Global corporations that once rushed to take in "China money" are now staking everything on disconnecting, cutting ties with Chinese capital. They are going beyond simply reducing the use of Chinese-made parts and are stepping up their response by unwinding Chinese equity or limiting voting rights. The trend is seen as a result of escalating U.S.-China trade tensions, with U.S. rules starting to target not only product origin but also corporate governance and the source of capital.
According to the Financial Times (FT) on the 6th local time, global tire maker Pirelli is mounting an all-out effort, even enlisting the Italian government, to break with its largest shareholder, China's Sinochem. Sinochem holds 37% equity in Pirelli. Because of this Sinochem-held equity, Pirelli is at risk of falling under sanctions from the U.S. government's "ban on China-linked connected car software and hardware," which takes effect in March.
The U.S. market accounts for about 20% of Pirelli's total sales. In particular, its premium tires, a mainstay in the U.S. market, are equipped with advanced proprietary technology. If the U.S. government classifies Pirelli products as "China-linked parts" on the basis of Sinochem's equity, Pirelli would lose in an instant its core market that generates annual sales worth several trillion won.
The Italian government is reportedly considering, as a last resort if Sinochem does not decide on its own to sell its equity, suspending the voting rights attached to the equity held by Sinochem. To protect national strategic assets, Italy operates a so-called "golden power" law that can restrict foreign corporations' investments or suspend voting rights. Italy's Minister of the Ministry of Trade and Industry (MOTI) Adolfo Urso emphasized in Nov. last year, "The government will do its part so that Pirelli is not sidelined in the international market," making clear that stronger legal intervention would be considered if necessary.
In the automobile and battery industries, scrubbing out Chinese capital is spreading like a trend. Under the U.S. Inflation Reduction Act (IRA), joint ventures that include Chinese capital are highly likely to be excluded from tax credit benefits.
Ford abandoned the traditional method of setting up a joint venture with China's CATL during construction of a battery plant in Michigan. Instead, Ford chose a structure in which it owns 100% equity and receives only a technology license from CATL. The calculation is to block the inflow of Chinese capital at the source and secure U.S. government subsidies.
Electric vehicle brand Polestar is also on alert. Polestar is an affiliate of Geely Automobile Holdings. Because of this label, it faces the risk of being hit head-on by the U.S. connected car rules, like Pirelli. Polestar announced it would switch its in-vehicle software and key parts supply chain to a non-China system to avoid the rules. Instead of touching an equity structure that is difficult to change immediately, its strategy is to maintain eligibility to sell in the United States by erasing traces of China in the connectivity area that regulators take issue with.
Recently, citing national security, the U.S. government has issued a series of divestment orders to information and communications technology (ICT) corporations invested in by Chinese capital. It has been resolute enough to retroactively nullify even transactions that had already closed.
The Committee on Foreign Investment in the United States (CFIUS) this month recommended a divestment order against a China-linked fund that invested in Emcore, a U.S. optical communications components company. A divestment order means to resell equity that was purchased with money. The committee cited the reason that "if China-linked capital gains access to Emcore's core technology and supply chain, it would threaten national security." After this decision, caution surged across technology transactions involving Chinese capital. Experts said, "As the perception spreads that once Chinese capital is mixed in, even completed transactions can be overturned later, global corporations are setting their course toward rejecting Chinese investment from the outset."
The British government is taking a path similar to the U.S. government. Citing the National Security and Investment Act, the United Kingdom ordered Chinese corporation Nexperia to sell more than 86% equity in the semiconductor plant Newport Wafer Fab it had acquired. Assets worth hundreds of billions of won have effectively been designated for forced unwinding under the banner of national security.
Experts assessed that this trend is closer to strategic and selective disconnecting than a full-on decoupling from China. The approach is to maintain production and sales in China while clearly cutting ties in sensitive areas such as governance or data access rights. This change is ultimately expected to make global supply chain uncertainty a constant. China is also likely to respond to moves that exclude its capital with retaliatory measures or export restrictions.