Procurement: China Breaks The Rules


September 15, 2021: The Italian government discovered and blocked a Chinese firm that had secretly and illegally purchased Alpi Aviation, an Italian firm that produced military UAVs. Italian law requires the government to be notified before a defense firm is sold to someone outside Italy. The Chinese kept the deal quiet by disguising the purchase as a domestic transaction. The Chinese realized their new acquisition would be of little use if it remained in Italy and planned to quietly shut down the Alpi operations in Italy and move them to China.

While China dominates the consumer and commercial quadcopter UAV market, there are segments of the military market where they are behind and trying to obtain that tech any way they can. Alpi developed and introduced the Strix-C UAV in 2007. This small, lightweight UAV has been used in Afghanistan and to provide security for Italian and NATO bases elsewhere. Strix-C is an 8.65 kg (19 pound) UAV made of composites and is carried broken down in a backpack. It can be assembled in eight minutes and launched by throwing it. It lands via a small parachute, which is repacked and returned to a compartment on the Strix-C for the next missions. Strix-C will automatically begin carrying out a pre-programmed mission or be controlled by a handheld device that sends commands and receives real-time video of what the UAV is seeing. Alpi also works with larger Italian defense firms, making the sale a huge security breach. This is the latest effort by China and Russia to use secret acquisitions to obtain needed military tech. There have been a number of these deals undone recently and it keeps happening because they are fearful of losing their trade relationships with a major economic power that tends to get its way and is immune to criticism.

Earlier in 2021 Norway blocked British firm Rolls-Royce from selling Bergen Engines, a Norwegian firm Rolls Royce bought in the 1990s. Rolls-Royce kept Bergen Engines in Norway, where it was a major producer of maritime engines. A Norwegian court backed the ban of the sale that would provide Rolls-Royce with $178 million of the $2.7 billion it was seeking to obtain by selling off assets to help it survive the covid19 recession that had reduced its sales and threatened the entire firm.

The Bergen Engine was to be sold to TMH Group, a Russian controlled holding company based in Switzerland. Why did the Russians want this Norwegian firm? Bergin Engine had sales of $333 million in 2019 and is a major supplier of naval engines to Norway and other NATO nations. While Norway has a law that blocks such “national security” sales, that law cannot block the sale indefinitely and the best solution is to arrange a sale to a Norwegian or other NATO country firm.

Russia has been seeking to purchase Western marine engine manufacturers to make up for what it lost when it went to war with Ukraine in 2014. That deprived Russia of its major source of maritime and helicopter engines that had long come from Ukraine based firms. This began during the Cold War when Ukraine was part of the Soviet Union but became independent after 1991 when the Soviet Union fell apart.

At the same time the Bergen Engine sale was blocked, Ukraine ended Chinese majority ownership of Motor Sich, a major and profitable Ukrainian defense manufacturer of aircraft jet engines and gas turbine engines for helicopters and ships. Ukraine will, in effect, nationalize Motor Sich. While this annoys China, it will also please the United States, a major ally and supporter of Ukraine in its fight against Russian invaders. The Americans had recently sanctioned the Chinese firms that were buying a majority interest in Motor Sich. The Americans feared that control of Motor Sich would enable China to solve its problems with developing and manufacturing high-performance jet, helicopter and marine gas turbine engines.

Back in 2019 China went forward with its efforts to buy this majority stake in Motor Sich. Many Ukrainians felt China would take advantage of their corrupt government and industry officials associated with firms like Motor Sich to get better deals. These were often at the expense of Ukraine but very lucrative for the corrupt Ukrainians involved. Many Ukrainians, and Americans, realized how China operated in deals like this. If China obtained a major, or majority, stake in Motor Sich they could, and probably would, steal all the technology and manufacturing secrets and eventually move Motor Sich production to China. Initially they would hire some Ukrainian tech experts to help the Chinese manufacturing operation to get up to speed, but Motor Sich in Ukraine would become a branch of the main operation in China. Eventually the Ukrainian branch would be renamed to something Chinese and “Motor Sich” would disappear. Most Ukrainians want to keep Motor Sich Ukrainian and not plundered by the Chinese. Norway saw Russia attempting to do the same thing to Bergen Engines and other European countries are scrutinizing Chinese investments more carefully and frequently. It’s not just illegal acquisitions that are a problem, the Chinese financial system in general is a problem with a growing number of Chinese financial institutions experiencing lower credit ratings and sharp declines in the value of bonds denominated in yuan (the Chinese currency).




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