Motivations, security threats and geopolitical implications of Chinese investment in the EU energy sector: the case of CDP Reti
| Date | 01 June 2020 |
| DOI | 10.1177/1354066119871350 |
| Published date | 01 June 2020 |
review-article2019
EJ R
I
Article
European Journal of
International Relations
Motivations, security threats
2020, Vol. 26(2) 594 –620
© The Author(s) 2019
and geopolitical implications of
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https://doi.org/10.1177/1354066119871350
DOI: 10.1177/1354066119871350
Chinese investment in the EU
journals.sagepub.com/home/ejt
energy sector: the case of
CDP Reti
Miguel Otero-Iglesias
Real Instituto Elcano, Spain
Manuel Weissenegger
European Central Bank, Germany
Abstract
The recent surge in Chinese outbound foreign direct investment in Europe has been
met with anxiety often invoking national security concerns. Using the national security
framework developed by Moran and Oldenski, we try to ascertain which transactions
justify apprehension. Our case study is the acquisition by a subsidiary of wholly state-
owned State Grid Corporation of China of a 35% stake in CDP Reti S.p.A. (CDP Reti)
that controls Italy’s electricity grid via its subsidiary Terna S.p.A. Although State Grid
Corporation of China can nominate two members of CDP Reti’s board of directors, we
find that there is no direct threat to national security. We then tackle the geopolitical
dimension of investments in electricity grids. Using the ‘thought experiment’ developed
by Scholten and Bosman, the contribution we make is that, in a world where the
importance of renewable energy increases, a framing power rather than control over the
strategic development of a country’s grid is sufficient to exert geopolitical power. Since
State Grid Corporation of China’s exponents on CDP Reti’s board can at least partly
influence the company’s investment decisions, we conclude that the transaction grants
China geopolitical influence over Italy’s grid. Furthermore, in the future this type of
geopolitical influence could also lead to indirect security concerns. The interconnection
of European electricity flows extends this conclusion to the EU’s electricity grid as a
whole.
Corresponding author:
Miguel Otero-Iglesias, Real Instituto Elcano, Calle Príncipe de Vergara 51, Madrid 28006, Spain.
Email: miguel.otero@rielcano.org
Weissenegger and Otero-Iglesias
595
Keywords
China, foreign direct investment, investment screening, European Union, Italy, energy
Introduction
In recent years China has made headlines with acquisitions that targeted important
Western enterprises. In 2004, Lenovo bought the iconic computer manufacturer IBM.
The British car producer MG Rover Group was purchased by Nanjing Automotive.
COSCO made an important investment in the Port of Piraeus in Athens, Greece. In 2015,
ChemChina bought the tire-maker Pirelli, a piece of pride of the Italian economy. Chinese
firms were also allowed to participate in the construction of a nuclear power plant at
Hinkley Point C in the UK. Finally, in 2017, there was the acquisition of German robot-
ics producer KUKA by Midea. The shock with which these acquisitions were met in the
West is comprehensible: everything is happening so fast, and the economic and geopo-
litical implications are still being digested.
At the turn of the millennium, China was nowhere to be seen in the world of outbound
foreign direct investment (OFDI). From representing virtually zero of global OFDI flows in
the late 1990s, Chinese OFDI surged to comprise about 10% in 2015. In the same year,
China’s OFDI stock exceeded US$1tn. However, representing only 4.8% of world total, this
is still negligible compared to the stock held by Europe and the USA (UNCTAD, 2018).
Thus, the surge in OFDI conducted by Chinese businesses should not be overstated.
The motivation behind the present research lies precisely therein. It aims, first and
foremost, at contributing to the growing literature on Chinese OFDI by trying to clearly
ascertain where to draw the line between deals that should cause apprehension and those
that should be seen with more positive eyes. Particularly, the discourse on national secu-
rity that has accompanied much of the discussion surrounding Chinese OFDI requires
careful examination. As we shall see, national security arguments give governments a
sort of final judgement call with which to block incoming investments, sometimes argu-
ably for political rather than security concerns (Tingley et al., 2015).
There are valid reasons for apprehension, as the latest discussion about Huawei’s
5G technology shows (Guarascio and Yun Chee, 2018). Chinese companies, be they
private or state-owned, are strongly linked to the government. State-owned enter-
prises (SOEs) in particular are subject to strict government scrutiny, not least because
personnel and career decisions are to a large extent taken by the government, whereas
senior executives of the most important SOEs are appointed by the Chinese Communist
Party (Leutert, 2016). Chinese OFDI provokes fear for reasons of military strategy as
China is not a member of the West’s security alliances (Meunier, 2019). The country’s
fame for breaching intellectual property (IP) rights and carrying out cyberattacks
against Western private and public entities does not do it any good either (Konrad and
Kostka, 2017; NBAR, 2017).
Apprehension is severe when Chinese investments target a country’s critical infra-
structure, i.e. assets or networks that constitute a vital backbone of the economy and the
functioning of the public sector (OECD, 2008). Recently, Australian lawmakers, follow-
ing a series of Chinese acquisitions in the nation’s electricity grid, had none of it and
596
European Journal of International Relations 26(2)
required tougher scrutiny of such investments (Masters and McBride, 2016). Even in
Germany, traditionally open to international capital, the debate around national security
with respect to Chinese OFDI is gaining pace (Stanzel, 2017).
To answer where security considerations begin to truly materialize, we have con-
ducted an in-depth investigation of a concrete Chinese investment (our case study).
In 2014, a subsidiary of State Grid Corporation of China (SGCC), the largest utility
company on the globe, acquired a 35% stake in the Italian holding company, CDP
Reti, which controls, among other things, the national electricity grid. The minority
stake cost SGCC €2.1b, making it the largest investment undertaken by the Chinese
utility. The transaction is of relevance, not only because of CDP Reti’s strategic posi-
tion within the Italian and European energy system, but also because of several pro-
visions accompanying the deal that grant SGCC representation on the board of
directors of CDP Reti and its most important subsidiaries. This gives rise not only to
security concerns, but also raises the question whether the investment was motivated
by financial considerations or rather followed a geopolitical agenda.
On the basis of our research, the paper makes a number of contributions. First, it
uncovers whether the investment was grounded on financial terms. The conclusion will
be affirmative. CDP Reti distributes dividends that are in line with the above-average
dividends that utilities traditionally hand out (Ross, 2014). Hence, this confirms the
strand of the literature that finds Chinese OFDI in Southern Europe’s energy sector to be
motivated by market and asset-seeking strategies (Pareja-Alcaraz, 2017).
Second, the paper analyses the deal for its national security risks. The inquiry extends
to the EU level. This is justified by the fact that energy markets, particularly electricity
grids, cross borders. The literature has voiced concerns over the presence of Chinese
representatives on the boards of critical European companies (Kamiński, 2017). However,
as will be shown later, in the case of SGCC’s investment in CDP Reti such threats do not
materialize yet. This finding should alleviate some of the concerns in Italy (and beyond)
surrounding national security.
Nonetheless, in the final part of the paper we also tackle the geopolitical dimension of
the acquisition. Rather than investigating what the transaction means for the present day,
we explore the increasing importance of electricity grids in the geopolitics of energy.
Based on a ‘thought experiment’, the contribution that we are trying to make is that con-
trol over electricity grids is not an indispensable precondition for a country to exert
geopolitical power over another nation. Rather, what is needed is a framing power over
the strategic development of a country’s grid. When the terms of a foreign investment
grant the foreign country with such influence over a nation’s electricity grid, FDI therein
can in the future effectively represent a means of geopolitical influence. Since the board
members that represent SGCC can in the present case at least partly influence what
investments CDP Reti and its subsidiaries should undertake in the future, we argue that
the transaction under scrutiny does grant China geopolitical influence over Italy’s and
Europe’s electricity grid. Moreover, this potential future influence could also indirectly
introduce national security risks through the backdoor.
The paper is structured as follows. The section ‘FDI and ‘national security’’will focus
on the literature that has covered the field of FDI and national security. It will provide the
framework of analysis against which the investment by SGCC in CDP Reti will be
Weissenegger and...
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