National Security

US strikes at the heart of China's tech ambitions with chipmaker ban

By Sherisse Pham

US restricts Chinese chipmaker Fujian Jinhua Integrated Circuit Co. from buying American parts.

Hong Kong -- The United States just delivered a sharp blow to China's lofty tech ambitions.
Its move to target a state-owned Chinese chipmaker over national security concerns goes to the heart of the clash between the two economic superpowers over technology and trade.

It also exposes China's lack of successful homegrown semiconductor companies as one of the biggest vulnerabilities in the country's bid to become a global tech powerhouse.

The US Commerce Department on Monday announced that it is restricting American companies from selling crucial software and technology to Fujian Jinhua Integrated Circuit Co., saying it "poses a significant risk of becoming involved in activities that are contrary to the national security interests of the United States."
The ban could bring the chipmaker, which relies on foreign tech, to its knees. 

A similar US move against Chinese telecommunications equipment maker ZTE in April brought its factories to a standstill for months.
The US government didn't provide details about what potential activities it's worried about. 

But Fujian Jinhua, which is owned by the provincial government of Fujian in southeastern China, has been accused of stealing trade secrets by US chipmaker Micron Technology.
Fujian Jinhua, which has filed a countersuit against Micron in China, didn't respond to a request for comment Tuesday.
The Trump administration has said China's efforts to get hold of American technology are "an existential threat" to the future of the US economy. 

It has made the issue a central part of its trade fight with Beijing, imposing tariffs on $250 billion of Chinese goods and threatening more unless Beijing changes its industrial policies.

Trade war turmoil
Like the ZTE ban, the US move against Fujian Jinhua is likely to add to the tensions between Washington and Beijing.
"China opposes the United States' behavior of abusing the concept of national security and export control measures, as well as the United States' unilateral sanctions and its interference in normal international trade cooperation between companies," the Chinese Commerce Ministry said in a statement late Tuesday.
It urged the US government to "stop the wrong measures immediately" and "protect the legitimate rights of the companies."
Analysts see little chance of either side backing down anytime soon. 

Trade talks between the two sides have failed to make headway this year. 

Bloomberg News alarmed investors Monday with a report that the US government is set to move ahead with even more tariffs if a meeting expected to take place next month between Chinese dictator Xi Jinping and US President Donald Trump doesn't go well. 

US stocks slumped, and the yuan fell to its lowest level in a decade in Asia trading.
President Trump suggested Monday on Fox News that he's not expecting quick progress.
"I'd like to make a deal right now," he said. 

"I just say they're not ready."

China's reliance on foreign tech
Xi has made building China's semiconductor industry a key priority, even comparing a computer chip to the human heart.
"No matter how big a person is, he or she can never be strong without a sound and strong heart," he said in April during a visit to a semiconductor factory in central China.
That heart is currently powered by foreign tech.
China buys more computer chips than any other country, consuming about $140 billion, or 38%, of the world's semiconductors, according to research firm IC Insights. 

Despite its voracious appetite, China produced just $18.5 billion, or about 13% of the world's chips.
Beijing is aggressively trying to close that gap, but developing a competitive chip industry is expensive, politically sensitive and takes time.
The government has invested billions in homegrown chipmakers like Fujian Jinhua, Tsinghua Unigroup and Innotron Memory to help them develop their own intellectual property. 

Even e-commerce company Alibaba is getting in on the game, announcing last month that it will set up a company focused on building artificial intelligence chips for cloud computing, internet-connected devices and other sectors.

Chinese companies have also tried to get their hands on technology by bidding for foreign chip businesses. 

But several attempts to buy stakes in American firms failed after US authorities objected to the deals on national security grounds.
Despite the hurdles, China is impatient to grow the industry. 

Beijing's "Made in China 2025" plan — one of the industrial policies singled out by the Trump administration as a concern — includes the ambitious goal of achieving self-sufficiency in high-tech industries, including semiconductors, by 2025.
The trade war is complicating that effort.
China needs foreign tech to keep developing its homegrown chip industry, according to SEMI, an international association for companies that supply the electronics industry.
"We need to face up to the fact that there is still a certain gap between the domestic semiconductor industry and that of [the] international advanced level," the group's head of China, Lung Chu, told reporters in Shanghai last month. 

"Therefore, international "cooperation" is the key to industry growth."

US concerns grow over Chinese chip expansion

President Trump threatened new tariffs as China's semiconductor sector receives massive subsidies 
By Louise Lucas in Hong Kong

Seldom have such small chips carried such a heavy load.
China’s fledgling semiconductor industry, after a messy birth, now finds itself in the crosshairs of conflicting political goals in Beijing and Washington.
Chips are a key plank of China’s industrial plans, attracting a massive $150bn government subsidy. 
This reflects national angst over reliance on overseas markets — it spends more on importing semiconductors than oil — and a fear, as one banker puts it, of being left in the dark “in case the US flips the switch”.
Washington harbours its own fears: that these subsidies will distort the market, dent its own domestic industry, jeopardise the edge it has held in the technology and threaten security. 
 “Chinese industrial policies in this sector, as they are unfolding in practice, pose real threats to semiconductor innovation and US national security,” wrote the President’s Council of Advisors on Science and Technology in a letter to Barack Obama earlier this month.
China consumes more than $100bn worth of semiconductors, or roughly a third of total global shipments, but produces just 6 to 7 per cent by value, according to consultancy Bain & Co.
Many of the imported chips go into PCs, smartphones and other gadgets that are then exported, but there is still a yawning gap between the semiconductors made by domestic chipmakers and the number consumed by a gadget-hungry Chinese public.


Early efforts to narrow this gap failed: a scattergun approach resulted in a highly fragmented sub-scale industry.
McKinsey, the consultancy, calculates Beijing had invested in 130 fabrication plants across more than 15 provinces at one point.
But lessons have been learned, says Mark Li, semiconductor analyst at Bernstein, pointing to Hong Kong- and New York-listed SMIC.
Initially, he says, it wanted to be as good as the top manufacturers and invested heavily in high-end equipment, racking up losses as a result. 


 “They adjusted their strategy to be a follower, and stay one to two steps behind Taiwan’s TSMC [the industry leader as a foundry making chips for others] and lowered investment a bit and reduced their R&D investment.”
SMIC, the fifth-biggest semiconductor foundry by revenues in 2015, according to Gartner, produces chip wafers mainly for communications and consumer devices.
Roughly half its revenues come from overseas.
This has served SMIC well.
Its shares have generated a total return of 27 per cent in the past 12 months, massively outperforming the benchmark Hang Seng index.
Of the 28 coverage analysts tracked by Bloomberg, not one recommends selling and 22 have a ‘buy’ rating.
“Normally size gives you better margins, but SMIC defies this,” says Mr Li.
“And that’s why it’s remarkable.”
He estimates SMIC will lift revenues 30 per cent this year, compared with a 2 to 3 per cent rise predicted for UMC, Taiwan’s number two player. 
But at a national level, SMIC is just one of China’s champions.
More ambitious is Tsinghua Unigroup, which in July merged its memory chip operations with government-run XMC.

Tsinghua has sought to plug another gap — a lack of leading-edge technology — by trying to buy overseas companies, including Micron of the US, for some $23bn.
Yet it has been largely stymied by US regulators.
Other attempts have met a similar fate.
In February, Fairchild Semiconductor turned down a $2.6bn bid from Chinese state-backed enterprises over fears that the deal would be blocked by the US authorities. 
Failure to buy-in technology is one of the biggest stumbling blocks to Beijing’s efforts to become a global power in chips, say analysts.
“Buying technology from the US will be more and more difficult,” says Mr Li of Bernstein, who alludes to a blocked attempted acquisition of Aixtron to show that even European deals fail.
“But I think China will continue trying.”
Roger Sheng, analyst at Gartner, says: “Without technology acquisition via [takeovers, joint ventures] or technology licensing, Chinese local companies still lack the capabilities to produce high performance processors and DRAM/flash [memory chips].”
Kevin Meehan, who heads Bain’s Asia technology practice, adds: “They can make progress in total production capacity. But they don’t have a clear path to obtain leading-edge process technology.”
Nor is it just acquisitions at which the US is balking, as testified by this month’s report to Obama.
In November, Penny Pritzker, US commerce secretary, attacked China’s $150bn plan, designed to ramp up Chinese-made integrated circuits at home to 70 per cent in 2025. 



Despite setting a bold goal, Beijing has been less clear on how it plans to get there or how the spending will be directed.
But multinational chipmakers have spotted the momentum shift and have begun setting up manufacturing and partnerships in China. 
The authors of the report to the US president, while noting that the $150bn spend is below the average $23bn spent annually on M&A by US semiconductor companies in the past five years, said acquisitions would help advance China’s aim.

Massive subsidies and intellectual property theft
They identified two further strategies: “subsidies and zero-sum tactics”.
Three examples were listed of the latter, including “forcing or encouraging” domestic buyers to only purchase from local suppliers, “forcing” technology transfer in exchange for market access and intellectual property theft. 
Analysts add a further risk, one that has repercussions across the globe: pricing.
As one analyst baldly puts it, “China is good at getting into businesses,” as it did with solar panels. “They are also good at shrinking profit pools” — alluding to the consequent oversupply and collapse of prices.  
President Donald Trump heightened concerns in December, when he raised the prospect of levying duties of up to 45 per cent on Chinese goods to level the playing field for US manufacturers. 
Such tariffs could hurt not just Chinese companies, but also the multinational players such as Qualcomm, Intel and Samsung that have set up shop in China, through joint ventures or partnerships. 
Some analysts point out that this co-operation, together with an ecosystem of suppliers on the ground, means China is closer to its goal of creating a globally competitive industry. 
“They’ve done it in PCs, in high-speed rail — but haven’t done that yet in semiconductors,” says Mr Meehan.
“They are certainly closer than they were, but they are going to face obstacles.”

Regulators prove a stumbling block 
The graveyard of failed semiconductor deals is littered with Chinese names that have fallen foul of US regulators.
Most recently, the Obama administration last month blocked Fujian Grand Chip Investment’s proposed €670m acquisition of German chip equipment maker Aixtron, which has a US subsidiary making products that have military applications.
The US Committee on Foreign Investment in the United States blocked the deal after flagging up security concerns to Aixtron, whose technology is being used to upgrade US and foreign-owned Patriot missile defence systems.
Berlin earlier withdrew clearance amid similar concerns that chips made with Aixtron equipment could be used in China’s nuclear programme.
Before Aixtron, there were Micron, Fairchild and Lattice Semiconductor — all of the US, and all targeted for bids or investments.
Some were thwarted by the threat of a Cfius red light, rather than a veto per se.
Take Fairchild Semiconductor, which cited the threat as reason to reject a $2.6bn Chinese bid in favour of a lower bid from ON Semiconductor of Arizona.
Chinese companies too have called a halt on proceedings ahead of Cfius reviews, the reason given by Tsinghua Holdings’ Unisplendour for pulling the plug on its $3.8bn bid for a stake in Western Digital, a US data storage company.
Not all blocked deals were obvious security threats: many bankers questioned the quashing of Philips’ planned $3.3bn sale of its US-based Lumileds lighting division to a consortium of Chinese private equity buyers.
But while China’s outbound hunt for chips may be stymied by politics and regulation in the short term, bankers — who have their own interests in robust M&A appetites — do not see mainland buyers giving up.
“This is going to be relevant for the next 10 years,” says one banker.

China's Dirty Money

Nose to the Window for China
By Nisha Gopalan

No matter who becomes the next occupant of the White House, it's already clear that it will be tougher for Chinese companies to make acquisitions in the U.S. and elsewhere in the West.
Chinese companies have ramped up outside purchases amid a slowing economy at home, but they are finding a bigger push-back from politicians in their target markets. 

U.S. lawmakers have expressed strong concern about Chinese acquisitions in Hollywood and urged the Treasury Department to reject the $1.1 billion takeover of Aleris Corp., a Cleveland-based aluminum firm, by China Zhongwang Holdings Ltd. 

That came a week after once-welcoming Germany withdrew its support for the 670 million euro ($743 million) purchase of chipmaker Aixtron SE by a unit of Fujian Grand Chip Investment Fund LP.
Even as Chinese companies hone their sophistication in global dealmaking, it's looking as if there's not much left beyond Switzerland and Mediterranean markets like Italy and Portugal.
Scrapped Chinese overseas acquisitions are hitting levels not seen since 2009, when the world was reeling from the global financial crisis and mainland buying of overseas commodities and related companies was on a tear. 

On the Scrap Heap
The value of rejected Chinese acquisitions overseas is approaching the record level it hit in 2009, when China was on a commodities buying spree

Note: Several big China commodity deals were scrapped in 2009, including the Aluminum Corp. of China's $4.1 billion bid for a majority of Rio Tinto and Sinochem's $3.7 billion bid for Australia's Nufarm. Cnooc's $19 billion Unocal bid was rejected in 2005.

The U.S. has always been a tough market for China, which was made clear when regulators spurned oil giant Cnooc's almost $19 billion bid for Unocal more than a decade ago. 

But that hasn't stopped companies from trying, even as the list of spurned deals this year grows. 

For example, Anbang Insurance Group Co.'s $14 billion offer for Starwood Hotels & Resorts Worldwide Inc. earlier this year, scuttled in large part by opposition in Washington, is the second-biggest terminated Chinese transaction in the U.S.
As that deal indicates, opposition is moving beyond military-related, energy and infrastructure purchases. 

Technology options are also increasingly out, led by Tsinghua Unigroup’s $23 billion rebuffed attempt to acquire Micron, which would have been the largest Chinese overseas takeover at the time. The company also backed out of a $3.78 billion deal to invest in disk-drive maker Western Digital Corp. 

Other abandoned deals include a lighting unit put on the block by Royal Philips NV and Silicon Valley stalwart Fairchild Semiconductor International Inc.
The U.S. push-back has even expanded into so-called soft power like media. 

Tycoon Wang Jianlin, who has set his sights on Carmike Cinemas and finalized his acquisition of Golden Globes producer Dick Clark Productions, faces political accusations of being the vehicle for China's takeover of American cultural trophies.
Opposition isn't limited to the U.S., either. 

Until the approach for Aixtron, Germany, while increasingly sensitive to Chinese purchases, seemed ready for China's business despite rumblings about the sale of robot maker Kuka AG. 

That openness is going to be increasingly rare.
Australia, long a source of cheap commodities and utilities and highly dependent on trade with China, joined the chorus this year, blocking a bid last month from mainland Chinese buyers for Ausgrid, the country's largest electricity network, as public opposition to the sale of everything from farmland to Sydney real estate heats up.
Even Britain, one of the most popular destinations for Chinese investing, is partly cooling to Chinese money after its vote to leave the European Union. 

After a brief delay, Britain approved the controversial 18 billion pound ($22.4 billion) Hinkley Point nuclear power project funded by Chinese money in September but attached new conditions on foreign investing in U.K. infrastructure. 

That leaves just three relatively wide open big markets: Switzerland, home to agricultural giant Syngenta AG, which China National Chemical Corp. is looking to buy for $46 billion in its hunt for seed technology; Italy, where the Chinese chemicals giant acquired tiremaker Pirelli last year; and Portugal, whose largest insurer is now in Chinese hands.
But narrowing the potential Western geographies that are open for business means that access to the kind of technology knowledge or global brands the Chinese covet is becoming much more difficult. While strapped Greece or emerging markets like Pakistan open their smaller ports and utilities to Chinese money, the really big Western targets could be off the table. 

Shopaholic
Of the top 10 bids for overseas assets made by Chinese acquirers on record, five were this year, and all but Spanish firm Repsol's sale of its Brazilian assets were of Western companies

Chinese bidders are going to have to either narrow their focus to targets in other parts of the world or focus on minority stake purchases if they want to keep buying overseas. 

Though unlikely to fizzle, China's M&A boom is definitely beginning to sputter.