When you look at an LED light, does national security jump to mind? If your answer is to scoff, would it change if the LEDs were in TV, mobile device and computer displays, used as a flash for smartphone cameras, used in general lighting markets, and the LEDs were in one of every three cars made in the world?
The LEDs mentioned above are made by Lumileds, a company that pulled in about $2 billion last year and is a part of Philips. By 2010, Philips Lumileds had shipped one billion Luxeon LEDs. In March 2015, Philips announced its intention to sell 80% of the Lumileds division based in California to GO Scale Capital, a group which included Chinese firms; yet on Friday, the majority interest sale hit a major snag. That’s when the Committee on Foreign Investment in the United States (CFIUS) slammed on the brakes, blocking the $2.8 billion sale, even as “Philips said it was not permitted to disclose the nature of the concerns raised by the U.S. committee, which vets deals for any national security issues.”
The U.S. is increasingly paranoid of Chinese tech companies. Bloomberg reported, “The sale stalled over the transfer of semiconductor technology involved in making LEDs.” Despite the long negotiations, in the end, the deal “fell short of addressing unexplained government concerns.”
Philips – Royal Philips NV – is actually a Dutch-owned electronics company; Reuters added, “The exact reason why the United States has blocked a Dutch company from selling a lighting division to Asian investors on national security grounds is not clear.”
Since neither of the principal actors in the deal were American, it “wouldn’t be considered a likely target for CFIUS to inspect for potential impacts on U.S. national security,” reported MarketWatch; it added:
CFIUS sometimes exerts its power “in a way that observers kind of scratch their heads and say, ‘Really’?” said Robert Profusek, the global chair of mergers and acquisitions at the law firm Jones Day. By their logic, he added, “almost anything is a CFIUS deal”.
CFIUS has the “authority of the President to suspend or prohibit certain transactions,” according to the U.S. Department of the Treasury. It consists of 16 officials from U.S. departments such as Treasury, Justice, Homeland Security, Defense, State, Energy, Commerce and the Office of Science & Technology Policy. Forbes added, “The chief executive of Philips, Frans van Houten, may be scratching his head over the question of why the world’s champion of free markets is blocking a deal between two overseas groups.”
The Wall Street Journal reported that CFIUS doesn’t have the power to reject transactions, but it can recommend for “companies to modify the terms of their deal” or recommend for the U.S. president to “nix the transaction. A presidential veto has only happened twice; more often, as was the case with Philips, the companies abandon transactions that CFIUS frowns upon.”
A CFIUS attorney told WSJ, “National-security reviews are expanding around the world and the national-security issues are broader as the supply chain globalizes;” another CFIUS lawyer stated, “CFIUS has been migrating to the emerging markets because the sources of inbound investment to the U.S. are shifting. What is perceived as being relevant to national security has also been expanded. You get these two phenomenona coming together at the same time.”
Five years ago it came to light that there was a kit capable of modifying any color LED bulb, such as those found in common appliances, into a “listening” device – basically a bug – that could send audio over 300 meters, about 984 feet, away.
Forbes also noted, “It is true that the potential of LED lights has not yet been exhausted and the lighting can be used as a new kind of Wi-Fi relay and has the theoretical possibility to monitor (and thus eavesdrop) on data activity in a company or city.”
So does the CFIUS actually know something we don’t about LEDs, some privacy or security snafu, or was the sale blocked and eventually dropped because the U.S. doesn’t want Philips to hand over the tech to the Chinese and other Asian firms that make up GO Scale Capital? What actually triggered “national security” concerns? It’s the dreaded Catch-22 of when national security is invoked and the public isn’t allowed to know the details because it allegedly involves national security. Reuters suggested the “deal may have troubled the U.S. government because of the prospect of a Chinese company acquiring advanced technologies to make the LED lights.”
Philips plans to “continue to report Lumileds business as discontinued operations” and Lumileds is looking for a new buyer.
Meanwhile, GO Scale Capital chairman Sonny Wu said, “China will inevitably become the leader of the global LED industry because of its industrial ecosystem and competitive advantages in scale and cost.”