New Bill Could Jeopardize Many Joint Ventures Between U.S. and Chinese Companies

There is a new bill being worked on in the House and Senate that would put a number of joint ventures at risk of being broken up by the U.S. government. The bill known as the Foreign Investment Risk Review Modernization Act would expand the role of the Committee on Foreign Investment in the U.S. (CFIUS).

CFIUS currently has oversight of deals concerning foreign investors taking majority stakes in U.S. companies. The committee can make recommendations to the President that foreign investments be blocked if they feel it could lead to the transfer of sensitive technology to foreign countries.. The new bill would allow the committee to have similar authority and oversight over minority investments and joint ventures.

A number of U.S. companies have spoken out against the new bill as they argue it would put them at a disadvantage when negotiating with potential foreign partners. With non-U.S. companies not having to face such scrutiny, partnering with an American company would have less appeal.

While the bill doesn’t isolate any one country, the main target of the legislation seems to be China. With the government of China requiring foreign investors to partner with local companies, many U.S. companies already have joint ventures in place and the proposed legislation could put some of these partnerships in jeopardy. With the tremendous growth in China’s economy over the past few decades, many U.S. companies see the country as a critical part of their global growth. Companies like Caterpillar, Cisco Systems, General Motors, and IBM already have agreements in place.

The bill appears to have bipartisan support and the support of the White House. Recent hearings regarding the bill have featured testimony from companies with interest in China. One of those testimonies was from IBM’s VP of government and regulatory affairs, Chris Padilla. Mr. Padilla stated, “Foreign competitors that do not face similar regulatory restrictions will seize global market opportunities while American companies are left watching from the sidelines.”

Supporters of the bill cite conflicts of interest from the likes of IBM. “I am concerned that some of the recent witnesses before the House and Senate have major financial conflicts of interest that prohibit an objective evaluation of the security threats we face,” Rep. Robert Pittenger (R., N.C.) said in an email. It should be noted that Mr. Pittenger helped draft the bill.

“The business models for IBM, Microsoft, and GE, for example, have led to the transfer of military applicable technologies to China that have likely aided the modernization of the Chinese military and intelligence agencies,” said Mr. Pittenger.

Of course the bill has corporate supporters as well, but the companies that support the bill are doing so quietly because there could be repercussions from China. Oracle and Nucor are two companies that have expressed support, but not very openly as they don’t want to be blackballed from selling their products in China.

One of the biggest surprises about the bill is how little press coverage it has gotten. Other than a recent piece in the Wall Street Journal there has been very little written about the bill from business and financial news sources. Given the role expansion in China has played in some company’s bottom line, you would think there would be more coverage.

While it seems almost certain that the bill will pass given it has bipartisan support and the support of the White House, the winners and losers upon passage will have to be sorted out. The biggest group of winners could be the attorneys that are hired to challenge the bill or sort out the bill’s impact on existing joint ventures.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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