition. 

One possibility is Aixtron’s leading position making technology that creates chips based on an advanced semiconductor material called gallium nitride.
The technology has been used in tech as mundane as Blu-ray Disc players, but its resistance to heat and radiation give it a number of military and space applications. 

Chips based on the technology are used in radar for antiballistic missiles and in an Air Force radar system, called Space Fence, that is used to track space debris. 

Cfius’s recommendation against the Philips deal earlier this year stemmed in part from that business’s involvement in gallium nitride.