Trump’s trade war one step behind China’s tech obsession

Source: Peter Behr, E&E News reporter • Posted: Monday, July 2, 2018

UQM Technologies Inc., a small Colorado-based company with pioneering electric vehicle propulsion systems, had been heading for a joint venture with China’s largest heavy-duty truck maker, China National Heavy Duty Truck Group Co.

If the deal had gone through, it would have given the $5 billion Chinese company nearly a one-third stake in UQM. And it would have given the U.S. company a foothold in China’s growing market for cars and trucks.

The deal was scotched in May, however, by the Committee on Foreign Investment in the United States (CFIUS), a federal interagency committee headed by the Treasury Department with authority to block foreign deals with U.S. companies that it believes threaten U.S. security.

The Trump administration said this week that it would rely on the committee, with strengthened powers that Congress is expected to approve, to keep strategic U.S. technology out of foreign hands. China is at the top of President Trump’s list, in part because of concern about intellectual property theft, but also because of China’s economic vision that aims to dominate advanced energy and auto technology development, including electric and autonomous vehicles.

Analysts tracking the global auto market say the U.S. foreign-ownership review policy could interrupt nascent U.S.-Chinese competition in the arena of autonomous, “self-driving” vehicles. But electric vehicles are better established, and China has already signed off on manufacturing partnerships.

“I don’t think it’s going to have a huge effect on EVs in China,” said Scott Kennedy, director of the program on Chinese business and political economy at the Center for Strategic and International Studies.

“There are already 25 joint ventures to manufacture EVs in China” involving U.S., Japanese, European and South Korean companies. “I don’t see them showing any hesitancy going forward,” he said. “U.S. companies probably will not be restrained.”

Except for Tesla Inc.’s plans to build electric vehicle batteries in China, U.S. companies don’t have a lot of business deals with China in the battery market, he added. “There are American companies working on storage, on improving battery intensity and different kinds of charging infrastructure,” he said. How CFIUS will handle new U.S.-China ventures in those areas remains to be seen.

The administration investment decision, announced yesterday, puts the White House in step with the U.S. House, which passed legislation on Tuesday to expand CFIUS’s authority, called the “Foreign Investment Risk Review Modernization Act.” The Senate has approved its version as part of the National Defense Authorization Act with a veto-proof majority, and the two chambers are expected to find common ground.

‘Critical technology’

The changes would expand the kinds of transactions CFIUS could review and apply to investments short of an acquisition that would give a foreign buyer significant rights to a U.S. company’s intellectual property.

A senior administration official, briefing reporters this week, said, “It increases our ability to tailor CFIUS’s review to the most sensitive U.S. technologies and to the threats that the president has articulated, including by defining what constitutes a ‘critical technology.'”

The conflict between China and the Trump administration over trade goes on, however.

The U.S.-China Business Council yesterday gave a written sigh of relief that the administration had turned to the CFIUS process rather than impose a strict investment restriction on China. But it said its members want to see Congress and the president “strike the right balance between national security and economic interests.” It added that the president should narrowly apply credible national security benchmarks.

The prospect of an escalating trade war with China has knocked about 1,000 points off the Dow Jones Industrial Average, a 4 percent slip, and the administration’s support of the CFIUS process was seen by trade experts as a sign that Treasury Secretary Steven Mnuchin and business allies had won a round against the administration trade hawks who are pressing for billions of dollars in tariff sanctions against China. The tariffs, however, remain on the table, as do market jitters.

“We are beginning to hear from auto companies about the repercussion of tariffs and disruption of supply chains as automakers globally are navigating a fluid trade situation,” said Brendan Ahern, chief investment officer of Krane Funds Advisors LLC. The firm manages a suite of exchange-traded funds focused on China.

“Cars and particularly EVs utilize a vast array of technologies with U.S. technology companies being significant suppliers,” Ahern said in an email. “An increased regulatory regime has the potential to shift suppliers. Hopefully continued dialogue leads to an outcome that preserves buyers of U.S. technology.”

No disarmament

“Although the president stepped back on unilateral investment curbs on China, it does appear that we’re moving forward with tariffs on China,” Kennedy said. “China will retaliate.”

Yesterday was an opportunity for one of Trump’s leading trade hawks to brandish more hardware in China’s direction.

Peter Navarro, director of the White House National Trade Council, released the administration’s new indictment of China’s trade practices, accusing China of “economic aggression” in seeking to acquire key technologies and intellectual property from other countries by all means, fair and foul.

Its technology acquisition is carried out through state-sponsored technology theft, cybersecurity espionage, “evasion of U.S. export control laws, counterfeiting and piracy,” the report said.

Navarro’s report focuses on China’s blueprint for manufacturing dominance, “Made in China 2025,” which seemingly played a big part in producing the consensus votes in the House and Senate on foreign investment policy.

Lorand Laskai, a research associate in the Asia Studies Program at the Council on Foreign Relations, authored a blog post, “Why Does Everyone Hate Made in China 2025?” this spring, commenting, “Equally problematic to Beijing’s goal of ‘self-sufficiency’ and becoming a ‘manufacturing superpower’ is how it plans to achieve it.

“Chinese officials know that China lags behind in critical hi-tech sectors and hence are pushing a strategy of promoting foreign acquisitions, forced technology transfer agreements, and, in many cases, commercial cyber espionage to gain cutting-edge technologies and know-how,” he said.

Some members of Congress said they were also influenced in voting on the CFIUS amendments by a report in January by the Pentagon’s Defense Innovation Unit Experimental on China’s industrial policy strategy.

The report said that technology transfers to China are occurring in part “through increasing levels of investment and acquisitions of U.S. companies. China participated in [about] 16 percent of all venture deals in 2015 up from 6 percent average participation rate during 2010-2015.”

“China is investing in an electric vehicle supply chain including battery technology and aims to have 50 percent of the world’s electric vehicle production and 90 percent of global battery production capacity,” the report said. Chinese companies are big investors in Silicon Valley startups and ride-sharing companies, as well, led by deals involving Baidu Inc., Alibaba Group Holding Ltd. and Tencent Holdings Ltd. — the Google, Amazon and Facebook of China — said the report authors.

Kennedy of the Center for Strategic and International Studies said it will take about a year for the new CFIUS procedures to be ironed out, and their application won’t be clear until then.

Meanwhile, for companies like UQM Technologies that see China’s potentially vast market for EVs as an irresistible opportunity, the uncertainty may weigh heavily.

Joe Mitchell, the chief executive of UQM, told shareholders that the shared goals between his company and the Chinese truck producer have not changed. The Chinese company last year purchased nearly 10 percent of UQM for about $5 million. Although the planned second-stage investment is shelved, “We continue to have discussions with the top executives of CNHTC, and they are committed to partnering with us to capitalize on the electric vehicle market in China.”

“U.S. policymakers have a difficult task ahead of them,” Laskai said in his blog post. “They have to pressure China in a way that balances national security interests and economic fairness while also standing firm against cyber espionage. Simply tightening CFIUS and slapping tariffs on Chinese tech goods is unlikely to achieve that balance.”