China Skirted EU Scrutiny To Buy Italian Drone Firm

"In 2018, a Chinese state-controlled company bought an Italian manufacturer of military drones. Soon after, it began transferring the company's know-how and technology -- which had been used by the Italian military in Afghanistan -- to China.

The Italian and European authorities had no knowledge of the move.

Italian authorities are investigating the 2018 takeover of Alpi Aviation Srl by a Hong Kong-registered company they said is a front for Beijing and was in the process of transferring the company's technical and intellectual property to a new production site in China.

The takeover fits a pattern, some analysts said, of Chinese state firms using ostensibly private shell companies as fronts to snap up firms with specific technologies they then shift to new facilities in China.

"It's a textbook case," said Jaap van Etten, chief executive of Dutch economic-intelligence company Datenna, which tracks Chinese investments in Europe. "This is the strategy of the Chinese state, pushed by the Chinese government."

Europe is strengthening controls over investments following a wave of Chinese acquisitions. In 2018, the European Union established a new framework for screening. But national governments must balance their desire for investment against security concerns and are unable to monitor deals at every company.

"We need to make sure that they are not ending up in the hands of those who seek to undermine the international order or Western democratic values," said Valdis Dombrovskis, executive vice president of the European Commission, the EU's executive body.

In Europe, companies themselves are generally obliged to report relevant foreign takeovers for official review, for example when they involve security. Self-reporting allows some deals to go unnoticed.

"It's a loophole," said Francesca Ghiretti, an analyst at the Mercator Institute for China Studies, a think tank in Berlin. "More proactive screening would require more people and funding."

Italian authorities said they stumbled on Alpi's China links during a separate investigation. The company, based in the northern Italian town of Pordenone, manufactures light aircraft and mini drones called Strix. The drones, which were used by the Italian air force in Afghanistan, can be carried in a backpack, be deployed quickly by a single operator and provide surveillance even at night, according to the company's website.

Alpi had appeared on the radar of the Guardia di Finanza, the Italian financial police, twice since 2009 amid suspicions it had sold aircraft parts and drones to Iran in violation of an embargo. Authorities were also investigating its alleged illegal use of an airfield. Alpi denied wrongdoing.

Police said two searches of Alpi's offices this year revealed the China connection. In July 2018, they said, a company named Mars (HK) Information Technology Co., which had registered in Hong Kong two months earlier, bought a 75% stake in Alpi for 4 million euros, equivalent to $4.6 million, and then invested an additional 1.5 million euros in it. Police said that was a significant overpayment.

They traced Mars's ownership of Alpi through a web of intermediaries to two companies Beijing controlled: China Railway Rolling Stock Corp., or CRRC, a state-controlled rail giant, and an investment group controlled by the municipal government of Wuxi, a city near Shanghai. That led the police to conclude Mars was a shell company created to bring Alpi under the control of the Chinese government.

"This was clearly mainly a predatory investment in technology. . .and this type of investment in this sector is forbidden by Italian law," said Guardia di Finanza Col. Stefano Commentucci, who ran the investigation.

Alpi denied it had violated laws on transferring strategic information and technology out of the country. It said the sale was transparent and at its real value. CRRC didn't respond to requests to comment.

Mars and Wuxi couldn't be reached to comment.

The new owners weren't deeply concealed. Datenna also traced the ownership using public sources. International law firm Dentons posted on its website in 2019 about its role advising on the deal, naming CRRC and Wuxi as the owners. The Dentons lawyer named as involved in the deal declined to comment.

Police said they found evidence that Alpi was negotiating with the prospective buyers before the sale was completed over the transfer of Alpi's know-how and technology to China. Such transfers require permission from the Italian government.

Plans to move production to a high-tech hub near Wuxi accelerated after the installation of new management, composed of three Chinese executives and three Italians, police said. Italian authorities are investigating whether Alpi already transferred the technology and started production in China.

Why Alpi was acquired remains unclear. China is a leading producer of reconnaissance and armed drones and is the world's largest drone exporter. The U.S., a leader in military drones, has demurred from foreign sales, citing proliferation concerns.

China was likely less interested in the drone aircraft itself than a specific element, such as its night-vision sensor or its data-link technology, said Douglas Barrie, senior fellow for military aerospace at the International Institute for Strategic Studies in London." [1]

1. China Skirted EU Scrutiny To Buy Italian Drone Firm
Marson, James.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 16 Nov 2021: A.1.