Obama Moves to Block Chinese Acquisition of a German Chip Maker

By PAUL MOZUR

The headquarters of Aixtron, a maker of semiconductors, in Herzogenrath, Germany.

HONG KONG — President Obama on Friday moved to block a Chinese deal to buy a high-tech company on national security grounds, an unusual step that could set the stage for greater tensions between his successor, Donald J. Trump, and a Chinese government determined to bolster its technological capabilities.
The intervention in a Chinese company’s bid to buy a German semiconductor company, Aixtron, comes after Chinese companies have spent billions to acquire technology in Europe and the United States. 

American officials have increasingly moved to stop such deals, but Chinese companies have shown growing adeptness in getting around those restrictions to strike up relationships that could someday lead to greater access to technology.
A statement from the Treasury Department said the administration blocked the purchase of the American portion of Aixtron’s business because it posed a national security risk relating to “the military applications of the overall technical body of knowledge and experience of Aixtron.”
It wasn’t clear whether other parts of the deal could be salvaged. 

Officials at the German chip company and its would-be Chinese buyer, the Fujian Grand Chip Investment Fund, did not immediately comment.
By rejecting the deal, the Obama administration showed how far it would go to keep China from using its wallet to acquire sensitive technology from the West. 

It blocked previous Chinese technology purchases only indirectly, using an advisory panel of government and intelligence officials who can discourage — but not directly kill — foreign deals. That same panel earlier expressed skepticism over the Aixtron deal.
Last year the United States accounted for more than one-fifth of Aixtron’s sales. 

And nearly one-fifth of its more than 700 employees are based in the United States.
That indirect strategy kept Mr. Obama from looking like a free-trade opponent, especially when the company in question was not American, and softened any potential response from Beijing. 

But Aixtron and its Chinese suitor tested that strategy by plowing ahead despite the panel’s concerns, forcing Mr. Obama to act.
Mr. Obama’s cancellation sets a stronger tone as Mr. Trump prepares to take the White House. 

As president, Mr. Trump will have considerable power to appoint the members of that advisory panel, called the Committee on Foreign Investment in the United States. 

He is likely to hear from members of Congress who have been pushing to toughen up and to broaden the panel’s reviews to encompass more types of deals.
Mr. Trump has been critical of China’s trade practices.
“It could feed into the narrative about how the Trump administration is going to get better deals for things, and this is the kind of deal he wouldn’t allow because it would affect U.S. jobs and U.S. manufacturing capabilities in one of the areas where we’re still the most competitive,” said Adam Segal, a technology security expert at the Council on Foreign Relations.
Still, simply rejecting deals is not so simple, Mr. Segal and others say. 

Wall Street sometimes pushes for such deals to go through, arguing that American companies can use Chinese money to invest or save jobs. 

Steven Mnuchin, a Wall Street veteran, is Mr. Trump’s pick to be Treasury secretary, heading a department with considerable say over the advisory panel.
The panel is crucial to the outcome of future deals. 

Created in 1975 by President Gerald Ford, it includes representatives from 16 executive departments and intelligence agencies including Commerce, Defense, Justice and Homeland Security. 

It judges whether a foreign investment in companies with operations or business in the United States poses unacceptable security risks. 

Because its deliberations are confidential, little about it has been made public.
Just the prospect of such an investigation can be enough to kill a deal. 

Under Mr. Obama, its scrutiny scotched Chinese deals for a European lighting-panel maker and an American manufacturer of microchips.
But China has already been testing ways to get around the panel. 

Such methods do not necessarily give Chinese buyers access to crucial technology, but experts say they could open a route to access down the road.
In some cases, it has struck other types of deals with Western companies, like licensing agreements, outside of the panel’s jurisdiction. 

When the panel opposed a Chinese bid for the American semiconductor firm GCS Holdings this summer, the American company instead signed a joint venture to make chips with its would-be buyer. 

GCS makes an advanced chip with military uses.
A spokesman for GCS said the joint venture makes products like cellphone chips that have long been commercially available, and that it follows U.S. government guidelines for all technology exports, whether sensitive or not.
In another case, the Chinese appeared to be testing how far it could push the panel.
In September 2015, Tsinghua Unigroup, the main corporate vehicle for China’s microchip ambitions, offered $3.8 billion for a board seat and a 15 percent stake in Western Digital, a maker of hard-disk drives. 

Lawyers who specialize in Committee on Foreign Investment law say the deal structure was unusual: The size of the stake walked the line of where the panel has investigated in the past, and the agreement had a clause that allowed either side to call it off if the panel became involved.
To lawyers who studied the deal, it looked as if the Chinese buyer was trying to find out what it could get away with.
Tsinghua did walk away, citing the panel, and began to look for smaller deals. 

In April, it successfully took a 6 percent stake in Lattice Semiconductor, despite the fact that in 2012 the Federal Bureau of Investigation indicted two Chinese men who it said illegally tried to procure chips from the company that could be used on spacecraft. 

In filings, Tsinghua said the stake had been taken for “investment purposes,” while Lattice has said military applications were only a tiny part of its business.
Tsinghua has since sold some of its stake, and Lattice is now the target of a new acquisition offer by a venture capital firm based in Silicon Valley but backed by Chinese government money. 

Lattice did not immediately respond to a request for comment.
Because information relating to its decisions is kept secret, the Committee on Foreign Investment in the United States remains one of the least understood parts of the United States government. 

The companies involved in the deal sometimes do not find out why a proposed acquisition was rejected.
Foreign companies applying for approval have to submit information about corporate ownership, including passports and records of the military experience of shareholders. 

Emails go out across American military research and development laboratories to check whether companies might unwittingly be important to American security. 

For instance, some seemingly harmless technology may be a component of an American defense project.
Companies can discuss with the committee what they will do if the proposed deal causes a public backlash, as has happened before. 

The committee can recommend changes or broker agreements that could include the sale of a sensitive part of the company.
The panel has considerable investigative and intelligence resources at its disposal, but the new influx of Chinese money has led some to argue it does not provide enough protection. 

Critics say it can examine each deal only in isolation and not consider a more widespread campaign of purchases.
Stewart Baker, a former representative to the committee under the Department of Homeland Security, also cites resources as an issue.
“My sense is they do have the resources now,” he said, “but if Chinese deal flow continues to increase, it is going to be a challenge.”

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.