Greg Levesque
China is adapting to a range of new legislative efforts to curb its acquisition of cutting-edge technologies in the United States and Europe. Last week, the Chinese government launched a price-fixing investigation into Samsung Electronics, SK Hynix, and Micron—three companies that collectively account for ninety-six percent of global dynamic random-access memory (DRAM) production. It was also announced that the state-funded Hou An Innovation Fund acquired a controlling interest in the China operations of ARM, the world’s leading semiconductor IP provider. Hou An Innovation Fund purchased that controlling stake in ARM from Japan’s Softbank to the tune of $775 million. Furthermore, China’s Ministry of Science & Technology was involved in forming that $800 million Hou An Innovation Fund with funding from the Silk Road Fund, CIC, Singapore’s Temasek Holdings, and the Shenzhen municipal government.
These most recent moves demonstrate China’s evolving tactics and determination to acquire the technologies necessary to transform the country into an innovative and technologically advanced superpower. Beijing isn’t about to let foreign lawmakers obstruct their grand plans.
Developing a world-class semiconductor industry is a cornerstone of the “Made in China 2025” industrial strategy and numerous technology industry plans. It serves economic development and military modernization agendas. Yet, after years of being blocked from acquiring the capability overseas, the Chinese government appears to be adapting, deploying a “by all means necessary” strategy to achieve self-sufficiency in semiconductor R&D and production.
China aims to achieve a self-sufficiency rate of forty percent for semiconductors by 2020 and seventy percent by 2025. Today, roughly sixteen percent of semiconductors used in China are produced in-country. In addition, China spends upwards of $200 billion a year on imports— approximately the same as crude oil. According to McKinsey, to meet its targets, all incremental foundry capacity globally will have to be built in China over the next ten years. These ambitions give Chinese technocrats, who see semiconductors as a strategically vital "core technology" for economic and national security reasons, few options.
As China’s technology ambitions have become better understood, foreign governments have recognized the need to protect domestic industries and ensure their own future economic competitiveness. The Obama administration outlined plans to maintain American competitiveness in semiconductors and intervened to block Chinese efforts to acquire American and European semiconductor companies. The Trump Administration has also carried this policy forward,supporting efforts in Congress to prevent China from obtaining sensitive U.S. technologies through the Foreign Investment Risk Review Modernization Act (FIRRMA). Moreover, FIRRMA seeks to expand the ability of the Committee on Foreign Investment in the United States (CFIUS) to review commercial transactions outside its present scope.
China has spent billions building supercomputing prowess and now operates the two most powerful supercomputers on the planet, the TaihuLight and the Tianhe 2. Yet, ironically it cannot achieve self-sufficiency in semiconductors quickly without the help of, or technology from, foreign companies. And if it can’t buy self-sufficiency, its shown a willingness to deploy a variety of asymmetric tactics to increase its odds of achieving it. This includes subsidizing domestic chip manufacturers and incentivizing—with both carrots and sticks—foreign firms to play ball.
In April, China’s Ministry of Industry and Information Technology dropped a potentially large carrot, announcing the opening of foreign money into the second phase of its China Integrated Circuit Industry Investment Fund. The fund, which was first unveiled in 2014, aims to build a $31.7 billion investment chest to promote “leapfrog development” in China’s integrated circuit industry. Regardless, years of throwing money at the industry have not yielded the results Chinese technocrats hoped for, and they now appear to be expanding their toolkit.
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