Impact of Chinese Ownership of a Major Distributor on Federal Contractors

September 29, 2017

As of December 2016, the IT distributor Ingram Micro is now part of fast-growing $30 billion Chinese conglomerate, HNA Group.  A large number of small businesses doing business with the federal government, especially those participating in one or more GWACs, might be concerned with this change of ownership of a vendor that they may be using.

When we think of foreign vendors, what comes to mind first is the Buy American Act (BAA).  However, the BAA does not address the ownership of companies but the country of origin of the products involved.  Also trade agreements and various bilateral agreements carve out many exceptions to the BAA.  To further compound the complexity, the rules to determine country of origin are themselves extremely complex.  So the fact that Ingram Micro is now owned by a Chinese company does not answer or necessarily raise any concerns about the BAA.  Those concerns have to be addressed on a case by case basis for each product, and more importantly for each end item delivered to the government.

One area where foreign ownership is an issue is review by the Committee on Foreign Investment in the United Stated (CFIUS).  [50 US Code 4565]  CFIUS is an federal inter-agency committee that reviews, for national security concerns, transactions that could result in control of a U.S. business by a foreign entity.  If CFIUS determines that a covered transaction is detrimental to national security, the President can suspend or block the transaction.  Not every foreign acquisition is reviewed by CFIUS.  Of course, if there is no CFIUS review, the government could come along later and undo the transaction.  In this case there was a CFIUS review and the transaction to acquire Ingram Micro was not blocked.

Another area where foreign ownership comes into play is in the performance of government contracts that require access to classified information.  For a defense contractor to have possession of classified information, it must have a “Facility Security Clearance” (FCL).  To obtain the FCL, one of the critical factors (in addition to appropriate physical security and access by cleared personnel) is the potential for “Foreign Ownership, Control or Influence” (FOCI).  Except in rare cases where the foreign ownership involved is from a country with bilateral security agreements, obtaining an FCL when dealing with the FOCI usually means setting up complicated corporate management arrangements that insulate the US-based management from control by the foreign owner.  When the foreign owner is from a country with a history of espionage against the United States, I would think the likelihood of resolving the FOCI and obtaining an FCL is remote or impossible.

So my best guess is that Ingram Micro would be unlikely to get or keep any FCL at this point.  However, that may not be important or relevant since my understanding is that as a distributor, Ingram Micro probably deals exclusively with commercial products and would have no need itself for an FCL.  While the Ingram Micro situation may seem to raise a unique issue with any prime contractors operating under an FCL, in no case should vendor without an FCL or vendor personnel without a personnel security clearance have access to classified information in the prime contractor’s possession.

Bottom line?  Small businesses with federal contracts using Micro Ingram as a supplier should not have an issue with the change of ownership.  Of course, the handling of classified information should be managed properly with this and every other vendor.