Last week, Ker Gibbs, the former President of the American Chamber of Commerce in China, H.K. Park, a managing director at Crumpton Global LLC, Christopher Swift and Louis Lehot, partners at global law firm Foley & Lardner LLP, and Brett Waters, founder of the 4thly Accelerator, convened a podcast in the Metaverse to discuss how the potential for new U.S. Government restrictions on outbound U.S. investment in foreign countries may impact business in the global Silicon Valley and beyond.
As of the time of the podcast, President Biden has not yet issued an Executive Order restricting outbound U.S investments, but it’s a fluid situation. and the momentum is there. While legislation was introduced in both houses of Congress and has been moving through committee for the past several Congresses, we believe that partisan politics and the business lobby will make legislative action too challenging, and legislators will prefer to leave this to an Executive Order.
The larger trend driving the potential Executive Order is the bipartisan consensus in Washington, D.C. that China is a threat to the U.S. economy, to other countries in Asia, and to the viability of the international system as a whole. U.S. government focus on “security” has evolved from national security during the Cold War, to homeland security during the War on Terror, and today, to industrial security. Both the U.S. and Chinese governments are holding businesses more and more to account for their impact in the national security sphere. On the China side, it’s less new. There has always been a connection. For the U.S., however, the intersection of business investments and national security is a 21st century development.
In Silicon Valley, companies have been trying to get into China for years. Whether you are a venture capital firm, a startup, or a “bigtech” company, you need access to the Chinese market to have your product go from garage to global. When entering a new market, you have to decide whether to attempt to sell your product directly under your own brand and corporate structure, whether to set up a branch office, or whether to set up a subsidiary.
Many of the most successful PRC-market entries by non-PRC businesses have been with local Chinese joint venture partners who localize the product, the brand and acceptance by Chinese customers. Now, the decision to invest in China, whether five years in the past, or in a year into the future, could be subject to review by a new U.S. government regulator of “foreign” investments.
In our podcast, panelists discussed that the Biden Administration, in drafting the executive order, will most likely be prioritizing:
- Any technology related to weapons;
- Dual-use technology: there is a lot of tech in phones that could be transferred to China; and
- Data/privacy related concerns focused on sensitive personal data (healthcare, bio tech, life sciences) transferring personally identifiable information.
Panelists recommended that every U.S. business or investment firm, and any non-U.S. business that does business in the United States, evaluate its current portfolio and potential targets and consider the following questions:
- In what regions does the business have existing investment and in what regions will require new investment?
- Where is the risk?
- What is the cost of doing nothing?
- Are further investments into an existing business required?
- What communications are required between U.S. executives and Chinese, Russian or other local, provincial, regional or national government officials?
- What is the risk of disclosure your existing investments?
While there remains considerable ambiguity, we can plan now and think ahead. Panelists recommended table top exercises and portfolio reviews, particularly for businesses that have funding or are tied to China-state owned companies or the military. If you think you can wait to consider reverse CFIUS only at the LOI stage, you will be spending a lot more on compliance, regulatory, and legal advice. As evidenced by the controversy surrounding the U.S. military’s tepid response to the Chinese weather balloon that penetrated U.S. airspace, the decision to do nothing or to wait to act, can come at a high price of controversy.
Following is a link to the full discussion: