• Eyal Pinko

Without the knowledge of the authorities, China purchased an Italian military-drone manufacturer

In 2018, a Chinese state-owned firm purchased an Italian military drone manufacturer. It soon began transferring the company's know-how and technology to China, which the Italian military had previously employed in Afghanistan.

The action went unnoticed by the Italian and European governments, illustrating how Beijing is circumventing Europe's lax investment screening to obtain vital technologies.

Authorities in Italy are looking into the purchase of Alpi Aviation Srl in 2018 by a Hong Kong-registered firm that they believe is a front for the Chinese government and was in the process of transferring the company's technical and intellectual property to a new manufacturing facility in China.

Analysts believe the transaction follows a trend of Chinese state corporations employing nominally private shell companies as fronts to buy companies with specific capabilities, which they subsequently transfer to new facilities in China.

Following a surge of Chinese purchases, Europe is tightening investment rules. The European Union developed a new screening mechanism in 2018. However, national governments bear the ultimate responsibility, as they must combine their desire for investment with security concerns and are unable to monitor deals at every corporation. The European Commission's goal is to make sure that technologies and capabilities developed by the EU countries will not wind up in the hands of those who want to destabilize the international order or Western democratic ideals.

Companies in Europe are often required to notify relevant foreign takeovers for official assessment, such as where security is involved, but in some cases, transactions go missed.

The United States, because of China's industrial espionage efforts, has expanded the powers of an interagency panel that reviews investments, allowing it to look at deals that haven't been submitted for approval and focusing its attention on China.

Alpi's China ties were discovered during a separate probe, according to Italian police. Strix is a brand of light aircraft and tiny drones manufactured by a firm based in Pordenone, Italy. According to the company's website, the drones, which were employed by the Italian Air Force in Afghanistan, can be carried in a backpack, deployed rapidly by a single operator, and provide surveillance even at night.

Since 2009, Alpi had been on the radar of the Italian financial police, the Guardia di Finanza, on suspicion of selling aircraft components and drones to Iran in contravention of an embargo. Authorities were also looking into the company's alleged illegal usage of an airport. Alpi denied any wrongdoing, claiming that it had not sold Iran any technology that could be used for military purposes.

The China connection was discovered during two inspections of Alpi's offices this year, according to the Italian police. In July 2018, a company called Mars (HK) Information Technology Co. Ltd, incorporated in Hong Kong two months before the procurement, paid 4 million euros for a 75 percent share in Alpi and subsequently invested another €1.5 million in the company.

Mars' ownership of Alpi was tracked through a network of middlemen to two Chinese state-controlled companies: China Railway Rolling Stock Corp., or CRRC, a state-owned rail powerhouse, and an investment organization controlled by the municipal government of Wuxi, near Shanghai.

The new owners were not well-hidden. But, a well-known international law firm announced on its website in 2019 that it had advised on the transaction, listing CRRC and Wuxi as the owners.

The Italian police claim they discovered evidence that Alpi was discussing with potential buyers about the transfer of Alpi's know-how and technology to China before the deal was completed. They said the Italian government must approve the transfer of military technology and manufacturing outside of the country.

After the foundation of new management, which included three Chinese executives and three Italians, plans to shift operations to a high-tech area near Wuxi quickened. Authorities in Italy are looking into whether Alpi has already transferred the technology and begun production in China.

According to police, Alpi shipped a military drone to China in 2019 for more than a year, falsely identifying it as a "radio-controlled airplane model" for a five-day import expo in Shanghai.

It's unclear why Alpi was purchased. China is the world's largest drone exporter and a prominent maker of reconnaissance and weaponized drones. The United States, a world leader in military drones, has backed away from international sales, citing fears about proliferation. So it is most likely that China's interest in Alpi is a specific feature of the drone aircraft, like its night-vision sensor or data-link technology.

Alpi denied that it had broken any rules regarding transferring strategic information and technology out of the country. The sale of the firm's interest was transparent, according to the company, and at its true value. It declined to provide any additional information.

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