In a time when global trade, the U.S. relationship with China and technology are fiery hot-button issues, one important debate that touches on all three deserves more attention. Now, a late-term presidential examination of Chinese attempts to quickly hoard semiconductor technology suggests a line needs to be drawn, and leaves it to Donald Trump to draw it.

President Barack Obama’s administration has been confronted by a wave of Chinese bids for semiconductor companies and their technology in his final term, and dealt with them on a case-by-case basis in a little-known but powerful regulatory body within the U.S. Treasury Department. With just two weeks remaining in his presidency, advisers to Obama finally released a comprehensive look that suggests at least some semiconductor technology should be treated as a state secret.

“I hope it wakes up Washington to the precarious national-security problem created by ignoring the issue until now,” said G. Dan Hutcheson, president and co-founder of market-research firm VLSI Research Inc. “I look at it and say there is nothing new here, but it’s good that the government is finally becoming aware of it. It’s finally now got some attention.”

China nominally wants companies that make semiconductors and related electronic components to feed its own burgeoning consumer-tech industry and bring down the prices on those already mostly cheap gadgets. However, the 32-page report notes that some technological breakthroughs would be very disadvantageous in Chinese hands, especially in the realms of military defense systems and security, and calls for standards that limit some acquisitions.

”The U.S. government will need to identify areas in which the diffusion of particular semiconductor technologies, or control of particular companies, poses intolerable national-security risks that cannot be mitigated through steps short of stopping their acquisition,” reads the report, written by a committee that included former top executives of Intel Corp. INTC, +0.01% Qualcomm Inc. QCOM, -0.49%  , Applied Materials Inc. AMAT, +0.98%  and other chip-industry giants.

The big question, though, is whether the incoming Trump administration will adhere to the recommendations in the report, which states that the U.S. should continue to allow Chinese acquisitions of smaller chip companies that have noncritical intellectual property. While much of the report could appeal to the president-elect’s stated positions, Trump could get even tougher on potential Chinese acquisitions.

“I think they will be subject to more heightened scrutiny [under Trump]. There are a lot of Chinese deals pending with” the Committee on Foreign Investment in the U.S., or CFIUS, said Anne Salladin, a special counsel of the Washington law firm Stroock & Stroock & Lavan, and a former senior counsel to the Treasury Department.

She added, though, that it is really far too early to predict Trump’s attitude on Chinese M&A in the semiconductor industry, and to remember that Trump is a businessman.

“His general election rhetoric may not be what we find in practice,” she said.

“If there is anything he understands, it’s deal-making, so President Trump may not be as adverse to foreign investment as one might believe from his rhetoric, as long as some element of reciprocity [is] included.”

The Trump transition team did not respond to questions about their approach to the China chip conundrum when asked by MarketWatch, but the president-elect’s stance toward China in general has been a tough one. He took aim at China throughout the election, blaming it for a downturn in U.S. manufacturing, and named noted China critic Peter Navarro, a UC Irvine economics professor and author of the book, “Death by China,” as director of the newly formed National Trade Council. Navarro also did not respond to requests for comment.

China’s move to create its own chip-making industry includes a government plan to spend $150 billion in a decade to build and buy its way into semiconductors, which are the core of every electronics device and a $341 billion global industry. The state-sponsored investment effort has a stated goal of giving China “advanced world-level [semiconductor capability] in all major segments of the industry by 2030,” according to the report.

Much of that push has involved attempting to buy U.S. chip companies or knowledge. Salladin noted that China had the most overall deals in front of the CFIUS, the regulatory body that can shoot down or approve foreign acquisitions, for the most recent year on record, 2014, and believes that number increased in subsequent years.

China has already made some costly acquisitions in the U.S. semiconductor business, but in recent months the climate has been tougher and CFIUS has been reluctant to approve such moves.

Last year, a consortium of Chinese investors called Uphill Investment Co. eventually won in a takeover battle for Integrated Silicon Solution Inc., a designer of specialized memory chips for automotive, communications and consumer electronics products. Uphill outbid rival Cypress Semiconductor Corp. CY, -0.22% and the approximately $765 million deal was ultimately approved after an extended review by CFIUS, which gave it a final go-ahead, finding “no unresolved national security concerns.” 

A more recent deal in Germany was killed last month after President Obama came out swinging against an approximately $730 million deal by a Chinese investment firm to buy Aixtron SE AIXA, -1.56% a German semiconductor equipment maker, which was contingent upon approval by the CFIUS.

One pending deal, a $1.3 billion bid for Lattice Semiconductor Corp. LSCC, -0.21%  by Canyon Bridge Capital Partners, could be a huge early indicator on how Trump’s policies will evolve. Lattice designs field programmable gate arrays, or FPGAs, which are finding a new home in data centers. Intel’s purchase of Altera Corp. last year was founded upon their joint venture developing configurable chips for data centers.

“Lattice is the canary in the coal mine,” said Chris Rolland, an analyst with Susquehanna Financial Group. “This relatively small deal is going to set the tone for what we might see over the next few years.”

Rolland gives the deal a 50/50 chance of being approved, but he does note that Lattice’s technology is not as leading-edge as competitors such as Intel’s Altera or Xilinx Inc. XLNX, +0.08%  

Just a few days after Obama blocked the Aixtron deal, 22 lawmakers wrote a letter to Treasury Secretary Jacob Lew to voice their concerns about the Lattice deal, according to The Wall Street Journal, noting that it appeared to be constructed in such a manner to “obfuscate the involvement of numerous [China] state-owned enterprises during the Committee on Foreign Investment in the U.S. review process.”

Despite national security concerns, many U.S. companies would like China to be an open and level playing field to avoid the plight of other tech companies that have had to walk away from the large potential market. But they have met the same sort of uneven enforcement that Chinese companies have so far faced: While Intel managed to strike a deal with Tsinghua University and Montage Technology Global Holdings to develop a special programmable chip that preserves the intellectual property of both parties, it also had to stop shipping chips to China for a supercomputer after the U.S. government intervened.

The Obama administration’s report strikes a proper balance between keeping the Chinese market open and drawing a hard line on what type of chips and semiconductor knowledge it will allow to flow to the country. But its arrival just ahead of a change in leadership means we must wait to see if Trump will have the same approach, with the Lattice deal a critical harbinger.

By: DocMemory
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