How China Is Mastering Computer Chips
WHY YOU SHOULD CARE
China is buying foreign semiconductor firms to develop expertise in manufacturing computer chips.
By Emily Feng
There was little fanfare when the private Chinese company NavTech bought Silex Microsystems in 2015, acquiring the Swedish company’s mastery of manufacturing accelerometers, gyroscopes and other microscopic sensors. NavTech — which specializes in navigation technology for aviation, satellites and defense — announced shortly afterward that it would build a $300 million plant in Beijing “relying on Silex’s technology” in micro-electromechanical systems (MEMS), the components embedded in chips that are increasingly central to everything from mobile phones and medical devices to self-driving cars.
But the acquisition of Silex, through a chain of investment holding companies, involved Chinese state-controlled funds. The new plant is located in a state-run industrial park and has been backed by a state-run semiconductors fund, the Beijing Integrated Circuits Fund.
It is a prime example of how China has sought out and purchased key technologies as it seeks to become a world-class producer of computer chips. Competence in MEMS is one part of Beijing’s efforts to reduce its imports of critical components, a strategy known as “Made in China 2025” that has seen the government deploy hundreds of billions of dollars.
“With so many sub-funds involved in the spaghetti bowl of capital looking to do deals, it isn’t surprising to find some entities that are presenting themselves as private investors which are in part capitalized by state-linked funds,” says Lance Noble, an analyst at research firm Gavekal Dragonomics in Beijing.
There is a risk that these acquisitions circumvent the Swedish export control regime.
Jerker Hellström, analyst, Swedish Defence Research Agency
Tomas Bauer, a senior vice president at Silex, plays down the concerns, describing the acquisition by NavTech as a “pure financial” arrangement that has allowed Silex to raise the money it needed to expand in a core market.
“Silex has done relevant research using expert consulting firms and concluded that Silex MEMS wafer manufacturing expertise does not comprise any technology subject to export regulations,” he says.
Silex, whose biggest competitors are European company STMicroelectronics, Canada’s Teledyne Dalsa and Taiwan’s TSMC, is not the only Swedish MEMS company to be bought in recent years by Chinese investors with state funding.
In January 2017, the Swedish semiconductor company Norstel was bought for an undisclosed amount by An Xin Capital, a RMB 50 billion ($7.4 billion) investment fund seeded by the Fujian government and the National Integrated Circuit Industry Investment Fund, a $21.8 billion state fund that’s different from the Beijing Integrated Circuits Fund.
San’an Optoelectronics, the private Fujianese company managing the fund, was also behind a failed 2016 bid for Aixtron, the German semiconductor equipment maker.
“There is a risk that these acquisitions circumvent the Swedish export control regime. As a result, Sweden may inadvertently assist the Chinese military in modernizing its capabilities,” says Jerker Hellström, an analyst at the Swedish Defence Research Agency.
Swedish officials declined to comment but pointed to a statement by former business minister Mikael Damberg to the Svenska Dagbladet newspaper in which he deflected any potential criticism from the government: “It is the company’s board and management that is responsible for the ongoing running of the company’s operating units.”
Neither NavTech nor the Beijing Integrated Circuits Fund replied to requests for comment.
The layering of funds and investment vehicles in semiconductor deals demonstrates the challenge faced by regulators in screening investments to protect sensitive or dual-use technology.
In 2017, the Committee on Foreign Investment in the United States (CFIUS), an American screening body, blocked a proposed $1.3 billion takeover of U.S. semiconductor company Lattice by Canyon Bridge Capital Partners because the investors were backed by China Reform Holdings, a government-controlled group that manages a $30 billion venture capital fund.
But other deals have been waved through. OmniVision, an American semiconductor company that designs image sensors, was acquired in 2015 by a consortium of Chinese investors including Hua Capital, a private equity fund jointly set up by the controlling shareholder of top state chipmaker Tsinghua Unigroup. OmniVision did not return a request for comment.
Hua Capital was making equity investments on behalf of Beijing Integrated Circuit Fund, according to a credit-ratings report, which declared the state venture capital fund had “privatized the U.S.-listed company OmniVision Technology” in the deal.
European politicians have proposed a CFIUS-like screening body to give Brussels power to block foreign takeovers involving sensitive technology. But opposition from several EU member states has watered the proposal down to a “framework for coordination,” according to two diplomats.
“At the very beginning, there was the consideration to make it a legally binding document, but because many countries opposed it, particularly in Eastern Europe, it was changed,” says Sun Yongfu, a former senior official at China’s Ministry of Commerce.
NavTech’s trajectory offers insights into how Chinese industrial policy picks winners and then cultivates them through choice access to business opportunities and technology assets.
The company’s founder, Yang Yunchun, completed his doctorate in the U.S. in 2001. He returned to China and was selected as an expert in the “Thousand Talents” program to attract talent from overseas. After founding NavTech in 2007, Yang was recruited to partake in China’s flagship 863 Program to develop advanced technologies with state funding.
By 2011, NavTech was landing contracts to supply components for prestigious projects such as Baidu’s Apollo autonomous car project and the state-led Beidou satellite navigation system, China’s rival to American GPS. NavTech also provides navigation technology for Chinese drones and fighter jets, including the JF-17 Xiaolong fighter jet, which the Chinese military jointly produces with Pakistan.
In 2015, the company encountered a golden opportunity. That July, a new subsidiary of the Beijing Integrated Circuits Fund, Ruitong Semiconductor Technologies, acquired Silex through its subsidiary, GAE.
A month earlier, NavTech had raised $48 million in a public offering on the Shanghai bourse. By the end of the year, NavTech had completed its acquisition of GAE and, by extension, Silex. The Beijing fund later invested RMB 600 million ($90 million) toward NavTech’s new MEMS foundry.
Less than two years later, MEMS manufacturing had become NavTech’s fastest source of increasing revenue, jumping by nearly 175 percent to RMB 319.3 million ($47 million) that year.
Additional reporting by Richard Milne in Norway.
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