China auto bid could hit a U.S. wall

WASHINGTON — If a Chinese company wants to buy part of an Italian-controlled automaker that's incorporated in the Netherlands and headquartered in the United Kingdom, it will still have to get past a national-security review by the U.S. government.

And it wouldn't be an easy hurdle to overcome.

The Committee on Foreign Investment in the United States, an interagency working group led by the U.S. Treasury Department, is responsible for reviewing deals that affect control of U.S. businesses and brands, even if the parent company is overseas, as in the case of Fiat Chrysler Automobiles, and even if the affected business lacks obvious defense ties. The reviews can last a month or more, and deals involving Chinese partners can be tied up even longer.

Automotive News has learned that at least one Chinese carmaker is making initial preparations for a possible filing with the group.

As Automotive News reported this month, China's Great Wall Motor Co. is interested in buying FCA's Jeep brand, and other Chinese automakers have explored a possible acquisition of FCA, which is seeking merger partners to help it compete with deep-pocketed ​ global rivals.

Chinese buyers of U.S. companies have received greater scrutiny from security officials in recent years, and the trend has increased substantially under a Trump administration that has promoted economic nationalism and criticized China's trade policies. Under such conditions, authorities are expected to apply an expansive definition of national security to justify an investigation, especially when it involves a well-known auto manufacturer with iconic American brands such as Jeep, Dodge, Ram and Chrysler.

Whether any such deal would pass muster with U.S. authorities is an open question.

"We have seen a number of transactions, particularly involving Chinese companies, where one might have thought there is no national-security interest, but the government has expressed concerns" and even contributed to deals falling apart, an international trade attorney intimately familiar with the process told Automotive News.

The law gives the president authority to vet commercial transactions with foreigners and prohibit those considered threats to national security. The criteria are broadly defined now to include critical infrastructure such as dams, transportation, the energy sector and food and agriculture.

The Department of Homeland Security lists certain types of manufacturing — primary metals, machinery such as engines and power transmission equipment, electric motor manufacturing and transportation equipment such as vehicles — among 16 categories of critical infrastructure that require protection from terrorism and natural disasters.

The Committee on Foreign Investment process is mostly voluntary. Companies aren't required to notify the government of deals that may have a security component, but if authorities later learn of a potential problem, they can unwind the acquisition.

Initial committee reviews take 30 days. If no security concerns are found, the parties are notified that action is concluded. More complex transactions or ones that require more research are kicked into an investigative phase, which can last an additional 45 days. The government sometimes imposes conditions on the parties to address national-security concerns, such as limiting access to facilities or information to U.S. citizens.

In the rare event the committee is unable to resolve a case, it is sent to the president with a recommendation. He has 15 days to approve, suspend or otherwise stop the deal.

Only two deals have been blocked in recent decades: In 1990, President George H.W. Bush ordered a Chinese company to divest its interest in aerospace supplier Mamco Manufacturing Inc. And in 2012, President Barack Obama blocked a Chinese company's plans for a wind farm in Oregon because it was too close to a U.S. Navy flight testing range.

Parties sometimes withdraw applications on their own when it becomes clear the committee has overriding concerns.

Several security and political factors play into whether FCA's purchase by a Chinese company, or any foreign company, gets approved, analysts say.

In the case of automakers, the government may want to ensure that critical technology, including microchips or autonomous-vehicle systems, stays in U.S. hands to protect American jobs and competitive advantages or to guard against intellectual property being transferred to foreign military operations.

"The U.S. government is going to get increasingly antsy that those products aren't supplied by someone that didn't have U.S. national security as its highest priority," according to the trade attorney, who has dealt with Committee on Foreign Investment reviews on the government side.

In FCA's case, officials may also study its supply chain to determine if any vendors provide components such as diesel engines and transmission systems for military vehicles because car companies can significantly influence partners, said Andrew Hunter, director of the defense-industrial initiatives group at the Center for Strategic and International Studies.

Hunter last year co-authored a review of the committee's effectiveness.

There's a real possibility that a Chinese takeover of FCA, or any of its brands, wouldn't get approved in time to close the transaction.

"There's a growing backlog of Chinese acquisitions being held up in CFIUS either because the government wants to kill the deal or because it can't make up its mind," said the Committee on Foreign Investment practitioner, who requested anonymity to protect client relationships.

Virtually any case that requires some analysis is spilling over into a full investigation, he said, and when Chinese buyers are involved, the Trump administration is going beyond the statutory time limits by getting companies to withdraw and then refile applications to restart the clock, sometimes multiple times.

Deals hinging on fluctuating market valuations can collapse if not finalized within a certain window, Hunter noted.

Some Trump administration officials are inclined to hold up deals for more political reasons, such as to pressure China to help resolve the North Korea nuclear situation or to counter Chinese discrimination against U.S. investors.

"There are players who just want to say 'no' and there are others who might be open to approving them but aren't prepared to take responsibility for demanding a decision and shepherding the process to conclusion" because it may not be good for their career, the source said.

And that sentiment extends beyond the administration. The Senate Democrats' new "Better Deal" economic platform includes a call for an American Jobs Security Council that would stop foreign companies from buying a U.S. company if it were to result in harm to U.S. businesses, including job losses.

Nancy McLernon, CEO of the Organization for International Investment, said the committee is necessary, but so is cross-border investment.

"It's important that the CFIUS process remain focused on national-security-related reviews and not some sort of economic protectionist tool," she said. "If it becomes very politicized, it could have a chilling effect on global investment in the U.S."