Chinese Investments in Germany in Times of Corona and Thereafter




The boom of Chinese Investments in Europe and specifically in Germany has experienced a serious cool-down. In 2019, Chinese Direct Investments in Europe have, in terms of deal value, dropped by ca. 40% to USD 13 billion. The biggest Chinese investment activities in Europe in 2019 took place in Finland, UK, Sweden, Germany and Italy, in all such countries mainly in consumer products, services and automotive industry companies. The number of acquisitions by Chinese state-owned enterprises (SOE) has declined even stronger than the general investment activity.

Reasons for Decline

There are several reasons for the drop of Chinese investments, such as the high indebtedness of certain Chinese companies and the need to improve their balance sheet structure before any new investments can be made. It is also apparent that a number of Chinese companies have still work to do in order to properly integrate the businesses they have acquired in the last years before they enter the adventure of new acquisitions.

Change of Regulatory Regime

Also the tightening of the pertinent legal investment control regimes in China and Europe played a role in the decline. The mandatory ODI approval processes carried out in China are not only relevant because the authorities prohibit investments which do not meet the Chinese regulatory requirements but also because these clearance requirements represent, in terms of deal certainty and in terms of timing, a considerable disadvantage for Chinese investors in structured sales processes compared to their Western competitors – not only in exceptional cases with the consequence that Western investors enjoy priority.

In addition thereto, also the foreign investment control standards in Europe and Germany are getting stricter. In the last three years, foreign investment control requirements in Germany have been tightened by, e.g., (i) the introduction of a lower 10% investment threshold (formerly, the 25% threshold applied throughout), and (ii) the addition of certain “critical infrastructure” items for which stricter standards apply, as well as (iii) a longer duration of the clearance process (up to six months). However, no prohibition has been issued so far and the few cases where a prohibition was announced (and the deal then failed without a formal prohibition being “necessary”) related to obviously critical investments like e.g. energy grids or military related technology. Therefore, investments in strong brands (e.g. ROLF BENZ furniture, TOM TAILOR fashion) and also in technology companies which are not defence or IT security related were not at risk to be prohibited and were, and still can be, successfully consummated.

Also, but not only, under the impression of the Corona crisis, the German government is currently considering a further amendment to the German foreign investment law. It is now proposed that also the aspect of a “possible future impairment” of the public order and security shall be taken into consideration. It is therefore proposed that not only an actual impairment but also a mere “probable impairment” can be a reason for the ministry to block a proposed transaction. The government thinks also on mechanism to prevent more efficiently the early outflow of know-how and expertise into countries outside the European Union.

However, from what is so far known about the possible changes of the German legal regime, the laws will remain in the logic of focussing on certain “critical” industries (e.g. defence, energy, IT, food, healthcare, telecom, cloud computing etc.). Other might be added, e.g., inspired by the corona crisis, developers of vaccines or certain pharmaceuticals but the vast majority of investments will remain to be doable even under the tightened regime. What nevertheless remains to be seen is the European and German reaction on currently too much dependence on foreign suppliers in the health and maybe in further sectors which qualify as being critical for the national wellbeing.

The economic downturn caused by the corona crisis will, also for Chinese investors, create interesting investment opportunities. Small, promising companies in tech and biotech are looking for fresh capital which their current investors are currently hesitant (or unable) to provide. Mid-sized world leaders in financial distress are looking for strong partners. Companies in the framework of insolvency proceedings are looking for investors who offer them interesting add-ons such as access to the (already recovering) Chinese markets. The legal and factual environment has certainly become more challenging. But it is obvious that the corona crisis is not the end of globalization and of cross-border investments and mergers of companies. But it is, more than ever, critical to be focussed on certain industries, to be well aware of the market environment and of the rapidly changing legal framework in which we are operating. And Chinese investors should take properly into consideration in which respects they can provide added value to the German companies, but also in which respects they are at a disadvantage compared to their Western competitors, namely with regard to foreign investment control, deal certainty and speed.