Exclusive: Germany to create fund to foil foreign takeovers after China moves

[March 20, 2019]  By Michael Nienaber

BERLIN (Reuters) - Germany plans to pass legislation by the end of 2019 to create a state-owned fund that can protect key companies from takeovers by Chinese and other foreign firms, government sources said, in a marked shift from its "hands-off" approach to business.

Economy Minister Peter Altmaier proposed the fund in February as part of a more defensive industrial strategy and three officials told Reuters the government was now working on draft laws so the fund could be up and running next year.

Two senior government officials, who spoke on condition of anonymity, said the idea was for the state-owned investment fund to work with the private sector when buying company stakes to foil unwelcome takeovers.

One official said the state could buy a stake initially and then sell it on as soon as possible to private investors while the other official said in some cases the fund could work with private investors from the start.

"In the past, Germany was too reluctant to define its national interests. This is changing now," the first government official said.

"We see that we cannot lean back anymore and let everything be decided by the free play of market forces," he said. "And this means more protection from the state."

Long an ardent advocate of free markets, Germany's move is a response to China's state-driven metamorphosis from customer to competitor and U.S. President Donald Trump's threats of unilateral trade sanctions and higher tariffs, the sources said.

For decades, German politicians followed the "ordoliberal" principles of post-war economy minister Ludwig Erhard who said free markets should decide winners and losers, with the state only providing a framework for fair competition.

The German move also comes at a time the European Union as a whole is reconsidering the bloc's industrial strategy and relations to China in the face of increased investment in critical sectors by Chinese state-owned enterprises.

The European Commission has urged the bloc to back its ideas to curb Chinese companies and EU leaders are due to discuss the issue at a summit in Brussels this week.

WAKE-UP CALL

In Germany, the Chinese takeover of robotics maker Kuka <KU2G.DE> in 2016 was the wake-up call for the government that underlined the urgency for the state to become more active, the officials said.

An attempt by China's State Grid last year to buy a stake in power grid operator 50Hertz also focused German minds. After Berlin failed to find an alternative private investor in Europe, German state-owned bank KfW https://www.kfw.de/kfw.de-2.html stepped in to keep the Chinese out.

That's why the German government is now aiming to pass new laws creating the investment fund by the end of the year so it can be ready for use in 2020, the first official told Reuters.

"Ideally, there will be stake acquisitions together with private investors," the official said, adding that Berlin had no plans to intervene in daily business decisions. "It's not about the state becoming entrepreneurial."

The state-owned fund could be managed by KfW, or be an altogether new entity empowered to hold company shareholdings, the second official said.

The plan goes hand in hand with a decision by the government in December to lower the threshold for screening, and even blocking, purchases of stakes in German firms in strategic areas by non-European investors.

An economy ministry spokesman said investment by the state fund would be limited to "very exceptional cases" and stakes would only be bought for a restricted period.

Such cases would mainly involve the protection of critical infrastructure where the government viewed a non-European investor as a threat to Germany's national interests, the ministry spokesman said.

"The idea and its possible implementation are being discussed now in the further process of the industrial strategy," said the spokesman, who declined to comment on the fund's expected size.

'ECONOMIC SOVEREIGNTY'

Altmaier said in February after presenting Germany's industrial strategy for the next decade that key sectors were steel and aluminum, chemicals, machine and plant engineering, optics, autos, medical equipment, Green technologies, defense, aerospace and 3D printing.

German Economy Minister Peter Altmaier presents the national industry strategy for 2030 during a news conference in Berlin, Germany, February 5, 2019. REUTERS/Fabrizio Bensch/File Photo

Among the companies whose survival Altmaier described as crucial for the economy as a whole were marquee names such as Deutsche Bank <DBKGn.DE>, thyssenkrupp <TKAG.DE>, Siemens <SIEGn.DE> and Germany's big carmakers.

Altmaier told Reuters in an interview that his aim was to safeguard global competitiveness and technological leadership of German industry for the coming decades.

"This should also be a top priority for the next European Commission," he said. "With this, we will secure jobs and prosperity in Germany and Europe. And, above all, it's what will give Europe its economic sovereignty and independence."

Germany and France, the two biggest economies in the euro zone, are liaising closely on how the EU could overhaul its competition and state subsidy rules to support European champions that can compete on a global level.

Following a decision by Brussels to block a rail deal between Siemens <SIEGn.DE> and Alstom <ALSO.PA> - a merger that was meant to counter Chinese competition - German Chancellor Angela Merkel wants to put reform of Europe's competition laws high on the agenda during Germany's EU presidency in 2020.

BUSINESS BACKLASH

While Germany's powerful BDI https://english.bdi.eu industry association has welcomed the government's plan to tackle a more assertive China, support national champions and reform competition law, it has criticized the idea of a state investment fund.

"New instruments for state ownership should not be used to fend off company takeovers, they should only support projects of new technologies," BDI director general Joachim Lang said.

In light of growing unease among coalition lawmakers and industry groups, Altmaier is trying to reassure critics that Germany will remain open for foreign direct investment and that the government wants to intervene as little as possible.

"However, there can be exceptional cases in which the state must take action to avoid severe disadvantages for the economy as a whole and the country's national welfare," Altmaier told Reuters. "For example in cases when our critical infrastructure is at stake or when it comes to game changer technologies."

Carsten Linnemann, deputy leader of Merkel's conservatives in parliament and head of the bloc's business-friendly Mittelstand wing, said the government's focus on national champions was problematic. "We shouldn't confuse size with competitiveness," Linnemann told Reuters.

He said Germany's "hidden champions" - mostly family-run firms that are market leaders in niche segments - were a good example that innovation is often driven by small enterprises.

Linnemann also rejected the idea of state intervention.

"The state simply doesn't have more knowledge than the market. This basic rule hasn't changed in times of big technological disruptions, in fact rather the opposite."

Asked if parliament would block legislation for a state investment fund, Linnemann said coalition lawmakers were still in the process of forming an opinion. He said they generally shared the government's goal to support the industrial sector.

"But we won't achieve this by copying the industrial policy of China, the United States and France."

($1 = 0.8829 euros)

(Reporting by Michael Nienaber; additional reporting by Andreas Rinke and Christian Kraemer; editing by David Clarke)

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