European Commission Concerned About U.S. Investment in HDW

The EU Commission has reservations about the investment by One Equity Partner, part of Bank One of the U.S., in Howaldtswerke Deutsche Werft (HDW), the world's leading conventional submarine maker.

People close to the EU's External Relations Commissioner, Chris Patten, said Tuesday that the majority investment (75% minus one share) by the U.S. fund group bore the risk of a transfer of sensitive defense technology.

Concerns were said to focus on HDW's new submarine, U31, which is being built in cooperation with Thyssen Nordseewerke for the German Navy. The U31 is powered by a fuel cell, able to stay submerged for several weeks and invisible to electronic reconnaissance.

Because of its unique features, the submarine is expected to become a big-selling export for Germany's defense industry. Taiwan has been among the countries to have expressed an interest in it.

But because of political tension between Taiwan and China, the German government has banned the sale of defense goods to the east Asian state.

In Brussels there is now concern that the majority stake taken by One Equity Partner in HDW could result in the export of a leading European defense technology to the United States and onwards to Taiwan.

U.S. President George W. Bush has pledged the supply of eight conventional submarines to Taiwan with a total value of $4 billion.

However, the U.S. has been building nuclear-powered submarines for the last 40 years and industry experts have expressed doubt as to whether the the country's defense industry is in a position to produce conventional submarines.

A colleague of EU Commissioner Patten said that U.S. shipyards are seeking to overcome their own weaknesses with the help of the German technology. "Behind One Equity Partner could be defense group General Dynamics," a source within the EU Commission speculated.

The contracts between One Equity Partner and HDW's sellers, Babcock-Borsig AG and Preussag AG, which have been examined by the German government, include clauses to prevent the transfer of know-how, and the U.S. firm is also banned from selling on its shares.

But despite these measures, the EU Commission refuses to rule out that blue prints from HDW will find their way onto the U.S. defense market.

Although the EU Commission can raise defense-political objections, its authority is restricted to examining company mergers and acquisitions. A notification of the takeover has already been submitted to Brussels. But even its antitrust rules don't apply fully in the defense industry.

As a result, the German government could push through One Equity Partner's investment in HDW against possible opposition from EU Competition Commissioner Mario Monti.