U.S. Semiconductor Sector Faces Risk From China

Jan 28, 2017

A White House advisory panel issued a report recommending that the U.S. strengthen protection of the semiconductor industry, especially against threats posed by Chinese policies to dominate the sector.

The report, released Friday by the President's Council of Advisors on Science and Technology, said that the "concerted push by China to reshape the market in its favor, using industrial policies backed by over one hundred billion dollars in government-directed funds, threatens the competitiveness of the U.S. industry and the national and global benefits it brings."

"We found that Chinese policies are distorting markets in ways that undermine innovation, subtract from U.S. market share, and put U.S. national security at risk," it added.

The reported noted that China's strategy has relied largely on large-scale spending. China has spent $150 billion in public and state-influenced private funds over a 10-year period to subsidize investment and acquisitions as well as purchasing technology. China also places conditions on access to its market to drive technology transfer, the report said.

What the U.S. should do

To be sure, the government hasn't been sitting idly. In August, President Barack Obama made the unusual move to block a proposed sale of Aixtron SE in Germany to a unit of Fujian Grand Chip Investment Fund, a fund that is part-owned by the Chinese government, citing security concerns. Aixtron develops technology with military applications.

The advisory group also outlined steps the U.S. government could take to combat Chinese competition, including improving transparency around Chinese policy regarding technology and investment controls; looking at individual transactions in the context of Chinese policy; and responding directly to Chinese policies that violate trade rules or distort the global market.

Outpacing the competition

The report also emphasized the importance of keeping the industry vital and competitive through policies aimed at developing and attracting talent, funding research, reforming corporate tax laws and reforming permitting practices. The U.S. "will only succeed in mitigating the dangers posed by Chinese industrial policy if it innovates faster. Policy can, in principle, slow the diffusion of technology but it cannot stop the spread. The only way to retain leadership is to outpace the competition."

The paper was informed by a semiconductor working group that was launched in October last year and co-led by John Holdren, director of the White House Office of Science and Technology Policy as well as co-chair of the President's Council of Advisors on Science and Technology.

More investments, more concerns

"Generally speaking, the level of anxiety within government and Congress about inbound investments has been rising over the past few years, particularly concerns relating to cyberspace, the transfer of personally identifying information or U.S. intellectual property," said DJ Rosenthal, associate managing director at Kroll in Washington, D.C.

Chinese investment in the U.S. tripled last year to $46 billion, according to Rhodium Group. More than 90% of the investments in 2016 were targeting U.S. services and advanced manufacturing sectors. The U.S. was also the largest recipient of Chinese outbound investment in 2016. While the Committee on Foreign Investment (CFIUS) examined many Chinese deals during the year and blocked others, the actions have been seen as insufficient by some lawmakers.

Because of growing concerns, CFIUS has been thrust into the limelight. Both Republican and Democrat members of Congress as well as the Government Accountability Office have urged changes to strengthen the committee's authority. The report also questioned the effectiveness of current U.S. policies and encouraged the U.S. government to "revisit its tools" to ensure they are sufficient.

 

Source: FORBES