Home Business China’s chip trade may be difficult to avoid “middlemen” – FTChinese

China’s chip trade may be difficult to avoid “middlemen” – FTChinese

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On Jan. 4, the Financial Times reported that South Korean chipmakers are ramping up lobbying efforts in Washington to counter U.S.-China tensions and secure key export licenses to supply Chinese companies under trade sanctions.

Korean companies Samsung, SK Group and LG are working hard to develop this business with great commercial potential. At the same time, they succumbed to pressure from Washington to produce strategically sensitive products in the United States, such as semiconductors and electric vehicle batteries, for which companies opted for greenfield investments. At the same time, these companies hope to use the geographical and management advantages to lobby the top US leaders in order to expand the export of chips to China.

At present, the Biden administration is promoting its grand-scale “industry return” plan, which has set up huge fund incentives, perfect supporting services and infrastructure. At the end of last year, major chip manufacturers including South Korea and Taiwan announced their greenfield investment in the US tens of billions of dollars. This phenomenon has accelerated the investment of global chip manufacturers in the United States. The advantages of the domestic investment market in the United States and the increasingly active institutional control of external investment in the United States have further enhanced the influence of the US government on the global chip industry.

The leading chip companies in South Korea have announced their investment plans in the United States. As these South Korean companies have close ties with the Chinese market, they have sought to expand their export licenses for chips and precision electronic devices to China in order to sell Chinese companies that have been “blacklisted” by the United States. The supply includes technology group Huawei and chipmaker Semiconductor Manufacturing International Corporation (SMIC). Against the backdrop of restricted chip exports to China and high tariffs, from November 9, 2020 to April 2021, the total export licenses granted by the U.S. Department of Commerce to supply Huawei and SMIC exceeded $103 billion. On the one hand, this kind of quota-based trade helps the United States to achieve control over China‘s high-end manufacturing process, on the other hand, through middleman transactions, Chinese companies have to pay more costs.

Of course, Chinese companies do not want to be in a passive position all the time. Implementing foreign acquisitions at the right time has become a “quick and quick” choice to solve the problem, but this road is also extremely difficult. The recent involvement of the Committee on Foreign Investment in the United States (CFIUS) in China‘s acquisition of South Korean chips shows that the U.S. government strives to control Chinese chip manufacturing at the lower end of the industrial chain, and U.S. review agencies will prevent Chinese companies from acquiring advanced chips through acquisitions and other means Company’s property rights and technology. At the end of 2021, Chinese private equity Zhilu Capital’s plan to acquire South Korean company Magna Semiconductor was thwarted by the U.S. government. A few days ago, the two companies issued a joint statement announcing the termination of the $1.4 billion merger agreement. The agreement was reached in March last year, but then the U.S. government intervened; in June, CFIUS asked the transaction to be put on hold; in August, the U.S. Treasury Department unilaterally determined that the acquisition posed a “national security risk” to the United States. After months of efforts, the two parties are still unable to obtain CFIUS approval of the merger agreement. In a joint statement, Zhilu Capital and Magna Semiconductor said they had to terminate the merger agreement due to U.S. government interference. The intervention of the US government has not only hindered the globalization process of Chinese enterprises, but also brought huge default and debt risks to the enterprises.

Since the channels for Chinese companies to acquire advanced chips or technologies are basically regulated and sealed by the United States, it is possible to purchase much-needed chips through middlemen. The severe sanctions imposed by the United States on specific companies have shown the influence of power on the international economy. The United States not only interferes with the investment of Chinese individual enterprises, but also prevents multinational companies from upgrading their chip production process equipment in China, preventing China from influencing specific foreign-funded enterprises by Acquire relevant technologies. Huawei and ZTE, under US sanctions, both saw their turnover drop. Huawei’s revenue fell by nearly 30% last year, according to reports, further exposing the “fragile side” of China‘s homegrown telecom industry. In fact, as early as January 2017, at the end of Obama’s second term in office, John P. Holdren, Eric S. Lander, William Press of the Presidential Council of Advisors on Science and Technology (PCAST) wrote the report “Ensuring Long-Term US Leadership in Semiconductors” that, Over the past 10 years, China has invested at least $150 billion in the industry to gain leadership in semiconductor design and manufacturing. The report warns that the United States must respond effectively if it wants to remain competitive in the semiconductor industry. At present, the huge investment has still failed to make China break through the predicament in the chip industry, and these companies in South Korea are taking a fancy to the plight of Chinese companies and hiring professional lobbyists one after another, trying to lobby the US government to relax its chip exports to China to make money Take more spread profit.

In fact, it is not difficult to see that due to the lag in the development of China‘s chip industry technology and its strong dependence on external chips, this has made China‘s high-end industrial economy in a passive situation, and its dependence on international “channel providers” has forced Chinese consumers to bear higher cost. The transactions between the U.S. government and the world‘s major chip manufacturers have made the United States achieve many breakthroughs on the road of “reindustrialization”. During this process, American companies may collude with multinational companies to control chip exports and make China involved in chips. The industry has basically achieved “transparency” to the United States, but to meet the competition and coveting of the Chinese market by South Korea and other countries, the US government has the “leverage” to control and influence multinational companies. In this series of complex transactions, it is difficult for all Chinese actors to effectively intervene and become “players” affecting the current situation, and more likely to become “receivers” of a result.

In recent years, the “fragile side” of China‘s chip industry has been exposed in the international community. In the context of the US government’s rising vigilance against China‘s industrial development, and the fact that the world‘s major chip manufacturers cannot give up China‘s huge market potential, the Chinese government needs to strengthen the “independence” construction of enterprises and the country, and effectively achieve independence in key technology fields. breakthrough. Otherwise, it will not only be the U.S. government that can threaten China‘s industrial development, but even giant multinational corporations from late-developed industrial countries in Asia such as South Korea. In the era when the global chip segment industry is basically monopolized by oligopoly, it is meaningless to emphasize the consumption advantage brought by the Chinese market. The competition in the global high-end industry is no longer a purely commercial profit competition, but a compound game of industrial chain suppression and anti-suppression, as well as national security and commercial interests. The reliance of Chinese companies on “middlemen” such as South Korean chip companies with channels and productivity is the expansion and reflection of the US government’s power in the global investment market. China should recognize the consequences of this phenomenon.

(Note: Wang Yingliang, who studies Sino-US political and business relations, industrial investment and national security, email: [email protected] This article only represents the author’s personal views. Editor-in-charge email [email protected])

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