Foreign investment regulation
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FI Monitor Issue 4, 2022
In recent years, industries have faced a shortage of advanced semiconductors aggravated by the COVID-19 pandemic – a situation which brought, for example, the automotive sector to a quasi-standstill in mid-2021. As a result, these small but very significant chips have rapidly become the centre of attention for policymakers and governments across the world.
Here, we examine two key pieces of legislation introduced in the US and the EU to foster domestic production – and explore how foreign investment rules are being applied to semiconductor transactions.
Both the EU and the US have introduced Chips Acts in a bid to promote local semiconductor industries.
The EU Chips Act focuses on a combination of improved state-aid funding opportunities on the one hand and new research centres and co-operation between industry players and universities on the other in a bid to help the European Union achieve technological sovereignty in semiconductors. At the same time, the EU wants to remain an attractive destination for foreign investment, especially in the high-tech sector, although always with a focus on safeguarding (local) security of supply.
The CHIPS for America Act (US Chips Act, which was enacted in the FY 2021 National Defense Authorization Act although funding is still pending in Congress) aims to strengthen the United States’ position in semiconductor research, development and manufacturing. It offers financial incentives for the construction or modernization of semiconductor fabrication plants ("fabs") in the US and establishes the Multilateral Semiconductors Security Fund which aims to foster secure semiconductor supply chains by creating a common funding mechanism between the US and its international partners.
Against this backdrop, investments into the European semiconductor industry by way of acquisition are closely scrutinized. The most recent example of this came in January 2022 when the proposed buy-out by Taiwan-based GlobalWafers of Germany’s Siltronic was abandoned after the German Ministry of Economics failed to grant FDI approval within the relevant deadline.
This unsuccessful bid shows the difficulties Taiwanese companies may face when pursuing investments in European high-tech businesses. However in the Siltronic case, political motivations may not have been behind the German government’s inability to approve the deal: just two weeks before its review deadline the ministry had received information about merger control commitments given by the parties to the Chinese authorities, including “most favored nation” (MFN) clauses, which would have had a significant impact on German customers. Nonetheless, the regulation of – and rhetoric against – foreign investors in the semiconductor industry has sharpened in recent years. For instance, the German FDI Ordinance now considers semiconductors a key technology and requires a mandatory FDI filing in cases like the Siltronic transaction – whereas before the legislation was introduced, such investments would only have been caught by the general FDI regime (and indeed the review of the Siltronic case was itself triggered by a voluntary filing).
A parallel case in Italy in April 2021, in which the Milan-based automotive semiconductor supplier LPE was shielded from being acquired by the Chinese government-affiliated Shenzhen Investment Holding, shows that European governments are extremely sensitive to the security of supply chains and view foreign investments in the semiconductor industry critically.
Another relevant factor in the Siltronic case may have been the fact that GlobalWafers is based in Taiwan. In light of the current geopolitical tensions between the West and mainland China, investments from Taiwan may receive tougher scrutiny from Western governments.
US-headquartered Intel, by contrast, faced no hurdles when planning its European advanced semiconductor plant. As a greenfield investment, Intel did not require German FDI approval, with the country’s minister for the economy even going as far as to call it “a key step for Europe’s digital sovereignty”. GlobalWafers’ bid however, was not seen as positive, with the same ministry stressing the potential “drain of German High-tech assets” and the threat to “supply chain security," even though it could have led to a similar expansion of chip production capacity in Germany as Intel’s investment. That said, the difference in evaluation may also have been driven by the type of investment proposed: while Intel invested in a new plant, GlobalWafers tried to acquire an existing European business – which may have raised concerns relating to the potential drain on domestic assets and knowledge.
In the US, between 2018 and 2020 the Committee on Foreign Investment in the United States (CFIUS) reviewed 16 filings from Taiwan. To date, no Taiwanese investment has been prohibited by the President at the recommendation of CFIUS, but the number of deals either voluntarily abandoned or subjected to significant mitigation remedies is unknown due to CFIUS’s strict statutory confidentiality requirements. Factors impacting CFIUS’s understanding of potential risks posed by investment from Taiwan might include concerns related to technology being transferred from Taiwan to mainland China, purported Chinese cyber activity targeting Taiwanese companies, and supply chain vulnerabilities created by the US Department of Defense’s reliance on chips produced in Taiwan.
Foreign investments in the high-tech industry, especially from investors with links to China or Taiwan, will need to be assessed carefully and may face significant hurdles in both Europe and the US. Additionally, the increasingly unclear international security situation may lead to more semiconductor supply shortages and thus to further strengthening of European and US FDI control instruments relating to semiconductor investments. Such developments should be closely monitored, especially when considering deals in the high-tech sector.