Advanced weapons like the Patriot Advanced Capability-3 missile interceptor unit use semiconductors made with a little-known but increasingly important material called gallium nitride. China is said to want the technology to make gallium nitride chips.
HONG KONG — China is spending billions of dollars on a major push to make its own microchips, an effort that could bolster its military capabilities as well as its homegrown technology industry.
Those ambitions are starting to be noticed in Washington.
Worries over China’s chip ambitions were the main reason that United States officials blocked the proposed purchase for as much as $2.9 billion of a controlling stake in a unit of the Dutch electronics company Philips by Chinese investors, according to one expert and a second person involved with the deal discussions.
The rare blockage underscores growing concern in Washington about Chinese efforts to acquire the know-how to make the semiconductors that work as the brains of all kinds of sophisticated electronics, including military applications like missile systems.
In the case of the Philips deal, the company said late last month that it would terminate a March 2015 agreement to sell a majority stake in its auto and light-emitting diode components business known as Lumileds to a group that included the Chinese investors GO Scale Capital and GSR Ventures. It cited concerns raised by the Committee on Foreign Investment in the United States, which reviews whether foreign investments in the country present a national security risk.Photo
James Ding Jian, managing director and chairman of GSR Ventures, whose bid for Lumileds was blocked by the United States for national security reasons. CreditImaginechina
Philips said that despite efforts to alleviate concerns, the committee — known as Cfius — did not approve the transaction.
“There is a belief in the Cfius community that China has become innately hostile and that these aren’t just business deals anymore,” said James Lewis, a senior fellow at the Center for Strategic and International Studies, a research firm, who speaks to people connected with the committee’s process.
Philips did not respond to requests for comment. GSR Ventures, which sponsors GO Scale Capital, declined to comment.
Cfius, an interagency body that includes representatives from the Treasury and Justice Departments, declined to comment and does not make its findings public.
Cfius reviews have been a growing problem for outbound Chinese deals. According to the most recent data available, in 2012 and 2013 Chinese investment accounted for more committee reviews than money coming from any other country. A 2008 Chinese effort to invest in the network equipment company 3Com was withdrawn while the committee was reviewing it.
Recently, the committee found acceptable a number of major Chinese deals, including a takeover of Smithfield Foods by Shuanghui International and Lenovo’s takeover of IBM’s low-end server unit. In 2012, President Obama ordered a Chinese company to stop building wind farms near an American military installation in Oregon after a negative Cfius review.
At the center of the committee’s concerns on the Philips deal, according to Mr. Lewis, was a little known but increasingly important advanced semiconductor material called gallium nitride. Though not a household name like silicon, gallium nitride, often referred to by its abbreviation GaN, could be used to construct a new generation of powerful and versatile microchips.
It has been used for decades in the low-energy light sources known as light-emitting diodes, and it features in technology as mundane as Blu-ray Disc players. But its resistance to heat and radiation give it a number of military and space applications. Gallium nitride chips are being used in radar for antiballistic missiles and in an Air Force radar system, called Space Fence, that is used to track space debris.Photo
Wan Long, right, of the WH Group, and Larry Pope of the American pork company Smithfield Foods. WH Group acquired Smithfield in 2013. The Committee on Foreign Investment in the United States approved that deal.
CreditBobby Yip/Reuters
“Gallium nitride makes better-performing semiconductors that were key in upgrading Patriot radar systems,” said Mr. Lewis. “It’s classic dual use, sensitive in that it could be used in other advanced weapons sensors and jamming systems.”
Advancing its chip industry has been a major political initiative for Beijing. In recent years, analysts said, Chinese corporate espionage and hacking efforts have been aimed at stealing chip technology, while Chinese firms have used government funds to buy foreign companies and technology and attract engineers.
Last year, different subsidiaries of the state-controlled Tsinghua Holdings made a number of bids for American companies, including an unsuccessful $23 billion offer for the American memory chip maker Micron Technology and a successful $3.78 billion purchase of a 15 percent stake in the hard-drive maker Western Digital.
Last year’s spree of deal activity, and lack of American regulatory response, spurred a Sanford C. Bernstein analyst, Mark Newman, to say in a November report that the United States “runs the risk of being asleep at the wheel.” He cited efforts by South Korea and Taiwan to prevent China from acquiring some technology assets.
The Lumileds block is being interpreted by the chip industry as the United States “waking up a bit to the threat,” Mr. Newman said in an email.
Gallium nitride is particularly sensitive. One military industry magazine called the material the biggest thing since silicon, which is now commonly used to make the transistors in microchips. It cited Raytheon’s use of the material to make smaller, low-powered radar for American missile systems.
“Many say it’s the most important semiconductor material since silicon,” said Colin Humphreys, a British physicist at Cambridge University.
He said that while it was not clear what the United States government was worried about, research by LED companies into technology linking gallium nitride and silicon could have broader implications for creating advanced microchips that could be used in a wide array of electronics.
The would-be investor in Lumileds, GSR Ventures, also holds a stake in Lattice Power, a Chinese company that has been vocal about its efforts to develop technology related to gallium nitride and silicon.
In a November 2015 statement about a recent investigation into Chinese industrial espionage, Taiwan’s Ministry of Justice also expressed worries about China aiming at the material. Calling the mass production of gallium nitride a “key development project” for China, the ministry said it was concerned about the theft of trade secrets from Taiwanese companies working on the material and Chinese-led recruitment of engineers knowledgeable about it.
Paul Mozur reported from Hong Kong, and Jane Perlez from Beijing.
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