China Zhongwang Bows Out of Aleris Acquisition

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Although opinions will differ, it is hard to see the failure of a proposed U.S. $2.3 billion merger between China’s Zhongwang USA, LLC and U.S.-based Aleris as anything other than the result of protectionist policies.

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Some two dozen US lawmakers had urged U.S. Secretary of the Treasury Steven Mnuchin to reject the proposed sale, saying Aleris was involved in the production and testing of specialized alloys used by the defense industry.

Considerable opposition was mounted by the Committee on Foreign Investment in the United States (CFIUS), a federal government body that reviews foreign investments in domestic firms, and determines whether those potential investments may impact national security. Lawmakers appealed to the CFIUS, saying Aleris’ research and technology were critical to U.S. economic and national security interests.

But the reality is Aleris USA has little or no involvement in the defense sector.

“Even the very small number of products that end up in the military through the supply chain were not made in the US but in Aleris’ European operations and did not involve sensitive technology,” the firm is reported as saying.

There were two forces acting against the takeover.

A Cloud Over Zhongwang

The first factor is Zhongwang’s connection to the stockpiling of thousands of tons of aluminum in Mexico, suspected of either being illegally exported from China under misreported tariff codes, or diverted to Mexico when it became clear they could not be legally imported into the U.S. without incurring anti-dumping duties.

Either way, a cloud hung over the company ever since these developments came to light two years ago. No amount of denials and PR work on its behalf have been able to shake the image that there is a less savory side to the company’s operations — or, at least, to that of its owner, Liu Zhongtian.

If the merger had been rejected on this basis, it would make more sense. It could be argued there are concerns about if  Zhongwang would be a reliable steward for Aleris based on its connection to these unresolved past issues.

Pushback from U.S. Manufacturers

The second factor is opposition from U.S.-based semi-finished products manufacturers.

Zhongwang USA made much (maybe too much) of its investment plans for Aleris post-merger, stating it intended to create 1,000 new jobs and make capital investments to expand capacity to better serve the growing automotive sector. AluminiumInsider reports this was met by an icy reception from much of the American aluminum industry and domestic labor unions, in addition to American lawmakers. Maybe another Chinese entity would have had a better chance of success, but maybe the growing anti-Chinese sentiment in the White House was always going to inhibit such a move.

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The CFIUS recommendation to block China Venture Capital’s takeover of Portland-based Lattice Semiconductor last June has more rationale as a security issue. The Aleris situation, however, appears to be more of a political decision, supported by trade fears of increased domestic competition.

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