Chinese Seek to Buy a U.S. Maker of Disk Drives By JOHN MARKOFF SAN FRANCISCO, Aug. 24 — A Chinese technology company has expressed interest in buying a maker of computer disk drives in the United States, raising concerns among American government officials about the risks to national security in transferring high technology to China. The overture, which was disclosed by the chief executive of one of the two remaining drive makers in the United States, William D. Watkins of Seagate Technology, has resurrected the issues of economic competitiveness and national security raised three years ago when Lenovo, a Chinese computer maker, bought I.B.M.’s personal computer business. Tensions have been increasing lately between the countries over China’s ambitions in developing its military abilities and advanced technologies for industrial and consumer uses. Although disk drives do not fall under a list of export-controlled technologies, the attempted purchase of an American disk drive company would require a security review by the federal government, according to several government officials. In recent years, modern disk drives, used to store vast quantities of digital information securely, have become complex computing systems, complete with hundreds of thousands of lines of software that are used to ensure the integrity of data and to offer data encryption. That could raise the prospect of secret tampering with hardware or software to make it possible to pilfer information via computer networks, intelligence officials have warned. Seagate has recently begun selling drives with hardware encryption abilities. Mr. Watkins did not identify the Chinese company. But he said that the possibility of an acquisition had sent alarm bells ringing at some government agencies. “The U.S. government is freaking out,” Mr. Watkins said during an interview on Thursday. Reached Friday night, Treasury officials declined to comment on possible Chinese overtures for an American maker. While Mr. Watkins said that Seagate, which is the largest drive maker in the United States, was not for sale, he also said that if a high enough premium was offered to shareholders it would be difficult to stop. Seagate’s shares rose 1.05 percent Friday to close at $24.96 and were up about 4 percent for the week after news that it might enter the flash memory market. There does not appear to have been any significant increase in trading of Seagate options. With a booming economy and $1.33 trillion in foreign-exchange reserves, Chinese companies are in a position to acquire American companies, as Japanese and West European companies were several decades ago. While those earlier acquisitions were often opposed out of fears that they would damage American economic competitiveness, the acquisition of American companies by Chinese companies is regarded with more suspicion, particularly in the high-tech sector. Since the Lenovo sale, the government has become increasingly concerned about technology security, according to members of federal advisory committees. “Seagate would be extremely sensitive,” said an industry executive who participates in classified government advisory groups. “I do not think anyone in the U.S. wants the Chinese to have access to the controller chips for a disk drive. One never knows what the Chinese could do to instrument the drive.” The transfer of advanced disk drive manufacturing technology would give the Chinese a major leg up in competing in information technologies. China, however, still lags in basic manufacturing skills like semiconductor design and manufacturing. “This is clearly a critical component of a computer system and the purchase by the Chinese or other nations merits a full review to determine what our risks are,” said Michael R. Wessell, a commissioner of the U.S.-China Economic and Security Review Commission, a group that monitors the national security implications of trade with China for Congress. I.B.M., which invented the disk drive in the 1950s and which dominated the industry through the 1990s, sold its disk drive business to the Japanese computer maker Hitachi in 2002, leaving just two American companies: Seagate, based in Scotts Valley, Calif., and Western Digital, based in Lake Forest, Calif. Two other Japanese makers, Fujitsu and Toshiba, and a division of Samsung, a South Korean electronics conglomerate, are also major manufacturers of the storage devices. Western Digital executives declined to comment. Kenneth Lieberthal, the senior director for Asia at the National Security Council during the later years of the Clinton administration, expressed strong doubt that the Chinese government would allow a technology company to pursue an acquisition if the transaction were likely to draw criticism from the United States government, even if that criticism did not reach the level of an actual prohibition on a deal. “The Chinese have been very concerned about how to invest in the United States without producing the kind of political firestorm they ran into when they tried to buy Unocal,” said Mr. Lieberthal, a professor of politics and business administration at the University of Michigan. “The government really does not want to confront the kind of situation it ran into with Unocal.” The China National Offshore Oil Corporation, a state-owned company, abandoned its plan to buy Unocal in 2005 when it touched off opposition in Congress. Mr. Lieberthal said that the Chinese government had only been lukewarm about supporting Cnooc, and was likely to be even more cautious now. “If’ they’ve really decided to go after a high-end computer equipment manufacturer, they’ve really decided to test the waters,” he said. If a Chinese company has made an advance to an American company in a technologically sensitive industry without obtaining prior support from the Chinese government, the Chinese company would be in serious trouble with Beijing officials, Mr. Lieberthal said. So it is unlikely that any serious approach would be made by a Chinese company without careful prior consultations in Beijing. Yet the Chinese government also faces a quandary: how to improve yields on its foreign exchange reserves, more than two-thirds of it in dollars. Roughly $100 billion is believed to be in American mortgage-backed securities, an investment that has suffered during the recent financial turmoil. A Chinese government investment fund spent $3 billion to buy nearly 10 percent of the Blackstone Group this summer, but made a point of taking nonvoting shares to reduce the risk of a political backlash. Stakes in financial services companies also tend to be less controversial than stakes in high-tech enterprises. Beijing authorities are also starting to encourage companies and even individuals to invest more overseas, as a way to offset some of the foreign investment pouring into China. The inflow of money from investment and trade surpluses has been putting upward pressure on the value of China’s currency, threatening to erode some of the competitiveness of Chinese exports. If a Chinese company does make an actual bid for an American high-tech company, a former government official said, and that bid is blocked for political reasons, then Chinese companies may become even warier of investing in American companies and the government in Beijing may begin to suspect that Washington so distrusts China that it is trying to throw roadblocks in the path of its economic development. “If they are blocked, I would suspect this would at a minimum contribute to their being gun-shy of the U.S. government,” said Mr. Lieberthal, a Chinese speaker who stays in close touch with a range of Chinese government officials and American corporate leaders.
