Did US stumble in barring Chinese move for chipmaker Lattice?

President Donald Trump’s move to block a China-backed investor from buying US chipmaker Lattice Semiconductor is being characterized in the US as a pointed signal that the White House will halt Chinese investment in US tech firms on national security grounds.

Trump issued an order on September 13 barring Canyon Bridge Capital Partners from acquiring the Portland, Oregon-based Lattice in a US$1.3 billion bid. Lattice, a supplier of programmable logic chips, had taken the unusual step of appealing directly to the President after the Committee on Foreign Investment in the United States (CFIUS), the inter-agency committee that reviews foreign acquisitions of American firms, recommended against approving the deal.

The White House action is aimed at conveying US displeasure with Beijing on several fronts. Not only is the US antsy about China’s efforts to secure an edge by acquiring US tech firms in areas like semiconductors, it is also unhappy about Chinese trade practices, and President Xi Jinping’s seeming inability to restrain North Korea’s nuclear ambitions.

Flip side

But there’s a flip side to what some see as a ham-fisted US retaliation. In addition to denying US workers and tech companies the benefits of Chinese investment, some analysts argue that Trump’s move risks unnecessary political and economic retaliation from Beijing at a time when bilateral cooperation on North Korea and other issues is crucial.

If Chinese companies are denied the ability to legally invest in US tech firms, it may also leave them with no choice but to engage in industrial espionage and other extra-legal means to acquire such technology.

Rather than cracking down, Gary N. Kleiman – an emerging markets specialist who runs Kleiman International in Washington, DC – argues it would be wiser for the US to have Chinese investment in US tech out in the open and under US law. Another advantage is that it would be easier to monitor such activities for the benefit of all parties.

“If China wishes to catch up through foreign acquisitions it most certainly would not acquire a fabless company like Lattice. It would most likely be companies that have leading edge manufacturing capabilities.”

“If you want the Chinese to operate from a rules-based approach … you want to promote systemic transparency above all,” Kleiman told Asia Times.

He also notes that CFIUS, so far, hasn’t clarified what types of US technology firms are critical to US security and competitiveness and when Chinese investment in these companies constitutes a threat.

In the case of Lattice, the company informed US regulators during the approval process that it no longer supplies chips to the US military. The company further noted that it had taken unprecedented steps to address US national security concerns.

“Our CFIUS mitigation proposal was the single most comprehensive mitigation proposal ever proposed for a foreign transaction in the semiconductor industry and would have maximized United States national security protection while still enabling Lattice to accept Canyon Bridge’s investment and double American jobs,” Lattice said in a statement.

Lattice doesn’t make chips

Richard L. King, a physicist and retired investment banker and venture capitalist, noted that Lattice is not even a leading US player in its chip space and that its acquisition by Chinese interests wouldn’t harm US national security.

He points out that Lattice is a “fabless” semiconductor company that outsources the manufacturing of its silicon wafers to Taiwan’s United Microelectronics Corporation. Hence, China would not have accessed any secret chip technology from Lattice.

“China at this point is probably two generations behind the US in chips,” King told Asia Times. “If China wishes to catch up through foreign acquisitions it most certainly would not acquire a fabless company like Lattice. It would most likely be companies that have leading edge manufacturing capabilities.”

King also argues that US companies no longer dominate in chips and that China can easily acquire what it needs from other countries if it’s denied access in the US.

A larger issue is whether US efforts to control the spread of chip and other technologies such as artificial intelligence is even practical in a world where technology is increasingly collaborative and transcends national borders.

Chinese investment in US tech firms has also been relatively low versus other sectors. Tracker Rhodium estimates that there were 69 deals, totaling US$5.1 billion, in “electronics” (which includes chips) between 2000 and Q2 2017. The pace has picked up in the last two years. But the numbers are dwarfed by the US$40 billion that Chinese investors poured into the US real estate and hospitality sectors in the same period.

Trump’s move to kill the Lattice deal follows a story by Reuters last year that Canyon Bridge is funded by cash originating from China’s central government, and also has indirect links to its space program.

Kleiman points out that Canyon never tried to conceal its ties to the Chinese government and pursued the deal openly. But such points are being ignored in Washington. There is increasing bipartisan support in Congress to enact legislation that would require CFIUS to toughen its scrutiny of acquisitions by Chinese companies and pay more attention to national competitiveness issues.

The White House’s reaction to Lattice may also indicate that US approval for other pending Chinese deals such as Ant Financial’s US$1.2 billion purchase of US-based money transfer firm MoneyGram International are at risk.

“What’s going to be interesting is the next chapter. We have all these financial services deals in the works,” Kleiman said. “There’s also been a lot of backlash from the US financial services community about lack of reciprocity from China.”

China is huge chip importer

In technology, the negative US reaction is due in part to a strong push by China to become the world’s leader in fields such as chips and artificial intelligence.

China’s State Council unveiled a “Made In China 2025” program in May 2015 that, among other things, aims to pump US$150 billion or more from public and private sources to expand the country’s domestic chip industry. The goal is to have 70% of all integrated circuits in China manufactured domestically by 2025.

But what’s portrayed in the US press as another Chinese bid for global dominance is far more nuanced. China currently imports over 80% of its chips from abroad. It is the world’s biggest consumer of foreign-made chips. There also are no domestic Chinese companies among the world’s top 10 chipmakers — a list that includes US giants like Intel and South Korea’s Samsung.

China may yet lead in chips. But analysts say it is still far from being the tech juggernaut the US fears.

Doug Tsuruoka is Editor-at-Large of Asia Times