TCS Daily

Wrestling with the Tensions Between Tech Investment and National Security

By James K. Glassman - May 15, 2001 12:00 AM

On May 3rd, a Cabinet-level panel known as the Committee on Foreign Investment in the U.S. agreed to an acquisition by Dutch firm ASM Lithography of Silicon Valley Group. The go-ahead capped months of behind-the-scenes jockeying by parties trying to square national security concerns with fair play for international investment activities.

The Pentagon previously had blocked the sale on grounds that a unit of California-based SVG made optical technology necessary to U.S. national security. As a result, the U.S. government's green light was conditioned on ASML making a good-faith effort to find a buyer of SVG's Tinsley Laboratories.

Tech Central Station Host James K. Glassman recently sat down to talk with Todd Malan, Executive Director of the Organization for International Investment, which represents U.S. subsidiaries of companies based abroad. The group, with members' businesses ranging from cars to phones; fast food to pharmaceuticals; energy to insurance, and much in between, was heavily involved in working to bring the standoff to a resolution.

James K. Glassman: Tell us the latest about the Pentagon's blocking of ASML's acquisition of the Silicon Valley Group.

Todd Malan: Well the government committee, on which the Pentagon was a minority of one, ended up doing the right thing while straying disturbingly from legitimate national security concerns. Our view is that the conditions it set before granting the go-ahead are rooted in industrial policy.

Glassman: Would a blocked sale have had wider ramifications?

Malan: You know, I think it would. The Netherlands is one of our greatest allies in Europe. They have their own system of export control. This company bent over backwards to try to accommodate the legitimate national security concerns of the administration. And DoD just kept moving the goalpost on them. So any future technology company that's headquartered somewhere else in the world that wants to acquire or merge with a U.S.-based technology company has got to think about what this means.

The second aspect of this, aside from the policy shift at DoD, is the role of a U.S.-based competitor in this process. There's a company called Ultratech Stepper, which is a competitor of both SVG and ASML, that wanted some of the key components of SVG a few years back. Now they may achieve through this regulatory process of approval what they could not achieve in the marketplace.

That's another precedent for firms outside the United States: they just have to be aware now that, just like in the antitrust world, if you are going to try to acquire companies with sensitive technology, you've got to watch out for competitors who are going to use Washington lobbyists to try and block or thwart your business plans.

Glassman: Now the House Commerce Committee Chairman, Billy Tauzin, said that he opposed the acquisition, and Senator Robert Bennett raised some security concerns. Were these folks sticking up for constituents? Was this a political move? Or are they generally worried about national security?

Malan: Well, I think there are a couple of different stalking horses here. First and foremost, many of these members did not pay personal attention to this matter. There was a lot of behind-the-scenes lobbying involved that was not very transparent. I think if some of these members knew a little bit more, they might not been so anxious to sign those letters. This is probably the fault of ASML in not taking a very aggressive counter-lobbying strategy.

Nevertheless, obviously many members of Congress are concerned about national security, and they should be. But in this particular situation I think it's more about a sophisticated and aggressive lobbying campaign than it is about true national security concerns.

Secondly, there seems to be a sort of macro debate going on between the national security hawks and the more moderate folks. You see it in the whole export control debate. You see it in our debate about what to do with China. I think this has just gotten tied up in that as well and is sort of a stalking horse for a bigger and broader debate about national security and, in particular, China.

Glassman: Beyond obviously trying to follow U.S. law, how do U.S. subsidiaries of companies that are based abroad weigh U.S. national security interests? How can they go about convincing skeptics that they show the same concerns?

Malan: Well, I mean anybody who does business in the United States is bound by U.S. law. And they're liable to the same sort of punishments that U.S. firms face -- namely, the U.S. export control regime in particular, which is one of the main facets of all our protection of national security in the inner section between Commerce, defense-related work, and security-related technology. Companies based in the United States have complained about the complexity of the system for years. In fact, earlier this year, Boeing faced a fine in the millions of dollars for over 100 violations. These things happen. And it's probably, in my view, a problem with our system and the complexity in the system, not necessarily out of a desire of companies to be bad actors.

U.S. subsidiaries of companies based abroad face the same sort of challenges and the same set of obligations that U.S.-based companies do. They need to make sure policymakers understand the fact that they're doing the same things that their U.S.-based competitors and their colleagues in individual industries are doing in terms of protecting national security.

The trick is to find a way for the government to help companies be aware of those technologies that it considers to be a threat and not just try to blanket everything they possibly can. Otherwise, at some point in time, people will end up finding their laptops on the control list. There is a level of ridiculousness that the business community finds very frustrating. It's not just a problem of U.S. subsidiaries; it's Intel's problem, Microsoft's problem, and Boeing's problem.

Glassman: Intel was very much in support of this deal. Was that because SVG makes lithography equipment that's used to make semiconductors?

Malan: Yes. SVG and ASML are both core suppliers to Intel and the rest of the worldwide semiconductor industry, but particularly the U.S. industry. ASML has been a research partner of Intel for the last five years, and it has been brought into the inner sanctum of Intel in terms of their plan for the future. They were then asked to be a participant in those plans by making the machines that help Intel make the semiconductors that they design and research.

So Intel viewed the success of this merger as a core part of their progress towards better and better semiconductor technology. I think Intel understands that the United States does not have a lock on great technology; it comes from around the world. They don't buy this idea that you have to sort of put flags on technology -- this is ours and that's yours. They don't see that as a winning strategy at all.

Glassman: Actually, putting flags on technology is a good lead-in for my next question. What is the biggest myth that Americans hold about foreign investments here?

Malan: Well, I think there are a couple of different myths. But the biggest one is that people tend to glom on to the word "foreign" as opposed to figuring out where these companies do business, how they operate, and the complexity of their economic contribution. Most of these companies have very significant operations in the United States, have a significant number of employees, and are very significantly owned by U.S. shareholders through their mutual funds and pension funds. So the line is really blurring between what is a, quote, foreign company and what is a U.S. company.

Take, for example, Nokia and Motorola. Nokia is making all its phones for the U.S. market in the U.S. Motorola is no longer making any phones in the U.S. On the other hand, if you look at the stock ownership, over 60 percent of Nokia shares are owned in the United States. The largest worldwide shareholder in Nokia is the Janus Fund. It's really hard to call that a foreign company.

From my perspective, these laws that prevent this kind of merger are antiquated. They're based on a misconception about the nature of nationality of companies.

You know, I don't want to say that the national security review is illegitimate. There's nothing wrong with doing a screening and sitting down with the company and saying, "Here's what we expect of you. These are the things we'd like to make sure you commit to," and making sure they have a full understanding of the U.S. system and expectations. Nobody objects to that. There is, of course, a necessity to make sure that a Swiss company isn't merely a Trojan horse for an Iranian company or some dictator. Clearly, that is something the U.S. wants to block.

So the whole process isn't illegitimate. It's just that the prospect of commercial or political interference in the test of what is national security or not, we can't let national security become just a test of commercial advantage by one competitor over another, or some sort of definition of economic national security rather than a test of true threats to the United States.

Glassman: Now, it is true that the chairman of ASML is a director of Delft Instruments, which was found guilty illegally shipping night vision goggles to Iraq? This causes a concern.

Malan: Well, I think this is a red herring. This story was used to scare people about the situation. Only recently has Glenn Simpson of the Wall Street Journal reported all the details. When you really look at the situation, it's sort of ridiculous and pathetic, really.

The director in question joined the board of Delft in 1996. The actions that were subject to the court case in 1992 took place in 1989 and '90. I don't know how we can hold this guy responsible for something that happened clearly before his time. The entire supervisory board after 1992 was fired. From my standpoint, this is a complete red herring and I have no idea how it's relevant.

Glassman: This was the kind of thing being raised by what, competitors? Or was it being raised by China hawks?

Malan: I think both. They were trying to say that companies outside the United States can't be trusted and that no amount of export control commitment can make sure that these companies won't trade in a way that the United States doesn't want them to.

Glassman: Just as a last question, should we in this country be concerned that the Dutch or other countries would retaliate or do something similar when our companies want to merge with theirs?

Malan: I think that's the biggest, long-term damage of the situation. What are we going to say when a firm in India or Argentina goes to their government and asks them to copy the same sort of tactics that have been employed here and not allow a U.S. company to acquire a domestic company? I think this whole thing just cheapens national security as a legitimate issue to be raised, and the U.S. business community, in large part, is going to pay the price of it, because the United States has now lost its ability to sort of claim the high road on national security.

Glassman: Thank you very much Todd Malan.

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