With its wide, curved wing, the Strix unmanned aerial vehicle (UAV) looks, at first sight, like an expensive boomerang.
In fact, it’s a drone that the Italian air force once used for airborne reconnaissance in Afghanistan. It’s made by Alpi Aviation, a northern Italy-based manufacturer whose products also include helicopters and light aircraft.
A new ‘secret’ about Alpi has now emerged: It’s become Chinese.
In early September, Italian financial police referred six people — three Italian and three Chinese — to prosecutors for allegedly arranging the sale of 75 percent of Alpi Aviation to two Chinese state-owned enterprises in secret in 2018, for 4 million euros.
Alpi’s executives allegedly failed to notify the Italian government of the sale for two years, even though domestic companies involved in the armaments industry are required to seek government permission to negotiate — let alone complete — a sale to non-E.U. buyers, under Italian law.
The two Chinese buyers involved are China Corporate United Investment (CCUI) Holding and CRRC Capital Holding, a subsidiary of the CRRC Corporation, China’s state-owned rail manufacturing giant that’s been on the U.S. Entity List since June 2020 due to its alleged links to the Chinese military.
News of Alpi’s sale has emerged at a time when national security experts are expressing growing concern about China harnessing civilian enterprises to benefit its defense supply chains, a strategy referred to as “military-civil fusion.” Researchers worry that some Chinese overseas acquisitions made ostensibly for commercial purposes may be disguising opportunities for the People’s Liberation Army to co-opt foreign technology.
But the Alpi deal wasn’t so surreptitious, if you knew where to look. The fact that Italian investigators took so long to catch wind of it raises questions about the capacity of foreign investment review committees meant to oversee acquisitions and prevent sensitive technology from landing in Chinese military hands.
THE ACQUISITION
Alpi Aviation makes both manned and unmanned aircraft, and has contracts with the Italian Ministry of Defense and Leonardo, a major Italian aerospace company that’s partially government-owned.
But it’s the Strix UAV model that has attracted most attention following the revelation of Alpi’s sale. In 2009, Alpi sold a version of its UAV to the Italian air force.
Chinese media reports have indicated that CCUI intended to transfer Alpi’s production lines to China. The country is already the world’s largest exporter of armed UAVs, and dominates the commercial drone market.
“China already has a leading position on the global commercial small unmanned aerial system (UAS) market through DJI and other smaller firms,” says Justin Bronk, a research fellow specializing in airpower and technology at the Royal United Services Institute.
“However, China has also taken a wide-net approach to commercial acquisitions of overseas firms with potentially useful proprietary technologies,” he adds. “There might not necessarily be any specific reason why Alpi Aviation is of interest, beyond the fact that it operates within a market which Chinese firms compete in.”
Italy’s financial police have alleged that Alpi was acquired at an inflated price, an allegation Alpi has denied. It claims that the sale took place transparently, using the real value of the company and in compliance with tax regulations.
A spokesperson for Alpi declined to comment for this story.
THE BUYER
The Alpi deal was certainly no secret in China, even though CCUI and CRRC bought their stake through a Hong Kong shell company, Mars Information Technology Co., which was incorporated just months before the sale in 2018, according to Italian financial investigators.
CCUI describes its cooperation with CRRC to “invest in [a] high-end equipment fund and purchase Alpi Aviation S.r.l. and related industries” openly on its website. Law firm Denton’s, which advised CCUI, laid out the structure of the investment fund and boasted about the successful deal in a March 2019 press release. Chinese media reports have also covered the appearance of Alpi’s drone at a 2019 Chinese trade expo, as well as plans to move the company’s production to a special-purpose industrial zone in Wuxi, Jiangsu Province.
Even so, Italian regulators failed to hear of the deal independently. Instead, the sale came to light by accident, during an unrelated investigation into Alpi’s unauthorized use of a military airfield.
That points to a significant loophole in Italy’s screening mechanism for foreign direct investments: Without notification from the company involved, authorities often don’t have the manpower or capacity to intercept deals in time.
“[European] countries and the EU are very much aware of these loopholes, and they have been for a long time,” says Francesca Ghiretti, an analyst at the Mercator Institute for China Studies specializing in China’s footprint in Southern Europe and economic security. “It was a very conscious decision not to have a screening mechanism that worked retroactively, unlike the Committee on Foreign Investment in the United States (CFIUS).” 1CFIUS can retroactively review transactions within the past three years.
“The reason is that it requires a lot of funding and workforce. Although there was political momentum for the strengthening of the screening mechanism back in 2017 [when Italy’s investment screening laws were expanded to include the high-tech sector] it has faded, but the case of Alpi might give it new impetus,” Ghiretti adds. “You would also have to deal with some very strict privacy laws. Navigating those means, again, funding and workforce.”
MILITARY CONNECTION
It’s difficult to know for sure whether CCUI and CRRC acquired Alpi to transfer foreign technology to the PLA, particularly as Alpi’s products can be used for both civilian and military purposes.
Still, several risk signals in the Alpi deal stand out, the most salient being CRRC’s involvement, according to Devin Thorne, a threat intelligence analyst at cybersecurity firm Recorded Future who has co-authored a report about global exposure to China’s defense-industrial base.
“[CRRC] has probably always had some involvement with national defense planning, if not the PLA, just given the nature of national defense mobilization and the way that rail and rail transport [is] important in that,” says Thorne.
Thorne points to a deal in 2008 in which CRRC’s predecessor, China South Rail (CSR), indirectly acquired U.K.-based Dynex Semiconductor with the stated goal of combining its technology with CSR’s locomotives. Dynex’s technology ultimately wound up in the hands of PLA engineers, according to Thorne’s report.2Page 47
“CRRC likely inherited China South Rail’s involvement in military-civil fusion, and any businesses they had acquired up to that point,” says Thorne.
Decisions over Alpi’s future will now fall to Italian Prime Minister Mario Draghi, a former head of the European Central Bank. Italian media has reported that a range of penalties are possible, including a nullification of the 2018 deal. Even so, Alpi’s technology is likely already in the hands of its Chinese buyers.
Draghi’s government has been frostier towards China than its populist predecessor, which embraced Beijing and signed a MOU supporting the Belt and Road Initiative. Had Alpi followed Italian law at the time of the deal, it might not have earned so much scrutiny, analysts say.
“2018 was a very positive year for Italy-China relations,” says Ghiretti, the MERICS analyst. “[If regulators had been notified], the deal probably wouldn’t have been stopped.”
Eliot Chen is a Toronto-based staff writer at The Wire. Previously, he was a researcher at the Center for Strategic and International Studies’ Human Rights Initiative and MacroPolo. @eliotcxchen