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February 12, 2013 9:21 pm

Supply chain concerns rejected in CFIUS review of A123

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This article is provided to readers by PaRR (Policy and Regulatory Report)— a newly launched product of The Mergermarket Group providing proprietary intelligence and research on competition law and sector-specific regulatory changes around the world.


The US government’s decision to approve the purchase of bankrupt lithium-ion battery maker A123 Systems by Wanxiang Group demonstrates that the recurring supply chain concerns raised by opponents of strategic Chinese acquisitions in the US are not gaining much traction.

While politicians and advocacy groups regularly raise concerns about China’s attempt to dominate manufacturing in emerging technologies, these concerns appear to have found little succor in the White House.

“The government was a little less concerned about the supply side … Globally, there’s an adequate supply of lithium-ion battery cells for most applications,” Thomas Golab, vice president for strategic initiatives with Illinois-based Navitas Systems, told PaRR.

Wanxiang sold A123’s military contracts to Navitas to assuage any concerns by the inter-agency Committee on Foreign Investment in the United States (CFIUS), which reviews such transactions for national security concerns.

Saft Groupe (EPA:SAFT), LG Chem (KRX:051910), and Dow Kokam, a subsidiary of Dow Chemical (NYSE:DOW), all have US operations and make products similar to those of A123, Golab said.

Furthermore, even if a Pentagon supplier were located overseas, CFIUS would not necessarily agree that a global supply chain constituted a direct national security threat, according to Thad McBride, a partner with Sheppard Mullin in Washington.

“When you can go and find the exact same thing elsewhere, even if it’s foreign, CFIUS would see that reasoning as specious,” McBride said.

Therefore, the key issue for CFIUS in this review likely was whether a Chinese-owned company would be working on the array of sensitive military equipment -- unmanned aerial vehicles, micro-grids, underwater propulsion and spy satellites -- powered by A123 batteries.

“The bigger issue here was the sensitive nature of the programs,” Golab said, adding that any security risk was mitigated by the sale to Navitas.

The types of security concerns CFIUS would want to mitigate in such an acquisition would be somewhat similar to those seen in the export control arena, McBride added.

In addition, manufacturing capability is not the prized asset in this sector, according to Golab.

“The secret to battery technology is less about the assembly process and more about the chemistry. The innovation that drives the industry still comes from Japan and the United States,” he said.

CFIUS review

China’s industrial policy of “R&D through M&A”, as well as its support of technology transfers to spur indigenous innovation, have generated criticism in Congress and calls to change the CFIUS review process.

Some lawmakers want to expand CFIUS’ narrow national security mandate and include broader economic issues such as market access and intellectual property protection in China.

One critic of the A123 deal said that although he believes the acquisition should have been blocked, the law governing CFIUS does not need to be overhauled.

“I don’t want to interfere just because they didn’t agree with me on something,” Senate Judiciary Committee ranking Republican Charles Grassley of Iowa told PaRR.

Grassley said that CFIUS is investigating other deals and Congress should not interfere with those reviews.

Derek Scissors, a senior research fellow at the Heritage Foundation, said he believes the process needs to be closely examined. “There are reasons for CFIUS legislation to be given a closer look,” Scissors said.

However, he added that CFIUS made the correct decision in the A123 case.

Last year, leaders of the House Intelligence Committee called for an expansion of the CFIUS law but no real progress was made.

“There’s almost always legislation introduced [governing] CFIUS,” Scissors said. “It never goes anywhere.”

However, he added that the increase in inbound Chinese investment in the US could provide added impetus for lawmakers to examine the process.

Despite the increased focus on China, a leading Obama administration official told reporters this week that the US must protect its reputation as one of the most attractive countries in the world for foreign investment, as measured by a World Bank index.

“I would proceed with extreme caution in using investment policy here as a stick because you would be setting a bad precedent that goes beyond China,” said Francisco Sánchez, undersecretary for international trade at the US Department of Commerce.


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