The Lattice Warning to China — China’s plan to dominate the global semiconductor industry

[desicanuk]

The U.S. blocks the purchase of a firm with sensitive technology.
By The Editorial Board
The Wall Street Journal
Updated Sept. 15, 2017 6:08 p.m. ET

The U.S. on Wednesday blocked the Chinese government’s attempt to buy Lattice Semiconductor Corp. , a manufacturer of advanced computer chips with military applications. Beijing’s American proxy, Canyon Bridge Capital Partners, refused to withdraw its bid even after the Committee on Foreign Investment in the United States, or Cfius, ruled against the deal.

Beijing wants to use the case as an example of Trump Administration protectionism, but that would be a mistake. The decision on Lattice is warranted, and evidence suggests tighter restrictions are needed on the sale of technology to China.

First the big picture. In January the Obama Administration issued a useful report on China’s plan to dominate the global semiconductor industry. The effort relies in part on forcing foreign chip makers to move operations to China or transfer technology to joint-venture partners in return for access to the Chinese market.

Last month the Trump Administration opened an investigation of this abuse of international trade law under Section 301 of the Trade Act of 1974, which allows the U.S. to retaliate unilaterally. The World Trade Organization would be a better venue for this dispute, but there is no doubt that Beijing is extorting U.S. intellectual property. China also obtains trade secrets through computer hacking and old-school spying. An FBI survey in 2015 found that China was responsible for 95% of economic-espionage cases, with its caseload growing 56% in a year.

Cfius oversees a third avenue by which Beijing seeks semiconductor technology: buying U.S. firms. Though it is only empowered to restrict deals on national-security grounds, the number of cases is increasing. In December the Obama Administration blocked a Chinese fund’s purchase of Aixtron SE , a German semiconductor-equipment supplier with assets in the U.S. State-owned Tsinghua Unigroup’s bid for U.S. memory-chip maker Micron Technology Inc. foundered in 2015 on doubts over Cfius clearance.

Lattice’s technology has been in Beijing’s cross-hairs for years. In 2004 the company paid a $560,000 civil fine for illegal exports to China, and in 2012 the FBI caught two Chinese nationals trying to smuggle Lattice chips. Tsinghua Unigroup bought a minority stake in Lattice last year before the Canyon Bridge bid. The American private-equity firm did not initially disclose that the investors in its fund were Chinese government entities.

Beijing wants Lattice’s field programmable gate array technology that goes into chips used in missile guidance and radar systems. The U.S. military has bought chips from the firm, and 22 Members of Congress warned Cfius in December that a Lattice sale could give China critical military technology.

This week’s rejection of the Lattice deal shows Cfius working as intended. But the scale of China’s efforts to acquire sensitive technology, as well as its military ambitions, suggests more scrutiny is needed. A recent Pentagon report warned that Chinese companies have invested in sensitive technology in the U.S. in ways designed to dodge Cfius oversight. For instance, Chinese firms have invested in startups that have conducted research with Pentagon grants.

Rep. Robert Pittenger (R., N.C.) and Senate Majority Whip John Cornyn (R., Texas) are drafting legislation to overhaul Cfius, and Treasury Secretary Steven Mnuchin has backed their idea to require added scrutiny of deals involving sensitive countries including China. Joint ventures and technology licensing could also be added to the Cfius purview.

The risk is that Cfius, which is secretive by necessity, will be abused for protectionist ends. The classic case is Senate Minority Leader Chuck Schumer’s partisan demagoguery in 2006 over Dubai Ports World buying some U.S. ports. The U.S. benefits from Chinese investment in nonsensitive areas, and Cfius revisions should not define national security too broadly.

But the scope and stealth of China’s industrial policy and IP theft require special attention. Beijing should consider the Lattice rejection a warning that predatory behavior will have political consequences.

https://www.wsj.com/articles/the-lattice-warning-to-china-

 

[desicanuk]

Here's more on the topic that will interest members:
China is stumbling hard at acquiring the high-tech chip companies it wants so badly:
By Josh Horwitz
September 14, 2017
US president Donald Trump yesterday (Sept. 13) vetoed a Chinese private-equity firm’s proposed $1.3 billion purchase of Lattice Semiconductor, an Oregon-based chip manufacturer.

The deal’s failure marks the latest instance where foreign governments have pushed back against China’s efforts to acquire technology assets in their country, as China invests heavily in hardware and software companies at home and abroad.

The semiconductor industry in particular has been a focus of China’s ambitions, as chips are the brains of nearly every electronic device. But as of 2014, China still imported 90% of its semiconductors. As a result, the country has gone on a spending spree, buying up semiconductor companies all over the world.

Many of these deals have fallen through, however, due to pressure from the Committee on Foreign Investment in the United States (CFIUS), an inter-agency branch of the Treasury that examines foreign purchases of domestic companies and assesses their potential impact on national security. While CFIUS does not “block” deals outright, it can make “recommendations” to both parties involved that the deal ought to be terminated. If necessary, CFIUS will refer cases to the president, who then holds the power to veto the deals—which is what happened with Lattice.

Lattice marks the seventh such major deal that has collapsed since mid-2015, and it’s the second to be vetoed by the US president within that period. This list shows just how badly China is failing at acquiring foreign semiconductor technology.

Micron

The largest attempted Chinese takeover of a US semiconductor maker began in July 2015, when media revealed that Tsinghua Unigroup, a state-affiliated Chinese chipmaker with ties to with Tsinghua University in Beijing, wanted to buy Idaho-based Micron. Tsinghua Unigroup reportedly had put up $23 billion (paywall) to purchase the company.

Micron made it clear it was cold on the deal from the get-go. Just days after Tsinghua Unigroup’s bid hit news outlets, a source at Micron told Reuters the deal was likely not possible as CFIUS would probably recommend against it. In August that year, senator Chuck Schumer, a frequent critic of China, directly called on CFIUS to formally investigatethe potential acquisition.

But the deal didn’t even get that far. Despite reports that Tsinghua’s chairman travelled to the US to talk to Micron, no further details about a deal emerged until November 2016, when Tsinghua confirmed it was not in any talks with the Idaho company.

Had both sides reached an agreement, the deal would have carried historic implications for the US tech industry. Micron to this day remains the last major US-based manufacturer of DRAM flash memory, a critical component in nearly all consumer electronic devices. Its American rivals all ceded ground to competitors in Japan, Korea, and Taiwan.

Fairchild Semiconductor

In December 2015, state-affiliated conglomerate China Resources Holdings made an unsolicited offer to purchase Fairchild Semiconductor, one of the oldest companies in Silicon Valley. The Chinese investors proposed paying $2.5 billion for the company, equivalent to $21.70 per share, a premium over what rival bidder, US-based On Semiconductor, had offered earlier. The Chinese suitors also offered a $108 million reverse termination fee in the event that CFIUS recommended against the purchase.

Despite the markup and the guarantee, Fairchild refused the offer in February 2016, stating that the deal presented an “unacceptable level of risk” of failing should it ever reach CFIUS. It ended up being sold to On Semiconductor in September 2016.

Lumiled

In March 2015, Dutch electronics giant Philips, which is also listed in the US, announced it intended to sell an 80% stake in Lumiled, a subsidiary that manufactures LEDs (light-emitting diodes), a semiconductor, to a Chinese consortium known as GO Scale Capital for $3.3 billion. In October, however, the company stated in its latest earnings report that CFIUS had “expressed certain unforeseen concerns” towards the deal, which could ultimately kill it.

The bid was dead by January 2016. “I am very disappointed about this outcome as this was a very good deal for both Lumileds and the GO Scale Capital-led consortium,” said Philips CEO Frans van Houten. While LEDs are generally associated with lighting, according to the New York Times, CFIUS held concerns that the gallium nitride used to make the components could also be used by China’s military (paywall). Philips eventually agreed to sell Lumiled to US-based private-equity firm Apollo Global Management in December 2016, at a discounted price of $2 billion.

Western Digital

In September 2015 Tsinghua Unisplendour, owned by the same parent as Tsinghua Unigroup, announced it intended to pay $3.78 billion for a 15% stake in Western Digital, the semiconductor maker best known for its hard-disk drive business. The company told investors it did not expect the deal to be subject to a CFIUS review because the stake was non-controlling. But in February 2016 Tsinghua backed out of the deal(paywall) once it became clear that a probe was indeed forthcoming. The two companies’ relationship didn’t end there, however. In September 2016 Western Digital and Tsinghua Unisplendour announced they had formed a China-based joint venture with Tsinghua as the majority shareholder.

GCS

In March 2016, California-based, Taiwan-listed semiconductor maker GCS announced it was in talks to be purchased by Sanan Optoelectronics, a Chinese maker of LED wafers and solar cells, for $226 million. In August, GCS confirmed that the deal had fallen through due to pressure from CFIUS. The body did not state its specific objections, but they likely stemmed from GCS’s contracts with the US military. Like Western Digital, GCS opted to form a joint venture with its Chinese suitor as an alternative.

Aixtron

In May 2016 China’s Fujian Grand Chip announced it had agreed to buy Germany’s Aixtron, a maker of semiconductor manufacturing equipment, for $752 million. In November, Aixtron announced that CFIUS told both parties there were “unresolved U.S. national security concerns regarding the proposed transaction.” Rather than kill the deal, Aixtron and Fujian Grand Chip said they would appeal the recommendation directly to president Barack Obama—who sided with CFIUS. The White House said that there was “credible evidence” that Fujian Grand Chip “might take action that threatens to impair the national security of the United States.” The process—a CFIUS warning, an appeal to the president, and then a veto–was the same process that led to the collapse of the Lattice deal.