×

ANALYSIS-Trade tensions drive Chinese auto investors from U.S. to Europe

* Chinese investment in U.S. auto sector drops - sources, data

* U.S. regulator CFIUS reviews and blocks more Chinese deals

* Investors look for other investment routes beyond direct M&A

STOCKHOLM, June 11 (Reuters) - Chinese auto investors are increasingly pouring money into Europe rather than the United States because of intense U.S. scrutiny of their deals under the Trump administration, according to industry sources and M&A data.

More than a dozen leading M&A bankers, lawyers and consultants told Reuters the number of mandates from Chinese clients to make investments in the European auto sector were increasing, while those for the U.S. sector were declining.

"Given the way that things are tightening up in the United States, Europe for China is the most obvious non-domestic market that they're pushing into," said Charlie Simpson, who specialises in the auto sector for consultancy KPMG's global strategy group.

The trend, which comes as Washington is locked in a trade battle with Beijing, is supported by an analysis of data of auto sector investment in the U.S. and European markets.

The United States accounted for 26 percent of the total number of Chinese deals in either of the markets in the first five months of this year, according to the figures from Thomson Reuters and research group Dealroom. That is down from 31 percent in the same periods of 2017 and 2016.

There have been 19 deals in total across both markets so far this year, worth more than $10 billion, according to the data.

At the centre of the trade dispute are U.S. allegations that China has stolen American intellectual property. There has been increased scrutiny of investments in sectors including autos, where companies are developing technologies such as electric and autonomous vehicles, artificial intelligence and robotics.

Washington says it is looking to broaden the reach of the Committee on Foreign Investment in the United States (CFIUS), which examines deals for national security risks, to further limit Chinese efforts to acquire U.S. technology.

Thirteen of the 17 bankers, lawyers and consultants interviewed by Reuters, based in Europe, the United States or China, said their Chinese clients were increasingly choosing Europe over the United States because of growing difficulties with CFIUS.

This means a large group of investors are hunting assets in Europe, mainly Chinese state-owned auto firms, listed carmakers and private equity funds, the industry sources said.

They include state-owned SAIC Motor Corp, BAIC Group and FAW Group Corp; and listed players Guangzhou Automobile Group , and Ningbo Joyson Electronic Corp, the people said.

Samson Lo, head of Asia M&A at UBS, said all big Chinese carmakers who wanted to do overseas deals were steering clear of the United States.

"The immediate reaction is: 'I don't think in the current environment it is for me'," he added.

FAW Group Corp and Ningbo Joyson Electronic Corp could not be reached for comments, while SAIC Motor Corp, BAIC Group and Guangzhou Automobile Group did not respond to emailed request for comments.

MORE CHINA DEALS BLOCKED

American officials say CFIUS reviewed about 250 foreign deals in total across all industries last year, an increase of 40 percent on 2016.

During the roughly 14 months of the Trump Administration to March 1, the committee has blocked 12 Chinese deals, or nearly half of the 27 transactions it has completed reviews of, and the fate of nine more are still undecided, according to an analysis https://bit.ly/2sG7XP4 by the law firm Pillsbury Winthrop Shaw Pittman.

By contrast, in 2016 only four Chinese deals were blocked out of 26 that were reviewed, partner Tom Shoesmith told Reuters.

Many more would-be investors are being deterred before the review stage, according to a lawyer who represents a major Chinese carmaker that has been investing in Europe.

He said a lot of deals were being ditched after informal talks with CFIUS officials who made it clear they would not pass muster. He declined to be named as this could identify his client and breach confidentiality.

U.S. President Donald Trump's administration has made the auto industry central to its "America First" trade agenda. It cited national security concerns last month when it launched an investigation into vehicle imports that could lead to tariffs similar to those imposed on steel and aluminium.

This year, CFIUS blocked U.S. semiconductor testing company Xcerra's purchase by China-based Sino IC Capital, which had expected the $580 million deal to help it benefit from automotive opportunities. State-owned China Heavy Duty Truck Group and UQM Technologies was also forced to scrap a deal that would have hiked its stake in UQM to 34 percent from 9.9 percent and given it three out of eight board seats.

By contrast in Europe, even though Geely's recent purchase of a stake of almost 10 percent in Daimler raised fears among some politicians in Germany of its expertise falling into Chinese hands, the deal is unlikely to be challenged.

Europe does not have a common position on screening foreign investments - some countries are pushing for talks to broaden checks on foreign investments, others oppose such plans that would reduce access to Chinese cash.

While individual countries do examine transactions, the depth and the number of reviews was negligible compared with the United States, according to the bankers, lawyers and consultants.

INVESTORS CHANGE TACTICS

However, some Chinese buyers are beginning to change investment tactics, even in Europe, as they look avoid political and regulatory complications, according to the industry sources.

They are ditching their favoured "direct" M&A model - buying a company and gaining total control over the technology - for other access routes such as joint ventures, patent purchases that raise less political and public concern.

Other options being explored also include licensing deals - where they could gain the ability to use, modify and resell the target's technology - and bringing on a local banking or automotive or private equity player as co-investors.

In many cases, these investment avenues may not be subject to a CFIUS or European review, the sources said.

"They are working on situations that is either more flexible, partnership based or less overtly Chinese branded," said KPMG's Simpson, adding that he was working on such deals but could not discuss specifics due to confidentiality.

Swedish manufacturing trade group FKG, whose members visited Geely in China in May, said the Chinese carmaker's focus was shifting towards "partnerships" and it had proposed deals to some of its members.

"There was no talk about buying a company... instead they were looking for joint ventures," said FKG's senior advisor Peter Bryntesson.

Geely, which owns Swedish carmaker Volvo and recently bought a stake in truckmaker AB Volvo, declined to comment on its future business plans.

Michael Dunne, president of investment advisory firm Dunne Automotive, said he had recently worked on deals where instead of acquiring companies, Chinese buyers had established licensing agreements as a workaround.

Sweden-China Trade Council Vice Chairman Frederic Cho said Chinese investors had realised they could gain access to a company's technologies without full ownership.

"It also sends a message to the market that: We are not here as predators. We're here for the long term." (Reporting by Esha Vaish in Stockholm; Additional reporting by Laurence Frost in Paris and Paul Lienert in Detroit; Editing by Pravin Char)