This article first appeared in The Edge Malaysia Weekly on November 5, 2018 - November 11, 2018
EXACTLY a year ago this week, Tan Hock Eng, the Malaysian-born CEO of global communications chip powerhouse, Broadcom, launched an audacious US$117 billion bid for rival Qualcomm. The world’s largest tech deal ever unravelled just four months later when the administration of US President Donald Trump scuttled the bid citing “credible evidence” that the merger “threatens to impair the national security of the United States”. Qualcomm is the world leader in baseband chips for 4G and 5G communications technology and the White House move was seen as a pre-emptive strike to prevent China from stealing a march in its quest to dominate a key next-generation technology.
The blocking of the Broadcom deal was America’s first shot across the bow in what is being ratcheted up into the next Cold War as tensions simmer between Beijing and Washington over access to technology and the alleged theft of intellectual property (IP) as the race for global dominance in key new technologies heats up.
On Oct 29, the US Department of Commerce announced it was cutting off Fujian Jinhua Integrated Circuit Co, a Chinese state-backed memory chipmaker, from American suppliers such as KLA-Tencor amid allegations the firm stole IP from US memory chip giant Micron Technology. The Chinese firm that currently makes low-end DRAMs, or memory chips, has officially been put on a list of firms that cannot purchase components, software and technology goods from any American company.
Earlier this year, the Trump administration almost put telecom equipment maker ZTE Corp out of business by cutting it off from American suppliers. ZTE, which US officials allege is part of China’s military industrial complex, was fined for illegally exporting US technology to Iran and North Korea last year and banned from buying US equipment earlier this year. The US backed down from the ban in July after ZTE, which has been accused of posing a cybersecurity threat, replaced its top managers and agreed to pay additional fines. Like ZTE, Fujian Jinhua is a key cog in the wheel of Beijing’s ambitious “Made in China 2025” master plan to help move China further up the value chain with a ton of subsidies.
Here is what is really going on: The battle between China and the US has essentially moved from a tiff over the long-standing and burgeoning trade deficit, to a battle to protect the IP of US tech companies to, more recently, a focused strategic war to contain China and its bid to become the global tech superpower.
Not just a trade issue
The Trump administration, particularly the president’s two top economic advisers Peter Navarro and Bob Lighthizer, have shrewdly moved the goalposts, from trying to forcibly open Chinese markets in the name of balanced trade to bringing manufacturing and jobs back to the US heartland to preventing China from overtaking the US in key technologies such as artificial intelligence, robotics, the Internet of Things, electric and self-driving vehicles, 5G communications and state-of-the-art semiconductor design.
Even as the goalposts keep moving, Beijing’s leaders still see their problem with Washington as merely a trade issue. Unfortunately, it has long moved way beyond that. Even if the Chinese were willing to buy half a trillion dollars worth of Boeing aircraft and a hundred billion worth of movies dubbed in Chinese from Netflix or Walt Disney tomorrow, Trump is likely to change the narrative to theft of tech IP, or China elbowing past the US in key technologies to become the dominant global tech leader.
Another concern is Beijing’s use of its tech giants to spy on the US and other western nations. Last year, the US banned Hangzhou Hikvision Digital Technology Co, the world’s largest manufacturer of video surveillance products, from supplying to US government entities. Hikvision makes internet-enabled cameras that have been installed in more than 100 countries. The cameras have been deployed inside US prisons and airports, as well as at Fort Leonard Wood military base in Missouri and the US embassy in Kabul. US government-related entities also shun Shenzhen-based DJI Technology, the world’s largest drone manufacturer, even though you can buy a DJI drone at almost any mall in America.
In early October, Bloomberg reported on a concerted effort by Beijing to embed microchips into motherboards that were installed inside servers operated by some of the world’s largest tech companies, including Apple and Amazon.com. Essentially, the embedded microchip can act as a trojan horse, bot, worm or another type of malware. Both Apple and Amazon have vehemently denied the allegation, declaring that they had extensively checked their equipment and found no such trojan horse chip in their servers.
Why are semiconductors so important? For one thing, chips are key building blocks of the tech ecosystem. We use chips not only in our PCs, but also in smartphones, tablets, speakers, microwave ovens, washing machines, refrigerators, cars and just about any gadget. China cannot be a robotics powerhouse without sophisticated semiconductors. If the US cuts it off from acquiring top-of-line chips, China will remain a second-rate tech power.
China imported US$260 billion worth of semiconductors last year. Lured by a growing demand for chips, cheap labour costs and its tax incentives, large chipmakers such as Samsung Electronics and Intel have set up plants to assemble and test chips as well as manufacture them in China. But the global chipmakers have refused to cross-license their technology and, indeed, used mostly older technology in China to safeguard their IP.
‘Made in China’
As the world’s biggest consumer of chips, it is only natural that China wants to have a higher domestic content in the chips that it produces. In 2014, Beijing announced that by 2020, up to 40% of all semiconductors consumed in China will be locally made. That was later moved to 2025 as China continued to plough in tens of billions of dollars in capital to enable it to meet its lofty goals. “China has been keen to establish a foothold in the global semiconductor industry with the objective of moving into high-value manufacturing and maintaining national security with ‘Made in China’ components,” notes Mark Newman, an analyst at Sanford C Bernstein in Hong Kong.
In 2015, China’s state-controlled Tsinghua Unigroup tried to buy Micron, one of the trio of dominant memory chip players that includes South Korea’s Samsung Electronics and SK Hynix. That bid was immediately rebuffed. Two years ago, Unisplendour, a Tsinghua subsidiary, attempted to invest in Western Digital, which at the time was acquiring SanDisk. The Committee on Foreign Investment in the US intervened and prevented the investment.
America has long accused China of stealing IP from Silicon Valley tech giants. Chinese communications giant Huawei Technologies dominates the networking gear business in Asia because it successfully copied the technology of US giant Cisco Systems. Now, China is trying to do the same with semiconductors, starting with memory chips. Prevented from accessing technology or buying chip companies in the US, Beijing pivoted to Plan B by encouraging its companies to start making their own memory chips. Tsinghua Unigroup’s 50%-owned subsidiary Yangtze Memory Technologies has focused on developing its own NAND flash chip, while Fujian Jinhua has collaborated with Taiwan’s No 2 foundry UMC to develop DRAM memory chips. Innotron Hefei Chang Xin, another state firm, is making mobile DRAMs for smartphones and tablets.
UMC hired a number of former Micron Taiwan employees to help Fujian Jinhua’s development of DRAMs. Micron has accused UMC and Fujian Jinhua of blatantly stealing its IP and trade secrets, and is suing some of its former employees who are now working for the Chinese to prevent the IP theft. Indeed, several of them have been barred from leaving Taiwan.
Tsinghua Unigroup has poached employees from other memory chip makers in the region. Hefei has had a close relationship with engineers from Japanese memory chip firm Elpida, which was acquired by Micron three years ago, and has reportedly lured former executives and engineers of Samsung and SK Hynix as well. As Micron piled on legal suits on Chinese chipmakers, in July, Fujian Jinhua countersued Micron in China and swiftly got a local court to rule against the American memory chip giant.
The semiconductor industry has been in consolidation mode over the past decade with smaller and mid-sized global chip companies merging or selling themselves to giants such as Intel, Broadcom and Qualcomm as they streamlined their businesses and cut costs. That has helped lower the costs of chips that go into our phones and cars. Goldman Sachs estimates that up to US$10 billion in cost savings have been realised in the global chip industry through consolidation over the past four years.
That is what Broadcom’s CEO Tan was trying to do last year when he made a bid for Qualcomm. Now, the era of chip mergers is clearly over. Broadcom, which was based in Singapore but has since moved its headquarters to the US, could easily do smaller or mid-sized acquisitions. However, any substantial chip deal would require the approval of Chinese regulators as well. Earlier this year, Qualcomm, which had an agreement to buy Dutch chipmaker NXP Semiconductors, pulled the plug on the deal because Beijing’s regulatory approval was not forthcoming.
The ban on Fujian Jinhua may be the template that will be used against Chinese companies that are trying to steal US technology. Washington knows it cannot stop Chinese tech firms from poaching top chip-industry engineers or even chip designs, but it can stop them from buying sophisticated chipmaking equipment from Japan’s Tokyo Electron, the Netherlands’ ASML Holding, and US-based Applied Materials, Lam Research and KLA-Tencor, which dominate state-of-the-art chip equipment manufacturing. If they stop supplying equipment, China will take years to catch up with the US in semiconductors and since chips are essential components of just about everything, the US will retain its lead in the interim.
Yet by denying China the tools to make its own chip, the US will likely push Beijing to redouble its efforts to build its own home-grown chip technology. Newman points out that there is an irony in the US trying to punish China for stealing its IP in technology. After the US gained its independence from England, it actually built much of its own manufacturing with the textile technology that it stole from its former colonial masters. Call it trade war or Cold War, the ball is now in Beijing’s court. Whether President Xi Jinping can quickly make enough concessions to mollify Trump without losing face remains to be seen.
Assif Shameen is a technology writer based in North America
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