Semiconductors at the Heart of the US-China Tech War How a New Era of Techno-Nationalism Is Shaking up Semiconductor Value Chains

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JANUARY 2020

Semiconductors at the Heart of the US-China Tech War How a New Era of Techno-Nationalism is Shaking up Semiconductor Value Chains

BY ALEX CAPRI RESEARCH FELLOW, HINRICH FOUNDATION Contents

CONTENTS 2 LIST OF GRAPHS 4 LIST OF TABLES 4 FOREWORD 5 EXECUTIVE SUMMARY 6 INTRODUCTION 7 China’s Semiconductor “National IC” Plan 8 US – Counter Measures 9 The Proliferation of Non-Tariff Measures (NTMs) 9 Impact on Trade Flows and Global Value Chains 10 REPORT OBJECTIVES AND FOCUS 11 1. WHAT ARE SEMICONDUCTORS? WHERE ARE SEMICONDUCTORS 13 MANUFACTURED? What are Semiconductors? 14 How are Semiconductors Manufactured? 15 Semiconductor Value Chains Operating Models 16 Semiconductor Manufacturing Cost Breakdown 17

2. TOP SEMICONDUCTOR COMPANIES: INNOVATORS AND MARKET LEADERS 20 The Large Gap between China Semiconductor Companies and their Competitors 21 Dominance of American Semiconductor Companies 22 3. CHINA’S SEMICONDUCTOR INDUSTRY 23 China’s Technology Gaps in Semiconductors 23 Can China Produce Semiconductors? 24 Chinese Fabless Companies: Slow but Steady Design Progress 24 New Fab Projects in China 25 SPOTLIGHT: Huawei’s Latest Microchip Design Capabilities 26 Semiconductor Demand by Chip Size 27 SPOTLIGHT: China’s State-backed Production of Memory Chips Could Lead to Overcapacity 29 4. CHINA’S TECH FUNDS, GOVERNMENT SUBSIDIES AND 30 INDUSTRIAL POLICIES Made in China 2025 30 China National Integrated Circuit Industry Investment Fund (China’s Big Fund) 31 Inward and Outward Investment Strategies 32 SPOTLIGHT: China’s Inward and Outward Investment Strategies 33 SPOTLIGHT: The Impact of Foreign-Invested Enterprises (FIE’s) on China’s GDP 34 SPOTLIGHT: Global Semiconductor Sales: China versus other Markets 35 The US China Decoupling of Semiconductor Companies 36 Technology Acquisitions by Chinese State-funded Actors 37 CASE STUDY: California Chip-Designer Atop Tech and a Mysterious Chinese Buyer 38

5. US EXPORT CONTROLS AND THE BIS ENTITY LISTS 39 Export Controls of “Dual Use Technologies” 39 China’s Military-Civil Fusion Initiative 41

2 Contents

Wassenaar and the International Application of Export Controls 41 Export Control Classification Numbers (ECCNs) and Supply Chain Traceability 42 Tracing ECCN’s in the Semicon Value Chain 43 Blacklisted Entities/Parties, Specially Designated Nationals (SDNs) 44 Semiconductor Value Chains are Deeply Entangled 44 CASE STUDY: American Technology Inside Huawei’s P30 Smart Phone 45 Chinese Acquisitions of US Companies 46 Blocked Chinese Technology Acquisition Deals 46 SPOTLIGHT: Mergers And Acquisitions in the Semiconductor Industry 47

6. STRATEGIES TO MANAGE TECH CONTROLS AND GLOBAL VALUE CHAINS 49 The “De-Americanization” of Global Value Chains 49 SPOTLIGHT: De Minimis Example 50 CASE STUDY: International Traffic in Arms Regulations (ITAR regulations) 52 The Second Incorporation Rule 52 Moving More Value-added Operations out of the United States 53 Ring-fencing and Off-Shoring Operations —China and Beyond 54 Vertically Integrated Semiconductor Value Chains 54 Exclusions and Waivers on Export Controls 55 SPOTLIGHT: Increased Cyber-Security Threats 55 Federal Register Notices 56 Decoupling Due to Excessive Regulations 57 Specially Designated and Blocked Persons List (SDN) 57

7. TECHNO-NATIONALISM & INDUSTRIAL POLICIES 58 Increased Government Intervention 58 Trans-Atlantic Technology Alliance 59 Semiconductors and Techno-Nationalism 60 The Evolution of China’s Techno Nationalism and Techno Mercantilism 61 Should the West Emulate China’s Industrial Policies? 61 The IDAR Methodology 62 SPOTLIGHT: Milestones of Chinese Techno-nationalism 63 The Scale of China’s Technology Laboratory 64 The Proverbial Horse Race 65 Military Involvement in Semiconductor Research 66 SPOTLIGHT: The Galapagos Syndrome 67

8. THE DECOUPLING OF US-CHINA VALUE CHAINS 68 The Decoupling of Talent 69 De-Americanization of Value Chains by Chinese Companies 70 The European Union and China 70 Japan in the Semiconductor Landscape 71 South Korea 72 Qualcomm-Samsung 5G Axis 73 SPOTLIGHT: Taiwan: A Strategic Semiconductor Hotbed 74 CONCLUSION 77 APPENDIX A: REFERENCES 79 RESEARCHER BIO: ALEX CAPRI 84 FOOTNOTES 85

3 Contents

LIST OF GRAPHS Graph I: Global Semiconductor Sales Revenue from 1987 to 2020 7 (in billion US dollar) Graph II: China’s Top Imports and Exports 8 Graph III: Semiconductors: At the Core of all Future Industries 13 Graph IV: The Semiconductor Ecosystem 15 Graph V: Rising Costs of Keeping up with Moore‘s Law and 17 Growing Release Dates for Intel lead-generation Chips Graph VI: Highly Integrated Semiconductor Value Chains 18 Graph VII: Geographic Dispersion: Semiconductor Value Chains 19 Graph VIII: Location of Semiconductor Companies, in Global Value Chains 19 Graph IX: Global Market Share (Sales: Company Nationality by Market Share) 20 Graph X: Top Semiconductor Companies 2018 21 Graph XI: Global Semiconductor Sales and American Semiconductor 22 Companies by Market Share Graph XII: China’s National Champions vs. Global Leaders 23 Graph XIII: Market Share of China’s Semiconductor Firms 24 Graph XIV: Semiconductor Demand by Microchip Size 27 Graph XV: Dominance of Foreign Firms in China’s Semiconductor Market 28 Graph XVI: Made in China 2025 Foundry Targets 31 Graph XVII: US Semiconductor Firms Joint Ventures in China, 2014-2018 34 Graph XVIII: Global Semiconductor Sales: China versus 35 US Sales: American & Foreign Firms Graph XIX: US Semiconductor Company Revenue from China Sales (2018) 36 Graph XX: Made in China 2025 & Export Controls in the US 40 Graph XXI: Export Control Classification Numbers (ECCNs) 43 along a Semiconductor Global value chain Graph XXII: Export Control Classification Number 3C002.a 46 - Selected List of Chinese Restricted Entities 9/2019 Graph XXIII: CFIUS Reviews of Proposed Acquisitions and Mergers 47 Graph XXIV: De Minimis Rule Example 1 50 Graph XXV: De Minimus Rule Example 2 51 Graph XXVI: Second Incorporation Rule 53

LIST OF TABLES Table I: Operating Models: Semiconductor Industry 16 Table II: 2017 China’s IC Design Industry’s Top Ten Company Ranking (PWC) 25 Table III: Huawei Smartphone American Technology Providers 45

4 Foreword

Semiconductors have become essential original research into the causes and to our modern life and the world’s effects of trade issues. The ongoing commercial and military technology. disintegration of technology-driven Extraordinary innovations have global value chains (GVCs) will have occurred in semiconductors in the last impacts on growth, innovation and 20 years, for the benefit of consumers geopolitics. and industry. This report discusses whether the However, the commercial competition self-sufficiency narratives and national between industry participants security-related neo-mercantilist from the US and China (and indeed, approaches that are now playing out participants from Taiwan, South Korea in the semiconductor industry – what and Japan) has not been allowed to the author calls “techno-nationalism” develop in a market-driven way. Whilst – might erode the last 70 years of value chains have developed across gains from trade. The report looks at borders in the search for competitive the impacts that a fragmentation of advantage, government intervention semiconductor value chains along for long term geopolitical purposes geopolitical lines may have in the has distorted markets. Recent events longer term on innovation, economic threaten to disintegrate previously transformation and growth. integrated value chains, dilute the efficiencies gained over past decades, We initiated this research to trigger a fracture common standards and slow broader discussion about the effects innovation. of the US China technology rivalry on sustainable and inclusive growth. Because of the ubiquitous nature of Please join us in the discussion. semiconductors, much is at stake in this new era, including fundamental values about how business enterprises contribute to the national security agenda. Is it possible that the unapologetic industrial policy approach of the Chinese Communist Party could find its way into liberal democratic economies?

The Hinrich Foundation focuses on Merle Hinrich advancing mutually beneficial and Founder sustainable global trade. We support Hinrich Foundation

5 Executive Summary

This report analyzes the growing US- subsidies and funding as well as forced Techno-nationalism is at the core China tech war and how it is impacting technology transfer and intellectual of the US-China tech war. Tech- the global semiconductor industry — property acquisition mandates. It also nationalsim is a set of mercantilist-like the critical technology at the core of focuses on countermeasures taken by policies that link tech innovation and the world’s commercial and military the US government, such as export enterprise directly to the national technology. controls, investment restrictions, the security policies, economic prosperity BIS’s Restricted Entity List, blocked and social stability of a nation. The purpose of the report is to technology acquisitions and new answer questions about how the industrial policies. US-China tech war is changing global value chains and trade flows in Finally, the study drills down into the semiconductors, and how both state consequences and possible outcomes and non-state actors are behaving in resulting from techno-nationalism, this fluid landscape. including how companies devise strategies to circumvent onerous More specifically, this report attempts controls and mitigate collateral to answer questions about government damage. This includes an analysis intervention and protectionist policies of scenarios involving the so-called and how they impact and influence US-China decoupling and “de- behaviors in semiconductor value Americanization” of semiconductor chains. To put the US-China tech war value chains, the fragmentation and in context, the author defines and reshoring of global value chains, and develops an emergent narrative: the formation of new corporate and “Techno-nationalism”. national alliances.

This includes a focus on China’s industrial policies, which employ state

6 Introduction

The United States and China are in the And at the core of all these future At stake is supremacy in the industries early stages of an historic tech war or technologies are semiconductors, of the future: data analytics, robotics, era of techno-nationalism. which provide the vital materials AI and machine learning, surveillance and circuitry necessary to produce technology and 5G networks Techno-nationalism is a new strain microchips — which, in turn, are of mercantilist thought that links required to operate everything from a tech innovation directly to economic smart phone to an advanced satellite prosperity, social stability and to the weapons system. In short, microchips national security policies of a nation. In are the central nervous systems and this regard, government intervention brains inside all new age technology. in markets is justified as protection against opportunistic or hostile state In 2018, global sales of semiconductors and non-state actors. and related technology topped $468 billion.1 China’s semiconductor market Techno-nationalism seeks to attain represents, by far, the world’s largest competitive advantage for its own importer. Semiconductor-related stakeholders, on a global scale, in technologies are China’s largest import order to leverage this advantage for products, exceeding even its imports geopolitical gain. of oil.2

At stake is supremacy in the industries As will be revealed in this study, China of the future: data analytics, robotics, depends almost entirely on American AI and machine learning, surveillance and other foreign companies to supply technology and 5G networks, to name its needs for integrated circuits, either a few. as imports, or as foreign producers within China’s domestic market.

Graph I – Global Semiconductor Sales Revenue from 1987 to 2020 (in billion US dollar) 3

500

450

400

350

300

250

200

150

100

0 1999 2015 1998 2016 1993 1995 2018 1997 1994 1989 2017 1991 1988 1996 2011 2013 2014 1992 2008 1987 2005 2007 2009 2000 2010 2012 2003 2006 1990 2001 2004 2002 2019* 2020*

Source: WSTS (2019) Sales revenue (in billion U.S. dollars)

7 INTRODUCTION

4 China has rolled out ambitious Graph II: China’s Top Imports and Exports strategies to acquire and develop TOP IMPORTS (2017) TOP EXPORTS (2017) semiconductor technology to reduce 250 its dependence on foreign producers.

200 Intergrated circuits Telephones Crude petroleum Intergrated circuits Iron ore Office machine parts 150 Cars Computers Gold Broadcasting equipment

100 in billions US$ in

0 Source: https://oec.world/en/profile/country/chm/

The intensifying nature of the US-China One such initiative is the Made tech war, combined with the scale in China 2025 government plan,5 and depth of China’s market—and the with some estimates putting the massive economic gains it provides to Chinese Communist Party’s funding American and foreign semiconductor commitment at $300 billion over a ten- companies—creates a collision of year period.6 vested interests that has sparked a flurry of protectionist policies in The Chinese Communist Party’s Washington and elsewhere. semiconductor financing efforts go well beyond Made in China 2025, China’s Semiconductor however. For example, China’s official “National IC” Plan government numbers claim that, as of 2019, some $29 billion of funding has In an attempt to reduce its been provided for the China National dependence on American and other Integrated Circuit Industry Investment foreign semiconductor technologies, Fund.7 as well as advance China’s own innovation, the Chinese Communist Simultaneously, the government has Party (CCP) has rolled out ambitious been pumping large sums of money strategies to promote and fund the into other technology funds, such as development of China’s technology Tsinghua Holdings, the technology in critical sectors. This funding investment arm of one of China’s is earmarked for attracting key top state-led universities, which the investment and technology transfer Chinese Communist Party has charged into China as well as acquiring critical with funding and advancing China technology overseas, through state- innovation in the semiconductor backed acquisition initiatives. industry.8

8 INTRODUCTION

The US has passed a slew of laws aimed at controlling the ownership and export of strategic technology.

U.S. Counter-Measures propose that the ECRA’s newly added In response to Beijing’s semiconductor tech controls also be adopted by its initiatives, the U.S. passed the Export allies under the multilateral framework 12 Control Reform Act (ECRA), in 2018.9 of the Wassenaar Arrangement , This was born largely from a broader which includes 41 other member narrative shift that links the level of countries. Meanwhile, the Foreign development of a nation’s commercial Investment Risk Review Modernization 13 technology directly with national Act (FIRRMA) of 2018, enforced by security —which increasing numbers of the U.S. Department of the Treasury, policy makers in the U.S. military and has led to a substantial increase in security establishment argue is more foreign investment reviews by the important than trade deficits or tariff Committee on Foreign investment in rates. the United States (CFIUS). As such, the number of high-profile acquisitions of Under the ECRA, The Department of US technology companies by Chinese Commerce’s Bureau of Industry and entities have ground to a halt. Security (BIS) is currently reviewing the addition of new “emerging” The Proliferation of Non- and “foundational” technologies,10 Tariff Measures (NTMs) for inclusion on U.S. Department of The US-China technology rivalry is Commerce’s Controlled Commodity driving an escalation of non-tariff 11 List (CCL) , which would require export measures (NTMs), which could have licenses for the sale and transfer of more profound effects on global supply such technologies. At issue is the chains than tariffs. relevance of “dual use,” which is The most noteworthy NTMs include: defined as a commercial technology • Sanctions or product which can be used for • Export controls military purposes–which would apply • Licensing requirements to virtually all of the industries of the • Restricted entity lists future. • Blocked acquisitions and investments These new measures will spill over into other markets, as the U.S. will likely

9 INTRODUCTION

By definition, an export control is And then there are military, space and US export controls are damaging simply a regulation that is put in place defense related articles as defined American semi-conductor companies, to protect national security, promote under the International Traffic in Arms with ripple effects throughout foreign or domestic policy, and, in Regulations (ITAR) in the US, which extended global value chains. some instances, control the export of control the manufacture, sale and items in short supply. An export control distributions of such items. Here, a is not, by itself, a prohibition to sell or simple transaction with a restricted buy something. party is forbidden. Many companies are asking how broad might the ITAR Export controls, however, mean that an controlled list become? export license may have to be issued by the appropriate government licensing Impact on Trade Flows and Global agency to allow an exporter to sell, Value Chains transfer or transport a product to a The world’s semiconductor companies foreign market, depending on where are now caught in the middle of the the final buyer is located, who the US-China tech war. buyer is, and how the controlled item will be used. In almost all cases, when Export restrictions on Huawei and the facts surrounding a controlled item other Chinese entities have inflicted are reviewed, US government agencies collateral damage on American issue export licenses in the vast semiconductor companies such as majority of instances. Broadcom, Qualcomm, Intel, Nvidia, and others, while the ripple effects of But NTMs such as export controls add these actions are being felt throughout a layer of uncertainty to GVCs and extended global value chains. threaten to turn a long-time supplier into an unreliable supplier. Export The US-China tech war presents an controls also mean that a company’s historic inflection point, therefore, global value chains will be examined for technology companies, with far- under the proverbial regulatory reaching consequences for trade flows. compliance microscope, adding This rivalry signals the beginning of compliance costs, delays and risks. a momentous shift in global value chains. Multinational companies in the Such was the case when the US semiconductor industry and beyond threatened to block the sale of will need to react and adjust to this American technology to Chinese changing landscape. telecoms company ZTE (which was later rolled back). Subsequently, Huawei, The ensuing sections of this report HikVision, SenseTime and other key delve into these issues and aim to Chinese tech firms have been placed on answer the key questions, outlined the US Restricted Entities List. below.

10 Report Objectives and Focus

As the US-China tech war escalates, Key Sections of the Report trade flows and supply chains involving To answer the above questions, the semiconductors are being disrupted. research, data and analysis are broken into eight distinct sections. Key Questions • What are semiconductor products? The report begins with an overview Where are semiconductor of the complexity and nature of products manufactured? What do semiconductor global value chains. semiconductor value chains look Then it reveals the market leaders like today and how extensive is and dominant players, and describes the interconnectivity between the current semiconductor industry international firms? landscape in China. This is covered in • What countries produce the most the following sections: semiconductors? What are the top 1. What are Semiconductors and semiconductor companies? How Where are Semiconductors significant is their lead? Manufactured? • Can China make chips and what 2. Top Semiconductor Companies, are its current capabilities in the Innovators and Market Leaders semiconductor industry? 3. China’s Semiconductor Industry • How will non-tariff measures such as export controls, export licensing The report then delves into China’s and BIS entity lists disrupt the funding initiatives and the Chinese semiconductor industry? Communist Party’s techno-nationalist • Are semiconductor value chains efforts to promote the development destined to fragment along of Chinese semiconductor companies geopolitical lines? or national champions. The analysis features a deep dive into its inward • How will companies mitigate risks and outward strategies to attract and circumvent industrial policies specialized foreign direct investment and/or protectionist measures? (FDI) and its efforts to acquire • How will “techno-nationalism” fuel semiconductor companies, assets and new industrial policies? technology abroad. Is US-China decoupling for • This is followed by an examination of semiconductor companies US protectionist policies designed to inevitable? prevent China from obtaining sensitive • What does the future hold for and controlled US tech. Here, the reader semiconductor trade flows? is introduced to the different kinds of enforcement mechanisms being used in the export control process and how they impact global value chains and

11 REPORT OBJECTIVES AND FOCUS

trade flows. Finally, the report concludes by looking Next, the reader is presented at the direction in which semiconductor with different scenarios whereby value chains appear to be heading semiconductor companies leverage under techno-nationalist pressures, strategies to circumvent and reduce the and outlines potential scenarios for re- risks of export controls and restrictions, alignment, restructuring and US-China with an analysis of how these different decoupling: outcomes could transform the global semiconductor industry. 7. Techno-nationalism and Industrial Policies These themes are explored in sections: 8. The Decoupling of US-China 4. China’s Tech Funds, Government Semiconductor Value Chains Subsidies and Industrial Policies The author’s analysis and conclusions 5. US Export Controls and the BIS were drawn from a variety of research Entity List methodologies including review of salient literature and corporate 6. Strategies to Manage Tech Controls publications, interviews with company Within Global Value Chains management at various semiconductor companies, and from the dissemination of questionnaires to entities in the semiconductor ecosystem.

12 1. What are Semiconductors? Where are Semiconductors Manufactured?

Graph III: Semiconductors: At the Core of all Future Industries14

Artificial Quantum Wireless Internet of Intelligence computing networks Things

Robotics Gaming

VR/AR Medical devices

Laptops and computers Planes

Power equipment Military devices

Additive Autonomous Smart Storage and Source: Author’s compilation manufacturing drivings phones memory

The fabrication of a state-of-the Only a small number of multinational art microchip represents, perhaps, companies can compete in this humankind’s greatest technological dynamic environment, where R&D achievement. The process of designing, costs run to the billions of dollars and creating and mass-producing, for represent more than 20 percent (and example, a 7-nanometer integrated rising) of annual profits.15 circuit, with virtually zero margin of error, is the result of one of the world’s The cost of building a highly most complex, knowledge-intensive automated, AI-enabled factory starts at processes. $10 billion, and requires “clean-rooms” that are 100,000 times more sterile than the average hospital environment.16

13 1. WHAT ARE SEMICONDUCTORS? WHERE ARE SEMICONDUCTORS MANUFACTURED?

What are Semiconductors? Integrated circuits are the most A semiconductor (also referred to as a common microchips and are often “microchip”) is a material that provides the technology that is referred to conductivity between an insulator and as “semiconductors” in the press other materials. and academic journals. This paper will use “integrated circuits” and There are three types of “semiconductors” interchangeably. semiconductors: What makes the science behind these microchips so impressive is the size • Discrete at which these tiny devices perform • Integrated Circuits (IC’s) their functions. A silicon atom is about Opto-electronics half a nanometer in diameter and • today’s most advanced microchips are Discrete semiconductors contain only produced at commercial volumes that one transistor. Integrated circuits attain a size of 7 nanometers or smaller. contain multiple transistors, while (One nanometer is one billionth of a 17 optoelectronics detect and generate meter. ) light pulses.

14 1. WHAT ARE SEMICONDUCTORS? WHERE ARE SEMICONDUCTORS MANUFACTURED?

How are Semiconductors can be managed. There are four basic Manufactured? stages in a semiconductor value chain: Semiconductor value chains in the semiconductor industry have become 1. Research and Development hyper-specialized, with critical portions 2. Design of the global value chain located 3. Manufacturing throughout the world. Highly complex functions in the manufacture of these 4. Assembly, Testing and Packaging products are performed at virtually any (ATP), also called Outsourced, location that can confer competitive Assembly and Testing (OSAT) or relative advantage, so long as risks

Graph IV – The Semiconductor Ecosystem18

Intelectual Property Raw Material (IP) Companies Supplies

Provide IP cores Raw wafer, Lead frames used to build chemicals packaging advances ICs material

RESEARCH & DESIGN MANUFACTURING ASSEMBLING, DISTRIBUTION DEVELOPMENT TESTING & Provide services Provide PACKAGING using specialized equipment design tools and tools

Electronic Design Equipment Automation (EDA) suppliers Companies

Source: SIA Beyond Borders

15 1. WHAT ARE SEMICONDUCTORS? WHERE ARE SEMICONDUCTORS MANUFACTURED?

Semiconductor Value Chains Foundries - So-called “foundries” Operating Models specialize solely in fabricating (hence Participants in the semiconductor they are also known as “fabs”). A industry fall into four categories: manufacturing foundry’s operating model depends on contracts with IDM – A number of companies such design firms to perform fabrication. as Intel, Samsung and Micron are vertically integrated, meaning that OEM/ODM – Finally, when a microchip they can perform all phases in-house. completes its journey through the These companies fall under the label semiconductor global value chain, of integrated device manufacturers it will be delivered to an original (IDMs). For example, Samsung makes equipment manufacturer (OEM) or chips primarily for their own branded original design manufacturer (ODM) products and finished goods such as such as Apple, Oracle, BMW or Airbus – smart phones and TVs. Intel is also where it is incorporated into everything vertically integrated in that it makes from smart phones, IoT infrastructure, chips for a whole range of its branded autonomous vehicles and aircraft components and subcomponents, but navigation software. Often, original it will also sell its chips to third parties. equipment manufacturers use contract manufacturers for the fabrication Fabless – In a separate niche, “fabless” of their products, which adds more companies focus on the research complexity and interconnectedness to and design of semiconductors, or, the end of the value chain. for example the electronic design and automation (EDA) software tools needed to design integrated circuits. These companies do not do any manufacturing.

Table I – Operating Models: Semiconductor Industry19

Fabless-Foundry Model

Outsourced Distribution Design (Fabless) Manufacturing Research & Assembly & Test (to OEMs/ AMD, Broadcom, (Foundries) Development (OSAT) ODMs) Media Tek, Global Foundries, HH CEA-Leti, IMEC, Amkor, ASE, ChipPAC, Allied Spreadtrum, Grace,SMIC, Tower ITRI, JCET, J-Devices, Electronics, Qualcomm Jazz, TSMC, UMC SEMATECH, Powertech, SPIL Arrow Semiconductor Electronics, Research Avnet, Digi-Key, Cooperation IDM Model Mouser Electronics

Integrated Device Manufacturer (IDM) Infineon, Intel, Micron, Renesas, Samsung, Texas Instruments

Source: SIA Beyond Borders

16 1. WHAT ARE SEMICONDUCTORS? WHERE ARE SEMICONDUCTORS MANUFACTURED?

Graph V – Rising Costs of Keeping up with Moore‘s Law and Growing Release Dates for Intel Lead-Generation 100 BILLION USD 21 0.8/0.15µm

Chips 0.13µm R 65nm 75 40/45nm OLDE

28nm OGY 50 20nm 16/14nm TECHNOL

25 NEWER

0 2015 2020* 2025*

TECHNOLOGY NODE (nm) COST TO ADVANCE TO NEXT LEVEL OF CHIP DESIGN 200 600 MILLION USD 1993 to 2012 : every two years 180 500 160 140 400 120 300 100

200 80 60 14nm slip s 10nm slips by 2 qua rters by 2 year s 100 40 7nm?? 20 0 65nm 45nm 28nm 22nm 16nm 10nm 7nm 5nm 0 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 Older INTEGRATED CIRCUIT DESIGN NODE Newer

Source: https://worldview.stratford.com/article/us-china-tech-wars-rages-electronics-industry-braces-impact, SCMP Stratford 2019

Semiconductor Manufacturing Cost According to the Semiconductor Breakdown Industry Association, about 90 percent As Moore’s Law20 reaches its end, of an IC’s value is derived from the the costs of achieving the next design and manufacturing phases of 22 breakthrough in a semiconductor have the global value chain. become increasingly expensive and complicated, thus the semiconductor This is an important fact, as this has a value chain could become more direct bearing on the state of China’s unbundled as it migrates towards firms semiconductor industry, which has that not only can absorb escalating been heavily concentrated in the costs but also can hyper-specialize in assembly, testing and packaging unique areas of the integrated circuit phase, at the low-value end of the value chain. semiconductor value chain — and many of these operations are performed by 23 Having reached the boundaries of the subsidiaries of US companies. Moore’s Law with the silicon-based chip, a race is on to develop the next This will be discussed later, in more generation of technologies, including detail, in the context of the US-China gallium and nitrogen-based materials tech war and what this could mean for and quantum computing. international trade flows should heavy export controls and restrictions be imposed on semiconductors.

17 1. WHAT ARE SEMICONDUCTORS? WHERE ARE SEMICONDUCTORS MANUFACTURED?

Over the past twenty years of 3. Ingots are shipped to the US and globalization, semiconductor global fabricated into blank wafers value chains have evolved into the most internationally integrated of any 4. The wafers are then sorted and cut industry. For example, when tracing the into dies within the US end-to-end value chain of a microchip, it may be exported and imported 5. Dies are shipped to Indonesia to be dozens of times, across multiple tested and assembled borders before finally being imbedded into a finished product. For example, 6. Product-ready microchip goes consider the following scenario for a through a centralized distribution standard integrated circuit (see Graph center and is shipped to China VI Highly Integrated Semiconductor Value Chains): 7. Microchip is imbedded into end- products in China 1. R&D is performed in the US 8. Finalized products are shipped to 2. Base silicon ingots are cut into customers around the world wafers in Japan, Taiwan, Philippines or Korea

Graph VI – Highly Integrated Semiconductor Value Chains24

Example of one global value chain adopted from SIA

Sorted and cut into dies R&D Chip integration by end- 4 1 product manufacturer 3 7 8 Cut silicon ingots into wafers 2

Customer buys end 6 product 5 Final product shipped for inventory

Dies are assembled, tested & packaged

Source: SIA (2019)

18 1. WHAT ARE SEMICONDUCTORS? WHERE ARE SEMICONDUCTORS MANUFACTURED?

Graph VII – Geographic Dispersion: Semiconductor value chains25

Research and Design

Manufacturing

Assembly Testing Intel Micron Toshiba Samsung Infineon NXP

Source: SIA Beyond Borders

A closer look at where semiconductor of key production activities for leading companies perform their highest value- semiconductor companies Intel and add activities (the R&D and critical Micron (US); Toshiba (Japan); Samsung manufacturing stages) reveals that (S. Korea); Infineon (Germany) and NXP they choose to ring-fence their most (Netherlands). valuable intellectual property and keep these processes close to home, while Leading US, European, Japanese performing the lower-end assembly, and South Korean semiconductor testing and packaging in other markets. companies all show similar behavior regarding where they have placed For example, Graph VII from the strategic assets, formed partnerships Semiconductor Industry Association and optimized their global value chains. (SIA) shows the geographical dispersion

Graph VIII – Location of Semiconductor Companies, by step in production, in Global Value Chains26

U.S. 51% U.S. 62% U.S. 10% U.S. 17%

S. KOREA 6% JAPAN 2% JAPAN 5% TAIWAN 73% TAIWAN 54%

S. KOREA 28%

JAPAN 1% EUROPE 2% TAIWAN 18% CHINA 12% JAPAN 11% CHINA 10%

SINGAPORE 12% EUROPE 7% CHINA 7% TAIWAN 73% OTHER 1% OTHER 7% OTHER 2% Design, manufacturing, Design, no manufacturing Manufacturing Assembly, testing assembly and testing or assembly (fabless) (45% (foundry) (45% of value (OSAT) (10% of value (IDM) of value chain) chain) chain)

TYPE OF COMPANY

Source: https://worldview.stratford.com/article/us-china-tech-wars-rages-electronics-industry-braces-impact,SCMP Stratford 2019

19 2. Top Semiconductor Companies: Innovators and Market Leaders

The semiconductor industry has high barriers to entry. In the past two Market share and innovation has been been dominated by a small group of decades, however, a handful of Asian dominated by US and South Korean companies, comprised primarily of semiconductor companies including companies. American semiconductor companies, Toshiba (Japan), Samsung (South Korea) which have been able to build upon and TSMC (Taiwan), have managed to first-mover advantage and create grow market share.

Graph IX – Global Market Share (Sales: Company Nationality by Market Share)27

Japan Korea 9% 24% US 45%

EU Taiwan China 9% 6% 5%

Source: SIA, World Semiconductor Trade Statistics (WSTS), IHS, Global, PwC

The Asian late-comers benefited and foreign direct investment.28 from a timely combination of Ambitious industrial policies by the government support, a narrow focus Japanese, South Korean and Taiwanese on specialization and innovation, and governments assisted these companies access to key foreign partnerships to achieve success.

20 2. TOP SEMICONDUCTOR COMPANIES: INNOVATORS AND MARKET LEADERS

The Large Gap between China Graph X, below, provides a snapshot China’s semiconductor companies Semiconductor Companies and their of the top semiconductor companies have less than 5% market share and Competitors by revenue and how a select group are multiple generations behind in This begs the question of whether of multinationals dominate global technology. the Chinese government will be able markets. to play catch-up and replicate these success models on a larger scale under What is noteworthy is the conspicuous its own ambitious Made in China 2025 absence of China semiconductor industry policy objectives or whether companies, not only from global the current state of geopolitics will markets but also from the China prevent such an outcome. market, which is almost entirely dependent on foreign firms for the Given the growing US-China tech microchips required for both its rivalry (and the US’s historic allies domestic and export markets. in Europe and Asia) as well as the overwhelming amount of influence According to the SIA, China’s current that both American semiconductor national champion semiconductor companies and the US government companies supply less than 5 percent wield in the semiconductor industry, of the worldwide market and are at the answer to this question is far from least two generations behind in their certain for China. ability to produce microchips for consumer electronics.29

Graph X – Top Semiconductor Companies 201830

COMPANY HEADQUARTER LOCATION OPERATING MODEL 2018 REVENUE (IN BILLION US$)

Samsung Electronics South Korea IDM $65.90 Intel United States IDM $61.70 TSMC Taiwan Foundry $32.20 SK Hynix South Korea IDM $26.70 Micron Technology United States IDM $23.70 Broadcom United States Fabless $17.80 Qualcomm United States Fabless $17.00 Texas Instruments United States IDM $13.90 Toshiba/Toshiaba Japan IDM $13.30 Memory Nivida United States Fabless $9.40 NXP Semiconductors Europe IDM $9.30 ST Microelectronics Europe IDM $830 Infineon Europe IDM $8.10 Sony Japan IDM $7.90 Western Digital United States IDM $7.80

Source; IC Insights (2018)

21 2. TOP SEMICONDUCTOR COMPANIES: INNOVATORS AND MARKET LEADERS

Dominance of American This also means that should the Semiconductor Companies US government choose to impose American semiconductor companies additional export controls on American enjoy a large footprint in all of the technology there could be extensive world’s markets, another indication collateral damage, impacting American that should the US-China tech war multinational technology companies morph into a full-scale neo-mercantilist primarily, but extending well out into rivalry across global markets, the US their first, second and third levels of government and its allies in Europe and suppliers and service providers. Asia could collectively weaponize a substantial installed base of American technology already imbedded in extensive supplier networks and industry.

Graph XI – Global Semiconductor Sales and American Semiconductor Companies by Market Share31

Americas market $103bn

Chinese market $154.4bn

Europe market $43bn Japan market $40bn

Source: https://worldview.stratford.com/article/us-china-tech-wars-rages-electronics-industry-braces-impact, SCMP Stratford 2019, Author’s compilation

22 3. China’s Semiconductor Industry

China is currently the largest consumer percent) and smart televisions (65 of integrated circuits in the world. percent).33 In 2018 its imports of microchip technology were valued at $300 billion At home, China’s domestic production and exceeded even the cost of its only accounts for 9 percent of imported oil.32 consumption – leaving 91 percent of China’s demand to be satisfied by China’s Technology Gaps in imports, including 56.2 percent from Semiconductors the United States.34 Semiconductor technology is vital to Domestically, China produces 16 China’s economy and its manufacturing percent of its semiconductors base, particularly as it feeds the supply – yet only half of this amount is chains of China’s top exports, including manufactured by Chinese companies.35 smartphones (90 percent of global production); personal computers (65

Graph XII – China’s National Champions vs. Global Leaders36

China’s major IC manufacturer sales China’s IC market and domestic production in 2018 Billion USD Market Domestic production Total: 250 Billion USD $23.8 billion $91 SK Hynix (S. Korea) 200

150

Samsung (S. Korea) $4.6 100 SMIC (China) $3.2 50 Intel (U.S.) $2.7 Huanghong Grp. (China) $1.5 TSMC (Taiwan) $1.0 0 Other $1.8 ‘09 ’11 ‘13 ’15 ‘17 ’19 ‘21 ’23

Source: https://worldview.stratford.com/article/us-china-tech-wars-rages-electronics-industry-braces-impact,SCMP Stratford 2019

23 3. CHINA’S SEMICONDUCTOR INDUSTRY

Can China Produce Semiconductors? Chinese Fabless Companies: Slow but The Chinese Communist Party’s Made Steady Design Progress in China 2025 plan calls for Chinese In the fabless semiconductor space, for semiconductor companies to produce example, Chinese fabless companies 80 percent of chips domestically but have been making progress and have this goal is far from being realized. clawed their way to 11 percent of Chinese semiconductor companies market share37. accounted for only $4.7 billion out of $23.8 billion worth of local production The area of fabless design has seen in 2018. a surge in the numbers of mainland Chinese firms. According to PWC, China’s dependence on US and foreign between 2010 and 2015 alone, the semiconductor technology has been number of Chinese IC design firms a catalyst for Beijing’s doubling down went from 485 to 715, with the largest on its Made in China 2025 industrial 20 percent of these firms producing policies for the promotion of its own revenues of between $2.3 billion and homegrown companies. $16 million.39

Graph XIII – Market Share of China’s Semiconductor Firms38

MAKING PROGRESS China’s semiconductor firms have slowly but steadily increased their market share

Top Chinese mainland fabless suppliers by revenue Fabless semiconductor industry market share by sales, 2017 Company Background Revenue HiSilicon Subsidiary of telecom $3.87 giant Huawei billion US Taiwan Chinese mainland Europe Tsinghua Government-backed $1.86 Unigroup group that acquired billion 1% 17% Japan Other Spreadtrun and RDA 2% Omnivision Founded in California $893 and sold to Chinese million 2010 market share Investors in 2015 11% 53% US 69% ZTE Micro- Subsidiary of leading $506 electronics telecom firm ZTE million Taiwan 17% 16% Chinese mainland 5% CEC Huada Subsidiary of central $506 Europe 4% government-controlled milliom enterprise Japan 1% Other 4% Nari Smart Chip Main supplier to govern- $478 ment-controlled utility million firm State Grid

Source: IC Insights, Electronic Design Source: http://knowledge.ckgsb.edu.cnu/2018/11/29/technology/china-semiconductor-industry/

Confidential and Proprietary. Copyright (c) by Alex Capri. All Rights Reserved. Source: http://knowledge.ckgsb.edu.cn/2018/11/29/technology/china-semiconductor-industry/ Source: Confidential and Proprietary. Copyright (c) by Alex Capri. All Rights Reserved. Source: http://knowledge.ckgsb.edu.cn/2018/11/29/technology/china-semiconductor-industry/

24 3. CHINA’S SEMICONDUCTOR INDUSTRY

Table II – 2017 China’s IC Design Industry’s Top Ten Company Ranking

RANKING COMPANY NAME SALE (MILLION RMB)

1 HiSilicon 361

2 UNIS Spreadtrum 110

3 ZTE Microelectronics 76

4 Huada Semiconductor 52.1

5 IPCore Microelectronics 44.9

6 Goodix 38.9

7 Hangzhou Silan 31.8

8 Focaltech 28

9 Galaxycore 25.2

10 Vimicro 20.5

Source: PWC

These Chinese tech companies have production of critical 7 nm and 5 nm been able to grow and innovate microchips, and the next generation because of unfettered access to of integrated circuits, which are collaborative relationships and currently in the R&D phase. To meet partnerships with foreign research growing demand, in October of 2019, and academic institutions, as well as TSMC announced additional capital access to foreign companies through expenditures of $4 billion to bolster the acquisitions and other mergers. company’s 2019 overall expenditures to between $14-$15 billion.42 The US China trade war and tech war has changed this, however, as will be In the wider context of US-China tech discussed in the subsequent sections war, Taiwan’s relations with both the on US export controls and restrictions US and China could tilt the tech war on acquisitions. significantly one way or the other. The geopolitical significance of Taiwan is The HiSilicon scenario underscores discussed in section 8. China’s dependence on foreign technology and has been a catalyst for New Fab Projects in China Beijing’s massive funding campaigns to According to SEMI’s World Fab Forecast produce Chinese technology around Report, China has the most new fab critical technologies of the future. projects – some 30 new facilities either under construction or in the planning China’s home-grown semiconductor stages — of any country in the world43. industry relies heavily on TSMC, a Of these projects, 13 are said to be fabs Taiwanese firm, to meet demand for targeted at the foundry market.

25 SPOTLIGHT Huawei’s Latest Microchip

Multinational semiconductor Design Capabilities companies are involved in the most noteworthy projects: • TSMC (Taiwan) plans to produce 16 nm FinFets44 at a new fab in Nanjing, in addition to the production of 200 nm integrated circuits that it has been producing in commercial quantities at its site in Shanghai. This is part of a phased plan to eventually migrate to a 12 nm integrated circuits. This is a development for China semiconductor production.

• Global Foundries (US) is building a 300mm wafer fab in Chengdu, and has announced that it intends to use the fab for production of the company’s 22 nm chip, which is suited for 5G, IoT and specialized One revealing insight into China’s HiSilicon cannot design its edge computing.45 semiconductor design progress microchips without licensing the involves Huawei’s fully owned intellectual property from UK-based • Foxconn (Taiwan) and Sharp (Japan) subsidiary HiSilicon. The company, chip designer Arm Holdings, which are said to be in talks to build fabs in which is a fabless microchip maker, was recently bought by the investor Zhuhai that will produce specialized has developed an advanced smart group Softbank of Japan. 300 nm chips.46 phone integrated circuit, which is on par with those used by the iconic US In addition to not owning vital • UMC (Taiwan), which has been brand Apple.40 design IP required to produce its producing 300 nm integrated circuits chips, HiSilicon relies on Taiwan in a fab in Xiamen, has been looking HiSilicon’s chips are vital for Semiconductor Manufacturing to raise funds to produce 40 nm competing in the next phase of Company (TSMC) for its production. and 28 nm chips. In order to wireless broadband, 5G, which Huawei could be vulnerable to US capacity expansion, UMC has slated means it could compete head-to- technology controls, since TSMC an initial public (IPO) of its head with American Qualcomm, may still rely on US manufacturing Chinese unit, Hejian Technology the world leader in designing 5G technology for its high-volume (Suzhou) Co Ltd (although the IPO is compatible processors. HiSilicon’s commercial production lines. on hold at time of writing).47 new microchip has a state-of-the art line width of 7 nanometers, Thus, as the tech war Meanwhile, as of 2019, there is which has been by Tokyo- Washington could exert pressure on overcapacity in the 28 nm based technology “tear-down” the Taiwan political establishment to niche of integrated circuits in China.48 TechanaLye.41 restrict the sale of semiconductors SMIC, China’s most advanced domestic to Chinese buyers, such as ZTE and foundry, has been stuck at the 28 nm However, looking more closely at Huawei. threshold as it continues to grapple HiSilicon’s latest accomplishment to produce high yield commercial reveals a high level of dependence quantities. SMIC currently does not on foreign technology. have the IP, processes or know-how to improve its yields.

26 3. CHINA’S SEMICONDUCTOR INDUSTRY

By contrast, TSMC, Samsung, Global Semiconductor Demand by Chip Size Foundries and UMC remain two or even Beyond the specialized and lucrative three generations ahead of Chinese microchip niches below 14 nm, foreign firms in the 28nm to 14nm range, and in firms still control a large swathe of the R&D phases of 12 nm and 7 nm. the Chinese market in such niches Within China, for example, Intel is as microchip packaging and testing, increasing 14 nm production and is in semiconductor equipment, memory the R&D stages of 10 nm microchip, and AI chips, as well as contract which is well ahead of SMIC, China’s microchip making. national champion. An analysis of China’s semiconductor Overall, China’s semiconductor development capabilities in 2018 shows companies still have a long way to the degree of dominance by American go before they are able to capture semiconductor companies and other significant domestic market share, foreign firms, throughout all phases of particularly in the critical space of the global value chain. microchips below 14 nm.

Graph XIV – Semiconductor Demand by Microchip Size

100 Billion USD 0.25 0.8/0.15 0.13 65 nm 75 40/45 nm Older

28 nm

20 nm 50 16/14 nm

10/7 nm Technology Newer

0 2015 2020* 2025*

Source: Strat for 2019

27 3. CHINA’S SEMICONDUCTOR INDUSTRY

Graph XV – Dominance of Foreign Firms in China’s Semiconductor Market49

(by revenue, in billions of dollars) Mobile chips Chip packaging, testing Contract chipmaker 2.05 Unigroup Spreadtrum & RDA Jiangsu Changjiang Semiconductor 3.79 Electronics Technology Manufacturing Chinese HiSilicon 3.1 International Corp. company 4.71 Technologies Up 24.5% year-on-year Foreign company 22.29 Qualcomm (U.S.) 9.54 6.6 Advanced Semiconductor *Memory chip sales only Apple’s chip unit (U.S.) Engineering (Taiwan) 32.1 **Data for FY2018 Taiwan Semiconductor Sources: Company filing, Manufacturing Co. (Taiwan) IC Insights

AI chip Cryptocurrency Semiconductor Memory chips mining chip equipment Tsinghua Unigroup’s Yangtze 1 Cambricon 2.5 Bitmain 0.354 Naura Memory Technologies Innotron Memory Technologies Technologies N/A N/A 56.4* 9.71 Samsung Electronics 14.53 (South Korea) Nvidia** (U.S.) Applied Materials (U.S.) 28.1 SK Hynix (South Korea)

Source: https://asia.nikkei.com/Business/China-tech/Chinese-companies-rush-to-make-own-chips-as-trade-war-bites/

28 SPOTLIGHT China’s State-backed Production of Memory Chips Could Lead to Overcapacity

For 2020, China’s state-backed Despite a steady accumulation of companies have announced major financial losses at Yangtze Memory production increases in both NAND Technologies, the state-backed and DRAM — critical memory company continues to operate technology for a broad range normally, has not defaulted on its of devices, from computers to debts, and continues to receive large smartphones. amounts of cash as well as the support of key shareholders.52 Yangtze Memory Technologies Co. (which is owned by the state-backed Losses at the group were reported Tsinghua Unigroup), expects to triple to be $460 million in the first half of production to 60,000 wafers a month, 2018.53 or 5 percent of world output, by the end of 2020 at a new $24 billion plant As China’s memory chip production is in Wuhan.50 based on government output targets and other strategic, non-market ChangXin Memory Technologies, driven goals, then the possibility of another state-funded company, an over-supply of NAND and DRAM has announced that in 2020, it will chips would seem likely, at some point, quadruple production of DRAM chips which would drive down global market to 40,000 wafers a month (or 3 percent prices. None of this bodes well for the of world DRAM output) at its $8 billion world’s existing players in this space. facility in Hefei.51 A recent OECD trade policy paper China’s rapid progress in NAND and measured and highlighted the DRAM production is noteworthy. But distortions caused by government it is the business model behind this activities in semiconductor value expanding output that should be chains.54 getting increased attention from the world’s dominant manufacturers in this space.

HINRICHHINRICH FOUNDATION FOUNDATION REPORT REPORT – SEMICONDUCTORS - SEMICONDUCTORS AT THE AND HEART THE OF US-CHINA THE US-CHINA TECH WAR TECH WAR CopyrightCopyright (c) © by by Alex Alex Capri Capri and Hinrich Foundation. Foundation. All All Rights Rights Reserved. Reserved.

29 4. China’s Tech Funds, Government Subsidies and Industrial Policies

China’s dependence on US and foreign of the 10 industries of MIC 2025. As China’s Made in China 2025 plan is technology is not only an issue of such, integrated circuits have been not about market share. It’s techno- national security, it poses a serious singled out for special attention and nationalism at work. impediment to the Chinese Communist have been receiving funding through Party’s geopolitical ambitions as a an assortment of other state-backed rising power, as virtually all hard and funds. soft power will depend on achieving technology supremacy. Beijing has set very aggressive goals for growing China’s foundry capacity. As such, a massive industrial policy According to recent analysis done by initiative to develop, promote and McKinsey, in order to meet Made in protect its own China semiconductor China 2025 growth targets for China’s industry is underway. This is share of global foundry capacity, technonationalism at work. virtually all of the foundry capacity growth in the world would have to take 57 Made in China 2025 place in China (see Graph XVI). Beijing’s Made in China 2025 plan aims The backlash against China’s aggressive to propel 10 key technology sectors to funding initiatives is driven by a national champion (a.k.a. global leader) growing consensus in Washington status. According to the US Chamber and other capitals that the Made in of Commerce, these key sectors China 2025 plan is motivated by the comprise 40 percent of China’s value- Chinese Communist Party’s ambitions added manufacturing base.55 for geopolitical power, and is not merely about capturing market share Some estimates put the Chinese for Chinese state-owned enterprises. Communist Party’s funding As such, it would differ considerably commitment for Made in China from other contentious industrial 2025 at $300 billion over a ten-year subsidy programs, such as the Airbus period.56 China’s key technology Consortium in Europe, which focuses sectors include: Next generation IT solely on capturing market share and is (AI, IoT), aerospace and aeronautical not seen as a geopolitical or systemic equipment, automated machine tools threat by the EU’s trading partners. and robotics (AI and machine learning), This same logic, for example, applies new materials, maritime equipment to the ongoing Belt and Road Initiative and high-tech shipping, advanced (BRI)58, which seeks to build a network railway equipment, power equipment, of costly hard and soft infrastructure new energy vehicles, biopharma and (roads, ports, wireless networks and advanced medical products, and railways etc.) through some of the agricultural equipment. world’s least developed and more politically unstable countries. In the All of these key sectors depend on case of China’s new silk road, its advanced semiconductors. In 2018, objectives are seen by many as purely Chinese, Premier Li Keqiang named techno-nationalist. semiconductors as the top priority

30 4. CHINA’S TECH FUNDS, GOVERNMENT SUBSIDIES AND INDUSTRIAL POLICIES

59 The China National IC Plan is to spend Graph XVI – Made in China 2025 Foundry Targets twice as much on R&D for integrated 2014-25 global foundry TAM vs China foundry 2014-20 2014-20 circuits as the rest of the world TAM, $ billion CAGR,2 % CAGR, % combined. 78

58 42 48 -0 0

42 43 36 21 20 16 5 2014 2020 2025

10 28 46 China capacity as % of total

Rest-of-world TAM1 China foundry TAM 1Total available market. 2Compound annual growth rate. Source: McKinsey analysis Note: For Beijing to reach its national IC plan targets for new foundries, virtually all the global growth in the semiconductor sector would have to occur to China.

China National Integrated Circuit National IC Plan.60 As of 2017, the SIA Industry Investment Fund (China’s has estimated that provincial and Big Fund) municipal integrated circuits-related In June 2014, the Chinese government funds have raised another $80 billion published “Guidelines to Promote and are likely to reach the overall China 61 National Integrated Circuit Industry” National IC Plan goal of $150 billion. (the China National IC Plan). The China National IC Plan (also known as the To put this in perspective, in terms of “China Big Fund”) called for $150 billion just R&D spending on semiconductors, in funding, from both the central SIA reports that US companies spent government as well as provincial and $32.7 billion in 2018, followed by EU municipal governments. Companies ($13.9 billion) and Taiwanese companies ($9.9 billion). Japanese Official government numbers claim companies and Korean companies were 62 that, as of 2019, some $29 billion of at $8.8 and $7.3 billion, respectively. funding has been secured for the China

31 4. CHINA’S TECH FUNDS, GOVERNMENT SUBSIDIES AND INDUSTRIAL POLICIES

In addition to the China National IC Yet, despite all of these requirements Foreign companies remain drawn to Plan, however, the Chinese Communist and China market access conditions, China for its market size, role in GVCS Party has been pumping large sums of American semiconductor companies and attractive government incentives. money into Tsinghua Holdings63, the and other foreign players remain drawn tech investment fund of one of China’s to China, primarily because of the China top state-led universities, which the market size and its growing importance Chinese Communist Party has charged in global value chains. with funding and advancing innovation in China’s semiconductor industry. To support the Chinese Communist Party’s efforts to attract strategic To mobilize these subsidies, grants foreign direct investment, China’s and other monetary assistance, Beijing technology funds have been instructed is pursuing an overarching strategy to provide US and other foreign that combines both domestic and companies with generous Chinese R&D international dimensions. The end game incentives to relocate research and is to create the next generation of processing activities to China. Chinese “national champions” within all the strategic sectors identified in both For example, in the construction of the National IC Plan and Made in China new fabs, Samsung, Intel, TSMC, 2025. UMC, Global Foundries and others are availing themselves of Chinese Inward and Outward Investment government funding and incentives, Strategies including subsidized loans. Local governments including Shanghai These policies are focused on two key (Pudong), Shenzhen and Wuxi are objectives: offering incentives to bring high tech manufacturing to those regions. This • Attracting specifically targeted includes land for free and employee tax foreign direct investment and savings. technology into China; and • Acquiring strategic technology abroad.

32 SPOTLIGHT China’s Inward and Outward Investment Strategies

Foreign Direct Investment: Attracting including: specialized foreign direct investment in • Strict foreign equity caps semiconductors in exchange for China • Mandatory joint ventures with market access. designated local entities • An administrative approval process According to the Organization based on broader requirements, of Economic Cooperation and including agreeing to other specified Development (OECD), China has the investment parameters and most restrictive inward foreign direct government projects investment policies of all the G-20 • Licensing requirements contingent countries.64 upon the transfer of blueprints, designs and technology In 2017, a survey conducted within • Requirements that the foreign firms the semiconductor industry by the US conduct R&D in China Department of Commerce’s Bureau of • Concessions regarding the use Industry and Security (BIS), found that of local content and export 25 US companies – which accounted requirements for more than $25 billion in annual sales — had been required to form JVs and/ In October 2019, perhaps as a result or transfer technology as a condition of of the on-going US-China trade market access.65 talks, China announced that it would abolish its forced technology transfer As recently as May, 2019, after more requirements for foreign companies. than a decade of dialogue between The US-China Business Council – which Washington and Beijing on matters represents over 200 companies – involving IP protection and tech publicly stated that there was also transfer, the US-China Economic a need for more transparency and and Security Review Commission, consistent application of these rules, published a paper66 which stated that, across China. In the past, Chinese when applying for a license or a permit government policies have not been to operate in a China, foreign firms are implemented uniformly, if at all, across still dealing with onerous conditions, different provinces and municipalities.

33 SPOTLIGHT The Impact of Foreign-Invested Enterprise’s (FIE’s) on China’s GDP

Foreign invested enterprises (FIEs) employment, and value added in In China’s computer sector, foreign- have a hugely under-valued impact China’s industrial sector, and in some invested enterprises accounted for on China’s semiconductor industry, advanced areas – such as computers, 59 percent of industry assets and and, more broadly, China’s economy in autos, and chemicals – the percentages 57 percent of industry profits in the general. are substantially higher. Since the manufacture of computers, in 2013.68 industrial sector accounts for roughly Simply measuring foreign direct half of China’s GDP, industrial foreign- The number of joint ventures in China investment in new fab sites or R&D invested enterprises contribute between American semiconductor centers, for example, does not approximately 10 percent of China’s companies and local partners — even accurately measure the on-going GDP just through their own operations. without the transfer of technology – is economic contribution of FIE’s to benefiting China’s economy immensely. China’s GDP. There is an FIE economic ripple effect that drives value chains and a multiplier Therefore, should American and According to the China foreign direct effect from direct and indirect Chinese JVs be forced to de-couple, investment research commissioned employer wages that can be traced there will be collateral economic by the Hinrich Foundation to Enright, back to foreign-invested enterprises’ damage to the local economy as well Scott & Associates, FIE’s contribute daily operations. as to JV partners and their respective more than 20 percent of sales, value chain.

Graph XVII: US Semiconductor Firms Joint Ventures in China, 2014-201869

ANNOUNCED DATE NON-CHINESE COMPANY CHINESE COMPANY Jan-14 IBM Suzhou PowerCore Mar-14 IBM Teamsun Sep-14 Intel Tsinghua Unigroup Nov-14 Texas Instruments Existing Texas Instruments facility expansion Dec-14 Micron PowerTech (Taiwan) Jan-15 Qualcomm-IMEC SMIC, Taiwan May-15 Hewlett-Packard Tsinghua Holdings (Unisplendour) Jun-15 Broadcom H3C Technologies Co. Sep-15 Ciscc Systems Inspur Group SJ Semi (SMIC & Jiangsu Changjiang Electronics Dec-15 Qualcomm Technology JV) Jan-16 Qualcomm* Guizhou Province (Huanxintong) Tshinghua University and Montage Technology Jan-16 Intel Global Holdings Apr-16 AMD Tianjin Haiguang Advanced Technology Investment Company May-16 Brocade Guizhou High-Tech Industrial Investment Group May-16 Dell Guizhou YottaCloud Technologies May-16 VMWare Sugon Information Sep-16 Western Digital Tsinghua Unigroup (Unisplendour) Feb-17 GlobalFoundries Chengdu Municipality Mar-17 IBM Wanda Internet Technology Group Jul-17 Nivida Baidu Feb-18 Intel Tsinghua Unigroup (Spreadtrum & RDA) May-18 Qualcomm Datang Telecom Technology Co. Note:* = Since dissolved.

Source: US International Trade Commission, Journal of International Commerce and Economics

34 SPOTLIGHT Global Semiconductor Sales: China versus other Markets

American firms have been transforming As the below graph shows, for most China’s semiconductor industry for foreign and American semiconductor years. This has occurred primarily companies and specialized equipment through joint ventures. However, makers, growing portions of their these same American semiconductor revenue are directly attributable to companies have been instrumental in China, which is the world’s largest driving the transfer of human capital consumer of integrated circuits. via US universities and R&D institutions and industry associations, which have benefited China greatly.

GraphChinaChina XVIII: Global versus versus Semiconductor USA USA and SpecialtySales: Sales: Equipment American American Sales: & &Foreign Foreign Firms Firms China versus USA Sales: American & Foreign Firms70

SemiconductorSemiconductorSemiconductor suppliers suppliers suppliers SemiconductorSemiconductorSemiconductor equipment equipment equipment

US$ 25 4bn 3.4 25 US$ 1bn 3 5 4.8 2.3 2.2 4 3.8 3.8 2 1.9 3.0 1.6 3 2.3 1.3 1.3 1.9 2 1.3 1 1.1 1 1.1

2 2

Qualcomm Micron Broadcom NXP Texas Instr Nvidia Intel SK Hynix Total Applied Dainippon Lam Tokyo KLA Teradyne ASML Total Sales 22.7 30.4 20.8 9.4 15.8 11.7 70.8 36.2 217.8 Sales Materials Screen Research Electron 4.0 2.1 12.5 60.7 (bn US$) US$ % US$ % US$ % US$ % US$ % US$ % US$ % US$ % US$ % 17.2 3.3 11.1 10.5 China 15.1 67 17.4 57 10.3 49 3.4 36 7.0 44 2.8 18.8 27 14.1 39 88.9 41 (bn US$) US$ % US$ % US$ % US$ % US$ % US$ % US$ % US$ % 24 China 5.1 30 0.9 27 1.8 16 1.9 18 0.6 16 0.4 17 2.1 17 12.8 21 US 0.60 3 3.6 12 2.7 13 0.9 10 2.3 14 1.5 13 14.3 20 12.8 35 38.7 18 US 1.5 9 0.4 12 0.8 7 1.2 11 0.5 12 0.3 13 2.2 18 6.9 11

Source: Bart van Hezewijk, Holland Innovation Network China ConfidentialConfidential and Proprietary. and Proprietary. Copyright Copyright (c) by Alex(c) by Capri. Alex AllCapri. Rights All RightsReserved. Reserved.Source:Source: Bart vanBart Hezewijk van Hezewijk, Holland, Holland Innovation Innovation Network Network China China

35 4. CHINA’S TECH FUNDS, GOVERNMENT SUBSIDIES AND INDUSTRIAL POLICIES

The US China Decoupling of To put this into perspective, more than Semiconductor Companies 60 percent of Qualcomm’s revenue Given the degree of penetration into came from China in the first 4 months the China semiconductor industry of 2018 (see below chart); for Micron, as well as integration within global over 50 percent; for Broadcom about 71 value chains, decoupling of American 45 percent. semiconductor companies from the China market and relevant industry In the case of Broadcom, the Huawei would have a traumatic impact on the ban and overall market uncertainty entire technology industry, and alter from the US-China tech war has the global economic landscape. prompted the company to revise its 2019 revenue estimate down by $2 72 Because key technology sectors billion. require a steady supply of leading- edge integrated circuits, a sudden ban All other semiconductor companies or severe reduction of these integrated have seen a similar decline in their 2018 circuits would result in manufacturing business. slow down and unfulfilled demand across a broad spectrum.

Graph XIX – US Semiconductor Company Revenue from China Sales (2018)73

Qualcomm Micron Broadcom Texas Instruments Applied Materials Intel Nvidia Analog Devices Lam Research

Return since May 3 (%) 0 2018 Revenue from China (%)

Source: Ned Davis Research

36 4. CHINA’S TECH FUNDS, GOVERNMENT SUBSIDIES AND INDUSTRIAL POLICIES

Technology Acquisitions by Chinese into semiconductor niches along global Chinese acquisitions of US technology State-funded Actors value chains. companies have been substantial and often state-funded. Chinese investors have taken Westlake Ventures is a Silicon Valley- advantage of generous government based entity that receives funding funding for technology acquisition to from the Chinese City of Hangzhou.76 attempt to invest in large projects with Another Silicon Valley-based VC fund key niche players in the semiconductor is ZGC Capital Connection, which lists industry, primarily in the US. itself as a subsidiary of a state-owned enterprise funded by the Chinese By providing state funds for government.77 acquisitions of foreign technology companies, the Chinese government A start-up tech company could make has been able to stay directly involved the argument that any money is better in orchestrating its broader objectives than no money, even if it comes from of the China National IC Plan and Made a Chinese state-backed company. in China 2025. Ultimately new capital can propel a company to create new innovations Acquisition of American technology and economic opportunities that and businesses peaked in 2015, when benefit the entire industry. The Chinese entities were involved in 34 challenge arises when previously announced mergers and acquisitions silent investors gain enough control with American companies, valued at over a start-up company to steer its $8.1 billion.74 strategic decision making and facilitate intellectual property theft. Digital Horizon Capital, a Chinese technology fund, has been used Dealing with Chinese entities that have extensively by the Chinese government (or could have) linkages to the Chinese to invest in strategic overseas government, has added huge risks and targets. The fund has invested in 113 complexities for technology firms as US companies which the Chinese they face the dangers of intellectual Communist Party has identified as property theft or having their Chinese strategic priorities.75 partners turn up on the BIS entity list or another Restricted Entity List. Digital Horizon Capital’s focus has been on an across-the-spectrum approach The purchase of Atop Tech went ahead to acquiring critical technologies, despite concerns, but it soon attracted including: the attention of US agencies doing national security reviews and even • Micro-electronic mechanical devices beyond, in the EU. (MEMs) • Memory chips The Atop Tech acquisition went on to • Advanced microchip making become a catalyst for the revamping of materials The Committee on Foreign Investment in the United States (CFIUS), the US China’s state-backed venture capital government committee assigned with firms have been active in Silicon Valley reviewing mergers and acquisitions in targeting start-ups working on of US companies and “dual use innovations that can be incorporated technologies” or other strategic assets.

37 CASE STUDY California Chip-Designer Atop Tech and a Mysterious Chinese Buyer

In early 2011, California-based The individual listed was a Chinese microchip designer Atop Tech, steel magnate, who also controlled a company with a $1 billion another Hong Kong-based company market share in electronic-design that was the major shareholder in automation (specialized software) Avatar.78 and integrated circuits markets, filed for bankruptcy in a Delaware court. For observers within the semiconductor industry this was a A Hong Kong listed company, Avatar text-book example of the Chinese Integrated Systems (which had been government working with a proxy set up at the same time that Atop for strategic technology acquisition. was filing for bankruptcy) moved to buy Atop. Avatar had a sole director listed in its incorporation papers.

38 5. US Export Controls and the BIS Entity Lists

The tech war is driven by national All of these “non-tariff measures” have security concerns in both the US and a disruptive effect on global value China. chains in the semiconductor industry, with far-reaching implications for The Trump Government and the second, third and fourth-tier suppliers. security establishment in Washington claim to have implemented what they Export Controls of “Dual Use consider to be necessary protectionist Technologies” policies and counter-measures to The Bureau of Industry and Security China’s long-standing “predatory” (BIS) of the US Department of industrial policies.79 Commerce enforces export controls on all items on the Commerce Control Washington’s countermeasures aim to List (CCL). The Commerce Control impede the Chinese Communist Party’s List covers information, goods and ability to promote technology transfer technology, and places special and IP transfer to Chinese entities — restrictions on exports. either by stopping sales of technology, stopping investment flows into China’s A core feature of the Commerce semiconductor industry or blocking Control List is the concept of “dual the acquisition of strategic assets from use technology” which applies to any US and foreign companies by Chinese commercial information, goods or state-backed entities. technology which could be converted or used for military purposes. The protectionist policies used by the It is necessary to obtain a license US security establishment to achieve before exporting, re-exporting or this goal include: transferring a controlled technology or item, depending on its destination Export controls and export licensing • (which country), the identity of the of “dual use technologies” actual buyer and the intended use of Restricted entities/parties such as • the item. the BIS Entity List Blocking of mergers and acquisitions • In 2018, the US passed the Export by the Committee on Foreign 80 Control Reform Act (ECRA) , which Investment in the United States was largely a result of the US-China (CFIUS) trade war and broader narrative shift around the link between technology and national security.

39 5. US EXPORT CONTROLS AND THE BIS ENTITY LISTS

Under ECRA, the BIS is reviewing the follow-up on the issue until the roll out addition of newly “emerging” and of the ECRA. “foundational” technologies81 to the US Department of Commerce’s Controlled All 10 categories targeted by Beijing Commodity List.82 The importance for development under Made in China of emerging and foundational 2025 are either already classified as technologies was acknowledged as dual use technologies or will likely end early as 2012 by the US government, up on the Commerce Control List, as but there had not been significant such.

Graph XX – Made in China 2025 & US “Dual Use” Commerce Control List83

Artificial intelligence (AI) and Emerging & Foundational machine learning technology Technologies (US CCL) Additive manufacturing Quantum information (e.g, 3D printing) and sensing Advanced Position, Navigation, and Timing Materials (PNT) technology Brain-computer interfaces Advanced Data analytics computing Hypersonics technology technology Aerospace and Microprocessor aeronautical equipment technology

New advanced New materials Advanced information technology surveillance Maritime equipment & Biotechnology high-tech shipping Agricultural Automated machine Logistics machinery tools and robotics technology Advanced railway Robotics equipment New energy vehicles & equipment Power equipment

Key sectors in the Biopharma & advanced China 2025 Strategy medical products

Source: Federal Register/Vol 83, No. 223/Monday, November 19, 2018; Bertelsmann Foundation China 2025, Author’s compilation

40 5. US EXPORT CONTROLS AND THE BIS ENTITY LISTS

As graph XX, shows, virtually all innovations and technologies (not industries of the future could be just in semiconductors) pertaining designated dual-use technologies and to the industries of the future will be subject to licensing or restricted entity considered dual use technologies, and laws, including every category of goods therefore, end up on the US Commerce in Made in China 2025. Control List.

China’s Military-Civil Fusion Initiative Wassenaar and the International In addition to committing funding Application of Export Controls for the Made in China 2025 plan The US is pushing for ECRA approach and the various large funds for the to be adopted under the multilateral semiconductor industry, Beijing has framework of the Wassenaar appropriated special technology Arrangement , with the aim of funding to promote what the Chinese preventing Chinese tech companies Communist Party calls “military-civil from replacing US semiconductor fusion”. technology with identical (if it is available) technology from other The Chinese government has launched countries. a series of state-backed venture capital technology funds that are designed Key countries in semiconductor to bring together tech startups and GVCs such as Taiwan and Singapore other private companies with the are not members of the Wassenaar People‘s Liberation Army (PLA). In but generally follow its rules and 2017, for example, the Foshan Military- application of standards. A key Civil Innovation Industries Fund was question, therefore, is whether Taiwan, launched to the tune of $28.75 billion86. for example, would enforce new, more stringent rules on semiconductors China’s military-civil fusion funding intended to block China’s access to key campaign virtually ensures that technology.

Source: Dji/Amazon

41 5. US EXPORT CONTROLS AND THE BIS ENTITY LISTS

The European Union recently described Export Control Classification Numbers China as a “systemic rival”, thus (ECCNs) and Supply Chain Traceability despite the fact that the Wassenaar Under the US Export Administration Arrangement is a voluntary rules- regulations (EAR), the BIS assigns framework, the EU appears willing to 5-character alphanumeric ECCNs to align with the US on matters regarding goods, software and technology. EU technology and national security. Most ECCNs are harmonized across multilateral regimes such as the This scenario is already playing out: Wassenaar, thus, enable international after facing pressure from the US, application of export controls among Dutch authorities have delayed the different countries. issuance of an export license to ASML (Europe’s largest maker of highly An ECCN determines whether an specialized chip making machines) export control license is needed by an for technology sales to SMIC, China’s exporter (depending on destination 88 semiconductor national champion. and buyer). As controlled goods, software or technology that moves ASML makes extreme ultraviolet through semiconductor global value lithography chip tools (EUVs), which chain companies must be closely are required by foundries to produce tracked and traced using ECCN. state-of–the-art integrated circuits in commercial volumes. Each EUV From a supply chain perspective, tech machine is valued at approximately firms must commit time and resources $150 million. Should SMIC be blocked to track and trace ECCNs in order to from acquiring this technology, its manage: ambitions of achieving domestically produced, leading edge microchips will • The de minimis rule – Applies be thwarted. to US controlled content that is incorporated into foreign made The BIS appears willing to draft products. If an item contains more unilateral semiconductor agreements than a certain percentage of US with specific countries such as the origin by value it requires an export Netherlands. Just as an increase in license. This is important as even bilateral trade agreements between goods made outside of the US two countries could undermine the with American technology could spirit of multilateralism and the WTO, be subject to export controls and an increase in bilateral export control cannot be sold to restricted parties. agreements could undermine the Wassenaar Arrangement. This is yet The de minimis rule will be discussed another example of how techno- later, in Section 7, as a reason why nationalism could fracture the global semiconductor companies may look trade landscape. to restructuring value chains to circumvent export controls in order to maintain a profitable business – while still complying with all relevant export control laws.

42 5. US EXPORT CONTROLS AND THE BIS ENTITY LISTS

• End-use of the technology - In the below example, ECCN’s Exporters must ensure that the apply to the design, materials, ECCN is used for the purposes production testing and end-use of described in the export license the semiconductor value chain. As application, thus they must put in materials, parts, components, sub- place processes to verify who the components, software and equipment end user of the technology is and move around the world, companies how it will actually be used. must track and trace everything, obtain licenses or refrain from transacting Tracing ECCN’s in the Semiconductor business with restricted entities and Value Chain customers in certain countries. As was described earlier, Failure to manage this process results semiconductor value chains are highly in fines, penalties, loss of export complex, with niche players operating privileges and criminal prosecution. hyper-specialized functions and operations throughout.

Graph XXI – Export Control Classification Numbers (ECCNs) along a semiconductor global value chain88

Design Materials Production Testing Incorporation & End-use

Semiconductor design/ Hydrogen fluoride Semiconductor Testing equipment for End-use development ECCN: 1C350d.1 production technology semicondutors determination technology Fluorinated polyimide ECCN: 3E003.d ECCN: 3B002.b / mass market products ECCN: 3E003.b. ECCN: 1C009.b Semiconductor 3B992.b vs. non-civilian Photoresists manufaturing purposes ECCN: 3C002.a equipment ECCN De minimis ECCN: 3D991 or 3D001 consideration Semiconductor production and manufacturing equipment ECCN 3B001

Computer aided Software for the Software “specially Mass market software design software for production of designed” for the “use” ECCN: 5D992.c semiconductor design semiconductors of equipment controlled Software “specially ECCN: 3D003 ECCN: 3D001 by 3B001.a designed” for the to .f, or 3B002. “development,” Software “production,” operation, ECCN: 3D002 or maintenance of military aircraft ECCN: 9D610

Source: Author’s Compilation

43 5. US EXPORT CONTROLS AND THE BIS ENTITY LISTS

Blacklisted Entities/Parties, Specially technology from the P30 Smart Phone. Export controls force manufacturers Designated Nationals (SDNs) As such, the US companies previously to replace component suppliers across A denied or restricted party is any in the P30 global value chain provide their global value chains. entity with which a US company or compelling examples of the collateral individual is forbidden to do business. damage inflicted by export controls. In May of 2019, the US government Once a company is decoupled from a famously placed Huawei, China’s customer relationship under an export telecommunications giant (and 68 of controls scenario, it is unlikely that it its non-US affiliates in other countries), will ever recapture that business. on a so-called restricted entities or “US blacklist”, which effectively banned the Restricted entities in the semiconductor sale of American technology to Huawei. space are not limited to technology In this scenario, the application for an companies. Take an example where export license would be presumed an exporter wishes to sell or transfer denied. a semiconductor material used in the fab process called photoresists (ECCN 3C002) to a foreign entity – assuming, Semiconductor Value Chains Are in this scenario, that this foreign buyer Deeply Entangled was a named restricted entity. See According to Ken Hu, one of Huawei’s Graph XXI. rotating chairmen, the company has more than 13,000 suppliers globally, This example shows the wide range of and it purchased some $70 billion in different kinds of entities that could be components and parts in 2018. These subject to restrictions if they are named technology industries include suppliers as restricted entities or specifically from across the globe and in the US, designated nationals (SDNs). These including Intel, Qualcomm, Broadcom could include: and Xilinx Inc.89 • Individual end-users (persons), who may be denied access to the end In the same timeframe, Huawei bought product (even an email or a text approximately $11 billion worth of message to a restricted foreign microchips from American technology national on the SDN list is considered companies alone. a deemed export, and, therefore, illegal). Fully executing a technology ban on Huawei, therefore could have a • Financial institutions, who may be disruptive impact on a tectonic scale, banned from processing transactions not just on US companies, but on the for a buyer or supplier named on an semiconductor industry as a whole, as OFAC SDN list an entire industry comprised of supplier Academic and research institutions, networks, service provider relationships • who may be prevented from using and manufacturing operations are the component in their research forced to adjust. • Professionals, academics, subject Take for example, the US companies matter exports, consultants that that, until recently, suppled microchips, have been placed on Restricted design software and operating systems Entity Lists or are subject to for Huawei’s P30 Smart Phone, below. restrictions • Manufacturers and assemblers, other As a result of its designation as a technology companies that have restricted entity, however, Huawei been placed on Restricted Entity claims to have replaced all US Lists or are subject to restrictions.

44 CASE STUDY American Technology (Previously) inside Huawei’s P30 Smart Phone

Table III – Huawei Smartphone US Technology Providers90

COMPANY FEATURE COUNTRY NEW STATUS

Skyworks Solutions Radio Frequency Chips United States Replaced/Changed Qorvd Radio Frequency Chips United States Replaced/Changed Micron DRAM and NAND Chips United States Replaced/Changed Mentor Graphics Design software United States Replaced/Changed Cadence Design Design Software United States Replaced/Changed Synopsis Design Software United States Replaced/Changed Google Android Android Operating System United States Replaced/Changed

Source: US Department of the Treasury

HUAWEI MATE P30 SMARTPHONE CHINA U.S. SOUTH KOREA JAPAN

GERMANY UK. NO ALTERNATIVE / FAR BEHIND Screen (OLED display panels) Samsung Electronics Co Ltd System-on-Chip BOE HISilicon Kirin 980 ARM Blueprint Communication (Sophisticated radio frequency chipmaking) HiSilicon Balong modem Other components Skyworks Solutions Inc and Qorvo Dolby Laboratories Inc’s immersive audio transceiver and “front-end” technology radiofrequency chips Shenzhen Goodix Technology Co Ltd. Murata Switch fingerprint sensor Huizhou Desay Battery batteries Memory Micron DRAM and NAND chips SK Hynix Inc DRAM chips Design software EDA software from Cadence Design Cameras Synopsys, or Mentor Graphics Sony image sensors Android software Leica tenses Sunny Optical Technology (Group) Co telephoto camera in cooperation with Leica

Source: Reuters China’s Chip Challenge

45 5. US EXPORT CONTROLS AND THE BIS ENTITY LISTS

Graph XXII – Export Control Classification Number 3C002.a - Selected List of Chinese Restricted Entities 9/201991 TECHNOLOGY COMPANIES • Beijing Opto- Electronics Technology VARIOUS INDIVIDUAL Company BANKS / FINANCIAL END-USERS • Shanghai Haisi INSTITUTIONS* • Yan, Xiaobing Technology Co., Ltd • Ryugyong • ZHANG, Keping • Sino Commercial Bank • SUN, Sidong Superconductor • DCB Finance • LI, Fangwei Technology Limited Company ACADEMIC • Etc ... INSTITUTIONS • Hana Banking • Zongyi Corporation Ltd. • Changchum Institute Superconductor CORPORATE END- of Applied Chemistry, Technology Co., Ltd. Chinese Academy LOGISTICS / TRAD- USERS of Sciences ING COMPANIES** • Hebei Fas East MANUFACTURERS/ • Guangdong • Dalian Sun Moon Communication ASSEMBLERS University of Star International System Engineering PHOTORESISTS Technology Logistics Trading • North Huawei *** • Xi’an Micromach ECCN 3C002.a Co., Ltd. Technology Co., Ltd., Photon Manufacture A light sensitive • Nanchang University Technology • Golden Start • Shijiangzhuang polymer used in • Beijing University of Trading & Communication and • Hebei semiconductor Aeronautics (BUAA) International Freight Control Technology Seminconductor fabrication • Renmin University • Guangzhou Syriss Institute • Xian Semi Logistics & Services Electronic Co., Ltd

*Most are actually North Korean banks with China branches **Many China 3PLs are linked with or also function as trading companies ***For Huawei Companies, there is currently a 90 day reprieve for licensing requirements expiring on 19 November

Chinese Acquisitions of US Companies American and Chinese semiconductor CFIUS appears poised to block The purchase of California-based chip companies. Below are a few examples virtually any mergers and acquisitions designer Atop Tech by Avatar, the of early activity in this area. in the semiconductor industry Hong Kong listed company, played involving American and Chinese an instrumental role in the recent Blocked Chinese Technology semiconductor companies. enlargement and enhancement of Acquisition Deals powers granted CFIUS. Aixtron (2016) – US President Obama blocks the Chinese firm Fujian But the semiconductor industry had Grand Chip Investment Fund from already been undergoing a gradual acquiring Aixtron, a German-based ratcheting up of controls and blocked semiconductor firm with US assets deals involving Chinese entities. Since because the acquisition would have Beijing’s roll out of Made in China also included the company’s US 2025, the China National Integrated subsidiary and assets in California.94 Circuit Fund and its Foshan Civil- Military Innovation Industries Fund, GSR Ventures (2016) – CFIUS advises CFIUS appears poised to block virtually blocking a deal between GSR Ventures any mergers and acquisitions in the and Nanchang Industry, a subsidiary semiconductor industry involving of Royal Dutch Philips Electronics Ltd

46 SPOTLIGHT Mergers & Acquisitions in the Semiconductor Industry

The US-China Tech war has sparked deals, particularly involving technology a surge in new regulations and acquisition by Chinese buyers. enforcement actions surrounding technology mergers and acquisitions in In 2018, with the US-China trade war the semiconductor industry. providing impetus, the US Congress expanded the scope, reach and overall In America, the Committee on Foreign remit of CFIUS, with the passage of Investment in the United States the Foreign Investment Risk Review (CFIUS) is responsible for reviewing Modernization Act (FIRRMA).92 all mergers and acquisitions involving American technology companies Among other things, FIRRMA gave and foreign entities. CFIUS, an inter- CFIUS the authority to review all agency committee, scrutinizes scenarios that might involve acquisition proposed and pending deals with the of US technology by Chinese state- aim of preventing strategic dual-use backed entities, no matter how small, technology from being purchased (or and across a broad range of sectors. obtained via any other financial means) by foreign actors. This means that even partial or “beneficial ownership” scenarios Overall, there has been a steady (compared with full legal ownership), increase in the number of cases where individuals have any kind of reviewed by CFIUS as well as a access to intellectual property or dramatic increase in the committee’s technology, can be blocked. recommendations to block or prohibit

Graph XXIII – CFIUS Reviews of Proposed Acquisitions and Mergers93

Foreign investment investigations Countries under review The most common foreign investor on the radar of the Committee on From 2008 to 2015, CFIUS investigations into foreign acquisitions nearly tripled Foreign Investment in the United States is China. Nearly 20 percent of the committee’s reviews from 2013 to 2015 involved China.

Investigations Total 387 70 China 74 Canada 49 60 U.K. 47 50 Japan 41 France 21 40 Germany 14 30 Netherlands 14 Switzerland 12 20 Singapore 12 10 Hong Kong 9 Israel 9 0 2008 2009 2010 2011 2012 2013 2014 2015 Australia 8 South Korea 8 SOURCE: Annual Report to Congress, CFIUS SOURCE: Annual Report to Congress, CFIUS

47 5. US EXPORT CONTROLS AND THE BIS ENTITY LISTS

that manufactures LED, which includes Germany recently blocked another semiconductors. attempt by a Chinese company, the Yantai Taihai Group, to buy Leifeld Fairchild Semiconductor International Metal Spinning AG, a high-tech (2016) – Because of CFIUS concerns, machine tool company.100 Fairchild rejects China Resources Microelectronics and CRE‘s $2.49 billion Export controls and investment acquisition bid.95 restrictions are having a profound impact on semiconductor value chains. Lattice Semiconductor (2017) – US The added risks and uncertainties mean President Donald Trump blocks that businesses must fundamentally Chinese-backed private equity firm, rethink their strategic and operational Canyon Bridge Capital Partners, from plans, going forward. the $1.3 billion acquisition of Lattice Semiconductor.96 The next section of this report will focus on the major risk mitigation Qualcomm (2018) – President Trump strategies that semiconductor blocks a $117 billion acquisition offer companies are currently exploring, for semiconductor chip maker by as they seek to protect market share Singapore-based Broadcom.97 and sustainable trade flows, while also adhering to relevant laws and Meanwhile, after it officially labelled requirements. China as a “systemic rival”, the EU Parliament has approved bloc-wide rules to increase scrutiny of foreign investment and acquisitions that could result in threats to national security.98

These latest technology acquisition efforts were triggered, in part, when The EU Parliament has approved China’s Midea Group acquired an 81 bloc-wide rules to increase scrutiny of percent stake in German industrial foreign investment and acquisitions robotics company Kuka AG, in 2016, that could result in threats to national which sparked a public outcry among security. policy makers in the EU.99

Since then, the current trade landscape in the EU, as in the US, is shifting towards more protectionist policies and non-tariff measures. Source: Wolfgang Rattay/Reuters

48 6. Strategies to Manage Tech Controls and Global Value Chains

National security issues and • Lobbying of government agencies semiconductors will remain inextricably to obtain exclusions and waivers on linked, well into the foreseeable future. export bans and export controls • Decoupling entirely from entities on This evolving trade landscape will the US blacklist. inevitably lead to the reconfiguration of global value chains and will necessitate The “De-Americanization” of Global corporate strategies that could involve Value Chains the shifting of manufacturing and other In 2018, when Huawei was placed critical operations to new locations. on the US government’s Restricted Entities List, effectively cutting it off The world’s top semiconductor from critical US inputs for its products, companies cannot ignore the it immediately sought other non- importance of China’s market, and, as American sources for its estimated $11 businesses that must compete in an billion worth of technology needs. extremely challenging and complex environment, this will require a host of However, this most important new approaches for risk mitigation. China tech company remains highly dependent on a broad range of Going forward, semiconductor American technology companies for its companies will grapple with the many 101 products. or all of the below challenges: As such, Huawei’s legal team began an The “De-Americanization” of global • analysis to determine if the company value chains could legally circumvent US export Circumvention of “de minimis” value • controls by instructing its suppliers to thresholds on foreign made goods reduce the overall value of American “Reshoring” of certain value-add • technology in its value chain. operations • “In-China-For-China” localization strategies

49 SPOTLIGHT De Minimis Example

For eligible items, there are two de the costs of foreign labor, overhead, IP minimis threshold levels that apply to license fees and the costs of materials. inputs of US origin content which is designated US controlled technology: Conversely, the US can arbitrarily lower 10 percent and 25 percent of a non- a de minimis threshold (from 25% to US made product’s overall fair market 10% or below, for example), making it value. more difficult for items further down a supply chain to escape the constraints In order to meet de minimis exclusion, of export controls. either of the below outcomes must be achieved: Take, for example, an integrated circuit that is of US origin (controlled 1) reduce the value of the US under ECCN 3A001.a.7), which is content; or bundled together with a non-US made underwater device known as a “towed 2) increase the value of the acoustic hydrophonic array“. non-US made product. An initial calculation shows that the This can be done by sourcing total US content is at 26.3 percent technology elsewhere or adding more which exceeds the de minimis level, non-US value to the finished item. For which means the product requires a example, to manipulate the value of license if it is to be shipped to, in this non-US inputs, companies can increase case, Russia.

Graph XXIV – De Minimis Rule Example 1

Product: Field programmable gate array integrated circuit Origin: US ECCN: 3A001.a.7 Product: Towed acoustic hydrophonic Fair market value: $250 array

Origin: UK 2 destinations Fair market value: $950 • Australia • Russia US origin calculation: Australia: No license required because ECCN 3A001.a.7 is US$ (250/950) X 100= 26.3% granted a license exception

Russia: License required because the controlled US content exceeds the de minimis threshold of 25%

Can the license be avoided? (See example 2)

50 SPOTLIGHT: DE MINIMIS EXAMPLE

A second illustration shows how which makes the product eligible for changes in the prices lead to a the de minimis exclusion. reduction of the US content to 20%,

Graph XXV – De Minimis Rule Example 2

Product: Field programmable gate array integrated circuit Origin: US ECCN: 3A001.a.7 Product: Towed acoustic hydrophonic Fair market value: $200 array Origin: UK 2 destinations Fair market value: $1,000 • Australia Adjust the values? US origin calculation: • Russia • Reduce price of US US$ (200/1,000) X 100= 20% integrated circuit Australia: No license required because ECCN 3A001.a.7 is • Increase price of granted a license exception hydrophonic array Russia: No license required because the controlled US content is within the de minimis threshold of 25%

51 CASE STUDY International Traffic

The Second Incorporation Rule in Arms Regulations Another way for companies to legally circumvent US licensing controls (ITAR regulations) is for suppliers to use the second incorporation rule. In the case of Huawei, the Chinese tech company performed a second incorporation analysis of all its supply chains and has instructed suppliers to utilize this loophole.

This rule applies where controls on American technology imbedded into a non-US second product (known as a “discrete product”) would no longer be subject to export licensing if the second product is incorporated into a third non-US product (i.e., second incorporation).

Here, for example, a US made microprocessor chip classified under Export Control Classification Number Source: Fabrizio Gandolfo/Jetphotos 3A001.a.3 (a controlled commodity) is first incorporated into a non-US CPU Military items listed under the Consider the example of the sale board classified under Export Control International Traffic in Arms of a Boeing 737 civil aircraft with Classification Number 4A003.c (also Regulations (ITAR) regulations GPS technology embedded in the controlled because of the American have a 0 percentage de minimis cockpit valued at $1000. Because technology imbedded in it). The CPU threshold. This means that they the GPS technology was on the ITAR board is then incorporated (i.e., a cannot be sold to a restricted entity list, the entire civil aircraft becomes second time) into a non-US laptop regardless of value. subject to ITAR regulations, computer. The second incorporation despite the technology in question rule releases the non-US laptop ITAR covers the manufacture, sale representing a tiny fraction of the computer from licensing controls. and distributions of military, space aircraft’s value. and defense related articles. The second incorporation rule is part Thus, if no special permission of an interpretive guidance document Under the so-called “see-through were obtained from the US State issued by the BIS and is not part of the rule”, if a part or component is Department, the sale of the aircraft existing export control regulations. subject to ITAR regulations and would constitute a violation subject The BIS is concerned about the incorporated into a larger system, to criminal and monetary penalties. fact that Huawei issued directions the entire larger system becomes to its suppliers to use the second subject to ITAR regulations. incorporation rule, thus, it is possible that this rule could be rescinded or changed significantly.

52 6. STRATEGIES TO MANAGE TECH CONTROLS AND GLOBAL VALUE CHAINS

Graph XXVI – Second Incorporation Rule

SECOND INCORPORATION RULE

(2ND INCORPORATION)

Product: microprocessor chip Origin: US ECCN: 3A001.a.3

(1ST INCORPORATION)

2nd incorporation rule releases the No license required in most destina- laptop from EAR license control tions*

Product: incorporated into non-US- *Note however that strict conditions have to be met before this is accepted (e.g., the origin CPU board (aka discrete product) discrete product after first incorpation must be a standalone/mass market product, and ECCN: 4A003.c should not be bespoke to the buyer), not to mention the conditions stated in the previous slide. Prior to 2nd incorporation the CPU board will still be subject to de minimis calculations and licensing

Moving More Value-added are looking into these de minimis Operations out of the United States exclusions as a means to help mitigate Even under normal circumstances, risk and maintain their businesses. semiconductor companies must The US-China tech war is adding costs struggle to manage highly complex, to semiconductor companies in the competitive and demanding global following ways: value chains. As the US Restricted Entities List expands and the US-China • Lost sales to restricted entities trade war escalates, many companies (which often awards the market to competitors)

53 6. STRATEGIES TO MANAGE TECH CONTROLS AND GLOBAL VALUE CHAINS

• Increased supply chain traceability Ring-fencing and Off-Shoring Circumventing export controls is costs (to track ECCN’s through global Operations – China and Beyond adding costs to semiconductor value chains) In the avoidance of export controls, products. • Risks of monetary and civil penalties there is historical precedent with and revoked export privileges for another American technology sector: non-compliance the US communications satellite • Legal and professional services industry which, in the 1980s and 1990s, costs. responded to increasing US export controls and restrictions by offshoring Therefore, unless foreign and key parts of global value chains. American semiconductor companies can convince US officials to walk- Because of China’s high demand for back or remove export controls and semiconductors, the business case for export restrictions on a growing adopting an in-China-for-China supply list of emerging and foundational chain remains strong for US and other technologies (see Graph XX, Made in foreign companies. China 2025 and US Export Controls), efforts to circumvent US export Localizing and ring-fencing controls will increase. semiconductor operations in a controlled, secure environment in Redesigning a supply chain around de China, however, is still very hard to minimis thresholds and the second do, as detailed earlier under China’s incorporation rule are perfectly investment and local business legitimate strategies available to requirements for foreign firms. companies looking to maintain their businesses, so long as they maintain Vertically Integrated Semiconductor compliance with relevant laws. Value Chains

At the moment, however, the One way to reduce the inherent risks of semiconductor industry is taking doing business in China is to diversify a wait-and-see posture regarding operations and activities to multiple large-scale reshoring operations, as markets in Asia, such as Taiwan, companies continue to gauge the Singapore or Vietnam, to achieve a so- likelihood of the rolling back of US called “China-plus 1-2-3” strategy. export restrictions or a future US China trade deal that would address both However, with the huge investments sides’ concerns regarding technology. associated with both fabless and foundry-related activities, it is difficult

54 SPOTLIGHT Increased Cyber-Security

to move facilities and operations or Threats replicate them. As such, there may be a need for consolidations and mergers within the industry to form more IDM semiconductor business models.

An IDM (Integrated Device Manufacturing) model is essentially a vertically integrated semiconductor value chain and is employed by Intel and Samsung.

Exclusions and Waivers on Export Controls The best hope for the semiconductor industry (in the near term) may be to redouble its efforts to lobby the US government to roll back export restrictions on certain items, rather than try to restructure global value chains around the de minimis exclusion.105 Here, associations like the Semiconductor Industry Association (SIA) would be well placed to facilitate and provide reliable information to all Cyber security experts have noted American semiconductor parties. that since imposition of export companies operating in China or restrictions on Chinese tech planning new operations are faced The outcome of the ZTE case, in firms such as Huawei, Hikvision, with a conundrum: how to tap 2018, may serve as an encouraging SenseTime and others, there has into China’s huge market, while at precedent for future efforts by the been an escalation of cyber security the same time, protect intellectual industry to work with and consult threats (attacks and attempted property and sensitive technology. with the US government regarding its cyber-intrusions) at American export control enforcement activities. technology companies.104 According to CrowdStrike, the cyber-security firm, this uptick in activity coincides with both the US-China trade war and the roll out of Made in China 2025.

55 6. STRATEGIES TO MANAGE TECH CONTROLS AND GLOBAL VALUE CHAINS

When the US government threatened A Federal Register Notice on a The US technology industry regularly ZTE, the Chinese telecoms company, proposed action gives the public the lobbies the US government to with a 7-year ban on sourcing US tech, opportunity to: ease restrictions on the basis of a well-organized group of American unreasonable harm. companies such as Qualcomm, • Disagree with the proposal Qorvo, Google, Intel and Microsoft • Suggest alternatives courses of were successful in getting the US action government to back off its threats.106 • Respond to specific questions in the Federal Register When seeking an exclusion to an • Estimate potential losses and other export restriction or license, companies burdens. often argue successfully that the item in question meets one of the below The importance of maintaining circumstances: transparent and open public-private communications through a process • The restricted item is made such as the Federal Register Notice elsewhere and readily available – cannot be overstated. In the realm and therefore, a prevention of the of export controls and dual-use export, re-export or transfer of technologies, special working groups said technology would harm the and public-private groups representing company requesting the exclusion the semiconductor and other sectors • The item in question can be labelled have been successful in influencing as “general merchandise”, meaning it policy making in Washington. poses no national security threat. One such group is the Information Many of these same companies again Systems Technical Advisory Committee played a key role in quietly convincing (ISTAC), which operates under the the US Commerce Department to auspices of the Department of delay a ban (for a second time) on Commerce’s BIS.108 Members of the technology sales to Huawei, which ISTAC committee are deep subject would have gone into effect on matter experts from the semiconductor November 19, 2019. and other tech sectors and have been instrumental in informing and guiding Federal Register Notices policy making. In the US, one of the most important However, there is a high level of public-private communication anxiety in the semiconductor industry mechanisms that has been used for because, since 2017, there has not been public-private cooperation is the an effective public-private dialogue US Government’s Federal Register 107 about the impact of export controls, Notice. Before arbitrarily enacting a BIS entity lists and other enforcement law or new enforcement mechanism, mechanisms. US officials have used the Federal Register to canvas the business sector for feedback, which gives companies and organizations the opportunity to comment on proposed actions and denials.

56 6. STRATEGIES TO MANAGE TECH CONTROLS AND GLOBAL VALUE CHAINS

The general concern is that there has Chinese buyers, R&D partners, The public-private communication been little or no consideration given to suppliers and other partners. process around semiconductor-related the long-term outcome of technology policy making in Washington has been bans and restrictions on US companies, Specially Designated and Blocked largely abandoned in the early stages and how this impairs their ability to Persons List (SDN) of the US-China tech war. compete and fully participate in global In what is often referred to as the value chains. Key concerns are: “nuclear option” of export controls, when an entity is placed on the SDN • Restricting US firms from doing list by the US Office of Foreign Assets business in key global value chains Controls (OFAC), then even simple effectively cedes market share to financial transactions with named Chinese and other foreign firms. entities become prohibited for US • Restricting sales to Chinese global companies and persons. value chain partners cuts off funding for much-needed R&D. Assuming it is not possible to obtain • Collaborative innovation across an exemption, this is the ultimate specialized clusters and between deal-killer and even a company-killer: human capital networks cannot such an outcome would result in a full occur in fragmented global value decoupling with affected parties. chains. At the time of publication of this report, 168 Chinese individuals and The public-private communication entities (representing a wide swathe of process around semiconductor-related industries) were on the SDN list.109 policy making in Washington has been largely abandoned in the early stages These restrictions are enforced by more of the US-China tech war. than a dozen different US government agencies and, can be implemented In addition to trying to compete in without warning and cause massive an already highly competitive global collateral damage. From a government market, American semiconductor perspective, such actions should companies are increasingly having not be undertaken without careful to react to what they considered consideration about the long-term short-sighted and seemingly irrational consequences. policy making – with no over-arching strategic vision on how to best position Therefore, even if businesses manage US entities over the long-term. to legally circumvent export licensing on dual-use goods by off-shoring Decoupling Due to Excessive operations and driving US origin Regulations values below de minimis thresholds, Assuming they are unable to obtain newly imposed SDN prohibitions could official exemptions or waivers from halt any dealings, whatsoever, with the relevant US government bodies, restricted entities. semiconductor companies also must prepare for scenarios involving a process of decoupling from their

57 7. Techno-Nationalism & Industrial Policies

The US-China trade war is but one likely to become further entrenched, Techno-nationalism is a set of symptom of an emerging systemic not only in the US, but in the EU and mercantilist-like policies that link tech rivalry between the world’s two beyond. innovation and enterprise directly superpowers. This competition covers to the national security policies, the entire geopolitical spectrum Increased Government Intervention economic prosperity and social and encompasses all aspects of hard Under the banner of techno- stability of a nation. and soft power — with fundamental nationalism, US government ideological differences between the intervention is increasing. For instance, two systems beginning to spill over it is exploring ways to funnel money beyond China and US trade-related to European telecommunications matters. companies Nokia and Ericsson, in an attempt to counter the dominance One could say that over the past thirty of Huawei in the next generation of years, despite the systemic differences wireless technology110. between the US and China, a kind of de facto strategic relationship has This kind of techno-nationalist rationale developed through an intertwined is new to Washington. A palpable network of global value chains. sense of urgency to find a competitor However, after decades of to Huawei reveals the degree to which globalization, where offshore techno-nationalist thinking is gaining production became the norm, the trade traction. landscape has been shifting towards a more fragmented and localized trade Funding Nokia and Ericsson is model, which the author calls “techno- Washington’s attempt to counter the nationalism”. generous multi-billion credit lines and other financial assistance that Techno-nationalism is a set of Huawei has been receiving from the mercantilist-like policies that link tech Chinese government via state-owned innovation and enterprise directly to enterprises and banks. Government the national security policies, economic assistance has allowed Huawei to prosperity and social stability of a offer cheaper prices for high quality nation. In this regard, it considers equipment when bidding for contracts government interventions in markets around the world, and has pumped up as a form of protection against what Huawei’s R&D war chest. it considers opportunistic or hostile foreign actors (both state and non- Also on the international front, the state) and to develop, enhance and US plans to counter China’s Belt and promote its own national champions’ Road Initiative by approving a huge chances for success. expansion of the Overseas Private Investment Corporation (OPIC) into a Many would challenge the underlying new agency, the International Finance rationale behind this new way of Development Corporation (IDFC), that thinking — which will be discussed can co-invest some US$60 billion with later. But, regarding semiconductor non-US and private-sector American value chains, this new mindset seems

58 7. TECHNO-NATIONALISM & INDUSTRIAL POLICIES

technology companies in the same for the homegrown development A palpable sense of urgency to find markets targeted by China’s Belt of software and technology that a competitor to Huawei reveals the and Road Initiative.111 The focus is on would allow separate pieces of 5G degree to which techno-nationalist developing telecoms that provide equipment from different companies thinking is gaining traction in the US. alternatives to China’s state-backed to communicate with each other — companies Huawei and ZTE. which would neutralize Huawei’s end-to-end domination of 5G network In the 5G space, the US has also been equipment.112 This approach will require seeking to push Oracle and Cisco, two the successful implementation of American technology companies, to universally accepted standards, but enter the radio transmission market it is not clear yet which country or niche as manufacturers, despite conglomeration of countries will win objections from both firms on the the contest to set the standards — grounds that Huawei’s first mover assuming that there will not be multiple advantage is too great. 5G standards that emerge. Finally, also in the 5G space, the Trump Government has been looking to use government funding

Source: John Thys/AFP

Trans-Atlantic Technology Alliance The report called for EU-US strategic The EU intends to join forces with the The EU is also turning to techno- cooperation and the need to join US to counter China’s attempts to nationalism. Brussels recently forces to counter efforts by Chinese dominate next-gen technologies. issued a report that emphasized the Government backed companies importance of working closely with to influence the International America to create an economic model Telecommunications Union and that would compete directly with the International Organization for Beijing, particularly with the intent Standardization. of blocking the Chinese Communist Party’s attempts to influence global This strong shift in both America standards in 5G and other next-gen and the EU to resort to a kind of technologies.113 techno-mercantilist alliance, after three decades of relatively open

59 7. TECHNO-NATIONALISM & INDUSTRIAL POLICIES

globalization and unrestricted trade, value creation undertaken around Policy makers on both sides of the represents a key moment for the the world, virtually anywhere that Atlantic appear to be comfortable to semiconductor industry and global relevant competitive strategies can embrace increasingly mercantilist and trade, in general. be leveraged. It has taken more than nationalist strategies. three decades for global value chains This is not a temporary phenomenon to migrate and agglomerate into key that will recede with the election of a global industries and networks. new American president in 2020. Policy makers on both sides of the Atlantic Semiconductor value chains are appear to be comfortable to embrace agnostic. They exploit competitive increasingly mercantilist and nationalist advantage strategies found within strategies. different countries in order to achieve:

This mindset was showcased in a long- • Maximum efficiency & productivity running debate among the EU anti-trust • Access to the best innovation & authorities on whether to allow two of human capital Europe’s dominant manufacturers of • Access to new markets high-speed trains (France’s Alstom AG • Movement up the value chain (when and Germany’s Siemens AG) to merge. possible). Coloring the debate were memories of tech transfer agreements dating back Trying to nationalize or ring-fence to the early 2000’s when Alstom and today’s hyper-complex semiconductor Siemens agreed to hand over some global value chains within an artificial, of their most precious Intellectual political-designated geographical area property to their Chinese joint venture will prove to be a difficult task. partners.114 Even in industries with less complexity, Alstom’s and Siemens’ Chinese joint lower costs and lower barriers to entry, venture partners have since merged to government-controlled champion become CRRC Corp, the world’s largest building is generally seen to have a maker of trains, and are now bidding dubious track record. The reasons for contracts around the world in for the failings are well documented: competition with Alstom and Siemens. failure to allocate funds efficiently, systemic corruption and rent-seeking Ultimately, the idea of creating behavior, and failure to punish subpar a European “national champion”, performance. And, of course, state- however, was rejected and the Alstom- driven growth targets encourage Siemens merger was blocked on over-capacity and can distort markets, anti-trust grounds, but not without as seen in the steel industry and other significant backlash in political circles. industries involving commodities.

Semiconductors and Techno- Beijing, however, has been steadily Nationalism expanding its state centric model As was described earlier, and has continued to bolster Chinese semiconductor global value chains are capabilities in the tech industry. highly rationalized with key sustainable

60 7. TECHNO-NATIONALISM & INDUSTRIAL POLICIES

The Evolution of China’s Techno- By the Chinese Communist Party’s nationalism and Techno-mercantilism ninth Five Year Plan (1996-2000) and Dating back to the 1960’s and the under the so-called Project 909, establishment of the Huajing Group’s industrial policy had successfully Wuxi Factory No. 742, which trained the lured Japan’s NEC, whose engineers first generation of China’s chip industry transferred technology and trained engineers, China has been riding local Chinese engineers for what industrial policy toward the creation of would become China’s first domestic a domestic semiconductor industry.115 production capabilities for Dynamic Random Access Memory (DRAM).118 From 1978, Deng Xiaopeng’s “opening” of China put the country on the Over the years, China’s industrial trajectory that got it to where it is planners have oriented their focus to today. By the early 1980’s, China’s emulate the so-called “fast-follower” sixth Five Year Plan (1981-85) created approach, described below, that a “Computer and Large Scale IC worked so well in the 1970s, 1980s and Lead Group” which was tasked with 1990s for tech companies in Japan, modernizing China’s semiconductors.116 South Korea and Taiwan. Already in the 1980’s the Chinese government had recognized the Should the West Emulate China’s advantages of shifting toward the Industrial Policies? hybrid industrial policy model that The Made in China 2025 Plan and is evident today: joint ventures and the National Integrated Circuit Plan technology transfer. Fund, among others, are the result of a long series of initiatives focused on In the 1980’s and early 1990’s, under semiconductors and related tech. Yet, the so-called Project 908, Chinese as earlier sections of this study have companies attracted joint ventures that described, China continues to struggle included Canada’s Nortel, Holland’s to make substantive progress when it Philips, Japan’s NEC, Belgium’s ITT and comes to reducing its dependence on Lucent laboratories from the US.117 foreign technology and foreign entities.

61 SPOTLIGHT 7. TECHNO-NATIONALISM & INDUSTRIAL POLICIES The IDAR Methodology

China’s semiconductor industrial policy has increasingly emphasized the core principles of technology transfer, joint ventures and strategic partnerships, with the development and acquisition of human capital, at scale.

In March of 2018, during the early days of the US-China trade dispute, the United States Trade Representative (USTR), published the findings of its “Section 301” investigation into China’s practices regarding innovation, tech transfer and IP protection. The report The US-China tech war has witnessed concluded China’s successful a tilt by the United States, the EU and industrial policies could be others towards techno-nationalism. attributed to an acronym: IDAR. Why is there an emerging narrative that government intervention in IDAR stands for “Introducing- markets and trade protectionism are Digesting-Absorbing-Re- needed to succeed in a tech war with innovating”. China?

It is an IDAR methodology that has Whatever short comings state enabled Beijing to leverage newly capitalist economies embody, there obtained IP and technology as part is increasing acknowledgement that of a “catch-up” strategy. Beijing’s methods have, in fact, been succeeding in some technology sectors.119

Thus, if Beijing’s financial support and strategic funding of key tech sectors have been successful, logic would dictate that the US and its allies should consider borrowing from China’s playbook, and adopt some of its methods.

62 SPOTLIGHT Milestones of Chinese Techno-nationalism

Examples of the successes of China’s Russia’s GLONASS. Beidou is said to China’s success in telecoms, satellite industrial policies in the modern era: be the most accurate of the world’s navigation and high speed rail has navigation systems and in just over 15 reinforced the attractiveness of Huawei – Huawei has become the years was designed, implemented and industrial policy as a tool for economic largest telecommunications equipment successfully deployed through China’s growth. manufacturer in the world. Its space and military programs. dominance of 5G end-to-end wireless technologies and infrastructure is well High Speed Rail – In roughly the same documented. timespan that it developed the Beidou Satellite system (15 years), China rolled Huawei’s success is not linked out the world’s longest and most exclusively to Beijing industrial extensively used public rail system, strategies, but, without access to with trains attaining speeds of 250-350 the broad range of government kilometers per hour. resources and financial assistance (including compensation for price Huawei and 5G, navigation satellites reductions and discounts on the and high-speed rail networks all bidding of international contracts) were brought to fruition through an the company would not have risen underlying, disciplined application of to its current status. Huawei’s access industrial policy, emphasizing the core to new technology and IP through objectives: state-funded acquisitions and state- orchestrated technology transfer • Technology transfer programs have paid off. • Acquisition of IP • R&D funding (ever-increasing) The fact that the present US government is adopting techno- • Development and acquisition nationalist policies and has made it of human capital a foreign policy priority to block the • Execution of IDAR installation of Huawei’s networks methodologies (Introducing - around the world and limit its access to Digesting - Absorbing - American tech is testimony that China’s Re-Promoting) industrial policies are working. As industrial policies become acutely Beidou Navigation Satellite System – focused on the industries of the future, China built its own independent global as described earlier, emerging and satellite system as an alternative to foundational technologies will garner the United States’ Global Positioning ever more attention from public- System, the EU’s Galileo system and private working groups.

63 7. TECHNO-NATIONALISM & INDUSTRIAL POLICIES

Even within the US tech sector, there This nationalist mindset is shared There are calls in the US for a more is acceptance that a techno-nationalist by executives from Apple, Google, overt industrial policy approach to agenda must emerge, with government Facebook, Intel, Microsoft and a host counter China’s advanced in the tech initiatives that create the right of other big tech firms, some of which sector. foundation for national innovation — participated in a national committee which must spill over into “main street” that drafted a report on the topic, and create jobs and economic benefits published by the Council on Foreign for the middle class. This cannot Relations. The publication was aptly happen without sound, well executed named “The Innovation and National industrial policy. Security Task Force Report”.120

The Scale of China’s Technology Engineers were tasked with the Laboratory re-writing of code and redesigning The scale of China’s technology specifications in order that Huawei landscape and its growing number of might minimize the damage of US 121 innovators and public-private industry export controls. partnerships is only just beginning to be put in proper perspective. Regarding the replacement of the Android operating system (and, Regarding Huawei and the advantage allegedly, the replacement of virtually of scale, consider the following: When all US parts and components from Washington announced that Huawei Huawei’s smart phone) the engineers’ would be placed on the Department of efforts appear to have paid off. In Commerce Restricted Entity List (which, October of 2019 Huawei paid its among other things, restricted its employees some $285 million in access to Google’s Android operating bonuses for “successfully coping with 122 system), management tapped 10,000 US sanctions”. Huawei engineers — requiring them to work continuously in three shifts The ability of a Chinese company like over 24 hours — to tackle the problem. Huawei to leverage high quality human

64 7. TECHNO-NATIONALISM & INDUSTRIAL POLICIES

capital, at such a large scale, has not come with excessive constraints US businesses would embrace gone unnoticed amongst businesses and conditions that would hobble government funding for R&D, outside of China. participation in global value chains. education and even more civil-military technology development projects, As such, the question being asked is: There is widespread agreement in the provided that the money did not would more government “support” US semiconductor space that export come with excessive constraints in the form of new industrial policies controls can inflict long-term collateral and conditions that would hobble be welcomed by the semiconductor damage, often resulting in the ceding participation in global value chains. industry, particularly in the US? of market share to competitors and the erosion of revenue bases that are If so, what would effective public- vital for generating R&D activities. private initiatives look like? In the past, Furthermore, escalating compliance Japan, South Korea and most notably, costs resulting from supply chain Taiwan, have benefited immensely from traceability requirements are also a semiconductor industrial policies, but negative factor. could similar practices work in the US and Europe? But the days of laissez-faire government approaches toward the The Proverbial Horse Race digital economy and technology are coming to an end, which means that If the US-China Tech war was described the semiconductor industry will have to as a horse race, should the participants learn to adjust. devote their efforts towards trying to slow down their opponent’s horse, or Industry thought-leaders recognize focus on making their own horse run as an acute need to develop human fast as possible? capital and the necessary skill sets for the industries of the future. This The consensus among the world’s comes down to the education of a semiconductor companies is the latter. new generation of professionals in the As one Silicon Valley executive told the science, technology, engineering and author: “We need to hire the best and mathematics (STEM) areas, beginning brightest and run as fast as we can, in primary and secondary schools especially while we still lead the race”. and then blossoming in the university environment. In terms of embracing new industrial policies, the most oft-cited request However, in the US, public funding from today’s tech sector involves two for the technology sector has been areas: more general R&D funding and steadily declining, particularly at development of human capital — universities, which are at the center primarily through education. of collaborative networks and are increasingly the catalysts of innovation, The author spoke with representatives tech-startups and new jobs.123 from numerous semiconductor companies in Silicon Valley and the According to the OECD, the US has slid emerging narrative, in general, is to 28th out of 39 nations in government that US businesses would embrace funding for university research as government funding for R&D, a share of GDP, with the 12 leading education and even more civil-military governments investing more than technology development projects, double the US’s investment.124 provided that the money did not

65 7. TECHNO-NATIONALISM & INDUSTRIAL POLICIES

However, in terms of overall R&D In the US, the Defense Advanced To continue to be competitive, US spending on semiconductors, U.S Research Projects Agency (DARPA) has universities would need a minimum of companies spent far more than any been increasing its focus and funding $45 billion per year for public-private other country, at $32.7 billion in 2018, on semiconductors. In 2018, the US research. followed by the EU ($13.9 billion) and Department of Defense announced Taiwan ($9.9 billion).125 Therefore, its first chip innovation center, with as industrial policy in the US and EU the aim of targeting more secure chip reorients toward new milestones and design.126 Of particular interest to public-private partnerships, human the US military is the development capital development and other of trusted sources of 14 nm process educational milestones should be technology and 2.5D chip packaging.127 achievable. Another DARPA program, the The Information Technology and Electronics Resurgence Initiative (ERI) Innovation Foundation (ITIF), a US- was announced to the tune of $1.5 based foundation, estimates that US billion over 5 years, to explore among universities should receive a minimum other things: of $45 billion per year, to promote public-private research. • Traceability of electronic components from design to end-use As Moore’s Law reaches its end, in a real supply chain the need to achieve the next level • IC technologies that can enforce of innovation in the semiconductor security and privacy protections industry has reached an historic • Secure and leading-edge milestone – one that could very infrastructure systems around well catapult the next innovators emerging and new foundational to an insurmountable lead over the technologies. competition. Therefore, the entities that can develop and leverage the Also under DARPA is the Joint smartest people, at scale, will likely win University Micro-electronics Program the race. (JUMP), which in 2018 committed to semiconductor R&D in the following This will require smart industrial policy areas: that enhances innovation, but, at the same time, does not create new • Materials & Integration distortions in the market that ultimately • Architecture harm key stakeholders. • Design.

Military Involvement in It is difficult to measure the true scale Semiconductor Research of US defense R&D spending, as other The scale of US and European programs may not be made public. For spending appears to be far less than Military organizations will play an increasingly active role in public- publicly known programs, however, what China has been spending on its the scale of US and European spending civil-military fusion initiatives. private partnerships and government funded programs in the development appears to be far less than what China of leading-edge technology for has been spending on its civil-military 128 semiconductors. fusion initiatives.

66 SPOTLIGHT The Galapagos Syndrome

Techno-nationalism has risks. Companies that dominate their protected domestic market under domestic standards may not be capable of competing globally.

One of the risks of techno-nationalism continue to expand into Japan’s market is that a ring-fenced, insulated market – as an invasive species, capable of can put local firms at a competitive out-competing the vulnerable and un- disadvantage on the world stage. adapted indigenous ecosystem.

Techno-nationalist policies can lead Techno-nationalist industrial policy to the emergence of local companies must strike a balance between helping that dominate the domestic market, the proverbial horse run faster, while but because they evolve in isolation also avoiding short-sighted actions from global industry (and operate on that lead to the horse falling over different standards) they are unable to farther down the track. National compete globally. This is known as the policies around R&D funding, human Galapagos syndrome.129 capital development and defending against unfair practices, therefore, A classic example of the Galapagos must be balanced with intelligent syndrome involves Japan’s NEC, trade facilitation efforts. As with which for decades dominated Japan’s any government intervention, these mobile phone market but ended up are significant challenges and prone crashing out of the industry in 2013. to political and vested interest Because the company had been manipulation. wedded to local phone standards, it lacked the scale to compete in bigger international markets. At the same time, foreign companies adopting international standards such as Google’s Android operating system

67 8. The Decoupling of US- China Semiconductor Value Chains

In the semiconductor industry, the Co., which had to shut down chip US export controls and other decoupling of certain US-China value production in March of 2019, as restrictions have already damaged chains has become inevitable. Even its access to critical materials and Chinese companies. But “de-coupling” if the two super-powers are able to technology were blocked.130 has far-reaching effects beyond just repair ongoing trade tensions and Chinese and US companies. hammer out a series of “trade deals”, These same painful lessons were there will be no turning back from the learned by China’s Hikvison, the pervasive effects of techno-nationalist world’s largest manufacturer of facial policies and the salient connection recognition and CCTV cameras, which between semiconductors and national depends on US chip makers Intel and security. Nvidia.131 And of course, Huawei has become a microcosm of the greater Given its heavy dependence on US decoupling narrative. tech, China has no choice but to double down on its efforts to “de- By definition, decoupling involves the Americanize” its supply chains, which, divorcing or separation of previously as was discussed earlier, will continue joined, embedded, intertwined value to be a catalyst for the restructuring of chains. Although the name implies that operations and supply chains by both just two primary parties are involved, US and other foreign companies. many more entities and stakeholders are affected in semiconductor The placement of Huawei on the US ecosystem, including: Commerce Department’s restricted list marks a watershed in US-China bilateral • Primary and secondary suppliers up relations and represents the beginning and down the value chain of an increasingly fragmented and • Designated Individuals uncertain trade landscape. • Companies • Academic institutions and think Non-tariff measures in the form tanks of export controls and all-out • Government entities. technology restrictions have already done extensive damage to Chinese The recent addition of Huawei to the companies, including state-owned US Restricted Entity List provides a Fujian Jinhua Integrated Circuit window into this new reality.

68 8. THE DECOUPLING OF US-CHINA SEMICONDUCTOR VALUE CHAINS

The funding and staffing for programs of academic institutions around the world are now under intense scrutiny.

The Decoupling of Talent This scenario played out recently when Shortly after being put on the US prosecutors indicted a University of Restricted Entity List, Huawei laid off Kansas professor, Franklin Tao, on the 70 percent of its staff at its Silicon grounds that the Chinese academic Valley-based R&D facility, Futurewei, failed to disclose his ties to Fuzhou fearing theft of IP.132 According to the University in China, which funds Nikkei Asian Review, Huawei has also research under various government been redeploying its senior research civil-military fusion initiatives. China scientists and executives with US already has the most academic links for fear they may be co-opted institutions on the US Restricted 134 by American espionage agencies and Entities List. facilitate technology transfer. Already, a number of the world’s The deterioration in trust in US-China leading universities have elected to relations has pervaded the entire stop receiving research funding from Huawei value chain, affecting the entire China, including Oxford and Cambridge industry and will be felt around the in the UK and MIT, Stanford and UC 135 world, as Chinese firms look for new Berkeley in the US. sources of talent. This decoupling of human resources Ren Zhengfei, the CEO of Huawei, from global value chains will present held a press conference in September a challenge for the semiconductor of 2019 and announced that Huawei industry. This also presents a paradox would be looking towards Russia to for techno-nationalism, as the find mathematicians and towards attempt to promote local champions Europe to find scientists.133 will likely result in cutting them off from international talent, especially US academic institutions and research smaller companies and start-ups. At organizations will feel the effects the very least, the world’s leading of decoupling as they come under semiconductor companies will have scrutiny for transferring, exporting to increasingly funnel resources into or sharing controlled technology, localized R&D efforts in key markets software and IP with restricted entities around the world. — which includes individuals as well as companies or governments.

69 8. THE DECOUPLING OF US-CHINA SEMICONDUCTOR VALUE CHAINS

De-Americanization of Value Chains historic allies in the EU, Taiwan, South As trade tensions escalate, it is by Chinese Companies Korea and Japan. Ideally, this means becoming evident how deeply As was discussed previously, Chinese figuring out how to engage the likes American technology is embedded companies have committed to looking of ASML, TSMC, Samsung and others, throughout global value chains and for alternative sources to American without putting them in a position how far the long arm of US laws technology and aim to bring entire where they have to “choose sides”. extends into the semiconductor value chains into closed, domestic industry. loops within China. As trade tensions escalate, it is becoming evident how deeply As the Huawei case demonstrates, American technology is embedded American and other foreign firms are throughout global value chains and deeply imbedded in these supply how far the long arm of US laws chains and are suffering collateral extends into the semiconductor damage from export controls and industry, even when Chinese restrictions on Chinese companies. companies purchase finished product As such, US and other international from other foreign firms such as TSMC. entities are actively looking for the legal means to circumvent these The European Union and China controls, including moving operations In 2019, the European Commission out of the US and changing the source published a policy paper calling and percentage of inputs to defeat de China a “systemic rival”. Beyond this, minimis value thresholds. the EU has been promoting a more robust trans-Atlantic alliance with But the risks of facing more draconian the US and Canada to counter China’s US extraterritorial laws, including those technological ambitions and growing that fall under the Office of Foreign influence at international standards Assets Control (OFAC) – especially as organizations, as described earlier. the US dollar remains the predominant international currency – means that If the Sino-US Tech war is polarizing the even a simple financial transaction with global landscape, then the EU is tilting a restricted entity could be prohibited, decidedly towards the US, despite thereby killing the business relationship having to endure historically low levels entirely. of trust with the Trump Government.

As such, Huawei and other Chinese The window appears be closing tech companies are looking to for Chinese state-backed strategic decouple entirely (or bide their time acquisitions of European tech until it is possible) from US-influenced companies, as evidenced by the supply chains. To do this, Chinese firms rejection of both the Aixtron must form alliances with non-American attempted acquisition by Fujian Grand technology companies. Chip Investment Group and the more recent blocking of the acquisition of For this strategy to succeed, however, Germany’s Leifeld Metal Spinning AG the Chinese technology establishment by another China state-backed entity, will need to differentiate US techno- the Yantai Taihai Group. national interests from those of its

70 8. THE DECOUPLING OF US-CHINA SEMICONDUCTOR VALUE CHAINS

EU member countries have been This runs contrary to a general trend The shift in EU-China relations has willing to voluntarily enforce export for Japanese companies relocating seen EU members states voluntarily controls as members of the Wassenaar their assembly and manufacturing enforcing export controls. Arrangement.136 One key indicator operations out of China: according to involves the withholding of an export the Nikkei Asian Review, one quarter license by the Dutch authorities for of Japanese companies in China are the sale of state-of-the-art ultraviolet reducing their footprint, and more than lithography equipment made by half of these companies believe that ASML, to China’s Semiconductor US-China tensions will last for at least Manufacturing Int’l Corp (SMIC). 10 years.137 Without this sophisticated technology from ASML, SMIC’s efforts to produce The Japanese semiconductor industry high quality commercial quantities of will, however, also remain attractive to chips will continue to be hampered. Chinese and other firms as a source of talent, as was evidenced by ex-Elpida All of these developments reflect a CEO and Japanese semiconductor broader shift in relations between the heavyweight, Yukio Sakamoto, being EU and China. The days of check-book recruited by Tsinghua Unigroup, one of diplomacy — where large delegations China’s leading chipmakers.138 of Chinese party members and state- owned enterprise representatives Japan and China’s uneasy history, toured Europe on well-publicized however, will continue to hang over company visits – are over. the bilateral relationship, creating opportunities for Washington – still a Japan in the Semiconductor strong and vital ally of Tokyo – to exert Landscape its will when it comes to enforcing export controls and restrictions on the Japanese semiconductor companies transfer of American technology to have remained, for the most part, Chinese firms. In an extreme scenario, hyper-specialized in the R&D and this could involve putting pressure on materials niches within global the Japanese government to halt sales value chains. In general, Japanese of Japanese technology to Chinese semiconductor companies have companies on the US’s Restricted Entity focused on Japan’s domestic market List. and have been active mostly within the value chains of Japanese Keiretsu Thus, as Beijing looks to de-Americanize structures. its semiconductor global value chains, it will find Japanese entities to be As such, Japanese companies have not less than ideal partners. At the time scaled out internationally in ways that, Japanese companies are reducing their of this publication, Japan had already for example, American companies have. footprint in China. It is foreseeable the blocked Huawei 5G technology from its The growth of China’s semiconductor US will pressure Japan to halt sales domestic wireless networks. sector has shifted attention to to Chinese companies on the US’s Japanese expertise in specialized restricted Entity list. materials, with the likes of Huawei, SMIC and other Chinese firms looking to build stronger ties with Japanese companies.

71 8. THE DECOUPLING OF US-CHINA SEMICONDUCTOR VALUE CHAINS

South Korea In 2019, American export controls Samsung benefited from the US’s For Samsung and SK Hynix, two of were timely for Samsung, as it had just ban on Huawei, but realizes it has to South Korea’s largest chip makers, closed it last smart phone factory in diversify away from its dependence China accounted for a substantial China due to declining sales and fierce on China. portion the company’s sales in 2018: competition from local brands such 140 38 percent of Samsung’s and 41 as Vivo, Xiaomi and Oppo. Thus, the percent of SK Hynix’s. This makes sales boost from Huawei’s dilemma was China a vital market for South Korean welcomed. companies and gives Beijing some leverage in bilateral discussions. The However, the US-China tech war also scale of China’s market will continue sparked forward-looking strategy to be a strong attraction and desired at Samsung to not only reduce its destination. dependency on the Chinese market, but also to position the company As US export restrictions were placed internationally, across a broad on some $12 billion worth of chips swathe of 5G markets. As such, from American companies, Samsung Samsung entered into an alliance with increased its sales of chips to Huawei Qualcomm, the American chipmaker and other Chinese firms. and wireless telecommunications company.

72 8. THE DECOUPLING OF US-CHINA SEMICONDUCTOR VALUE CHAINS

Qualcomm-Samsung 5G Axis number of Samsung devices, The Qualcomm-Samsung Axis alliance In the context of the US-China tech including mid- and low-priced will promote 5G interoperability, rivalry, this Qualcomm-Samsung Axis models, which will appeal to avoiding single player dominance. alliance is important for a variety of customers in both emerging and reasons: developed markets. • Qualcomm’s chips are also designed • The alliance was announced at the to operate across a full spectrum of time that Huawei was struggling 5G frequencies, which encourages with a pending ban (currently connectivity with a broad range of delayed) on its use of Google’s different devices, made by different Android operating system for manufacturers, once again making it Huawei smart phones, thus less likely that one dominant player positioning Samsung and other will control the technology for an international brands not only to end-to-end 5G value chain. win market share but to influence standards, in the future. • Qualcomm’s chips have been designed for a large, diverse 5G ecosystem that will work on a

73 SPOTLIGHT Taiwan: A Strategic Semiconductor Hotbed

Taiwan is a global hotbed of semiconductor innovation and production. It is TSMC may be caught in the crossfire strategically important to both China and the US on a number of levels, all of them as a leading innovator and critical fraught with geopolitical consequences. supplier to both US and Chinese companies.

Source: Chien-Ying Chiu

TSMC been detailed, and will continue to Taiwan is home to Taiwan create demand for TSMC and Taiwan’s Semiconductor Manufacturing other semiconductor companies, such Company (TSMC), the world’s largest as United Microelectronics Corporation semiconductor foundry, which (UMC). produces more made-to-order chips than other company. In 2018, TSMC However, as TSMC, UMC and other manufactured 10,436 different products Taiwanese firms increase their dealings using 261 distinct technologies for 481 with Chinese buyers, they find different customers.141 themselves caught in the middle of the US-China tech war. For example, In addition to being the world’s largest as sales to China increase, the Chinese pure-play foundry, TSMC is also a government is pressing TSMC to move leading innovator: it has crossed the key manufacturing operations from 7 nm threshold for microchips and Taiwan to China – something which is producing them in commercial could incite countermeasures from the quantities, most notably for Huawei’s US, which will be discussed, below. wholly owned subsidiary, HiSilicon. Simultaneously, proponents of the US China’s Growing Market Demand techno-nationalist view are keen for Huawei accounted for 11 percent of TSMC to stop providing leading edge TSMC’s total sales in 2018. China’s technology to Huawei. This rationale is microchip market is growing, as has based on the following assumptions:

74 SPOTLIGHT: TAIWAN: A STRATEGIC SEMICONDUCTOR HOTBED

1) Cutting off sales to Huawei operations locally — even as China is Both the US and Chinese government would slow down the transfer of also urging TSMC and UMC to move have asked TSMC to move its technology and flow of human high-end operations into China. operations to their jurisdictions. capital and resources to state- backed Chinese entities. Taiwan and US Export Controls Currently, from a US export controls 2) A significant scaling back of perspective, Taiwan is a “Group B” commercial ties would mitigate the country. As such, in the semiconductor risks of Chinese actors infiltrating space, most non-military items on the TSMC’s manufacturing operations Commerce Control List are permitted in Taiwan, which supply virtually to be exported to Taiwan under a all of the major US semiconductor license exception. This has been very companies and a large number of good for TSMC and its customers, original equipment manufacturers. everywhere.

Therefore, severing ties with Huawei, The license exception has been according to its proponents, would especially beneficial to TSMC reduce the risks of espionage and the regarding the import of semiconductor embedding of malicious technology in manufacturing equipment from US-bound integrated circuits. Applied Materials and Lam Research, both American companies, on which US Leverage Over TSMC it relies for this critical technology US pressure on TSMC is likely to – along with highly sophisticated increase, however, as more than 60 inspection equipment. percent of its revenue still comes from American companies such as Similarly, for much of its business, Apple, Qualcomm, Broadcom, and TSMC receives chip designs from its US Nvidia — all of which are buying the customers and some of those designs Taiwanese company’s most advanced are also on the Commerce Control List, microchips.142 but enjoy export license exemptions.

For decades, US firms have considered What would happen, however, if Taiwan to be an IP safe-haven, a place the US government were to remove to keep operations and technologies Taiwan’s “Group B” designation safely out of the reach of Chinese and deny export licenses for these state-backed actors. This perception components? is now changing, as Huawei and other Chinese firms pursue deeper ties with Apart from constituting a major policy Taiwanese firms. change in US-Taiwan relations, there would be immediate consequences. Consequently, TSMC is being asked In the short term, TSMC’s ability by the US government to move key to produce and sell its microchips manufacturing activities to the US, to Huawei, for example, could be in an attempt to ring-fence these substantially impaired.

75 SPOTLIGHT: TAIWAN: A STRATEGIC SEMICONDUCTOR HOTBED

There would also be collateral damage. Communist China), the US Congress Although not openly discussed, US American fabless semiconductor passed the Taiwan Relations Act143, national security experts have drawn companies, for example, that have a document that was intentionally up scenarios that include China’s relied on TSMC for the supply of ambiguous but allowed the US to acquisition of all of Taiwan’s local finished wafers, would lose a vital provide Taiwan with “military arms of semiconductor assets, through “forced supplier. This, in turn, would send shock a defensive character”. This recently unification”. A scenario of this sort waves rippling throughout entire global played out in the sale of $8 billion would represent the most extreme value chains and industries, disrupting worth of military technology, including outcome of a techno-nationalist business for suppliers, service providers F-16 jets and advanced radar systems, policy. and original equipment manufacturers. in 2019.144

Given the negative consequences of Although not openly discussed, US such actions, removing Taiwan from national security experts have drawn Group B status would most likely be a up scenarios that include China’s decision to be avoided by the US, or acquisition of all of Taiwan’s local only undertaken in unusual or extreme semiconductor assets, through “forced circumstances. unification”. A scenario of this sort would represent the most extreme Instead, US policy makers will likely outcome of a techno-nationalist policy. be tempted to increase pressure on Taiwan’s political apparatus to restrict As such, the US-Taiwan special sales to Huawei. relationship makes matters even more complicated when it comes to Taiwan’s US-Taiwan History and Military Ties semiconductor companies, given the The US has maintained strong relations precarious balancing act that all parties with Taiwan since 1979. At the same must maintain to avoid decidedly bad time as US President Jimmy Carter outcomes. unilaterally severed diplomatic relations with the island and formally recognized the People’s Republic of China (i.e.

76 Conclusion

The US-China tech war has led to a trade landscape that is increasingly impacted by techno-nationalism. After decades of globalization, this emergent state- centric model is fundamentally changing value chains in the semiconductor industry — and beyond.

After assessing the evolution of the the “de-Americanization” of supply How can semiconductor value chains global semiconductor industry, this chains. continue to benefit from access to report has explored the extent to China’s market, while simultaneously which China’s ongoing government Finally, the report examined geopolitics mitigating the escalating risks intervention in the semiconductor and possible US-China decoupling associated with techno-nationalism? space has been countered by US scenarios where other strategic policies such as export controls, semiconductor economies such as the technology controls and other non- EU, Japan, South Korea and Taiwan tariff measures. were involved.

The report posed questions about the The China Conundrum ascendance of techno-nationalism’s China’s market and trade opportunities industrial policies – specifically whether remain hugely attractive to foreign the US, the EU and others would adopt multinational companies. China and their own industrial policies similar to the US have systemic differences, but those embraced by China, and what after decades of cross-border flows of those new policies might look like. products, investment, ideas and human The report then examined the capital, the countries have become fragmentation, restructuring and unwitting strategic partners. decoupling of global value chains, and how these trends are impacting This produces a conundrum for the the world’s far-flung, highly complex semiconductor industry. Specifically, semiconductor global value chains – as how can semiconductor value chains well as how companies are deploying continue to benefit from access to new risk mitigation strategies. China’s market, while simultaneously mitigating the escalating risks American and foreign firms are associated with techno-nationalism? grappling with the collateral damage Going forward, for the US, EU and created by US technology controls others, determining the right balance and they are looking to minimize that between techno-nationalist objectives damage. The report explored the legal and an environment that allows a small ways to circumvent export controls, group of powerful non-state actors to including the seeking of licensing remain profitable and independent will waivers from the US government and

77 CONCLUSION

be a contentious topic – perhaps even the automotive sector. In-China-For-China ring-fencing more so in an era of rising populism Meanwhile, the lessons of Siemens and strategies will be expensive, because and nationalism, where the technology Alstom, the high-speed rail companies they cannot fully capitalize on global industry is increasingly viewed (at least that freely signed away their most innovations and economies of scale. in the West) as elitist and detached precious IP for market access in China, from main street. will not soon be forgotten. Doing business in China is always going to be Despite the fact that techno- a Faustian bargain. nationalist policies can end up hurting the very entities they aim to protect, An “In-China-For-China” strategy, semiconductor companies will learn to therefore, will be expensive, as it deal with the challenges of the China cannot capitalize on global economies conundrum. of scale while local operations have to be ring-fenced. There is also the Under the uncertainties of techno- possibility that techno-nationalism will nationalism, living dangerously will lead to various “Galapagos Syndromes” become the new normal for US and in a world where global value chains foreign semiconductor companies have fragmented and regionalized. – and all tech-related businesses in Different technical standards may general. emerge for different markets.

Looking for ways to legally circumvent This outcome certainly diminishes export controls will become an the benefits of a fully connected and accepted way of doing business. In collaborative global commons, where general, foreign firms that continue to semiconductor companies can operate do business in China must accept the with fully rationalized global value risks involved. chains, and will affect both US and Chinese firms. The Ring-fencing Strategy All of these issues represent a new The world’s leading semiconductor techno-nationalist reality. The US-China companies have managed to stay tech war will influence semiconductor ahead in the race and keep their most global value chains, and the global valuable IP and technology safely technology sector in general, for many ring-fenced and out of the reach of years to come. malevolent actors. This approach has worked so far, not only for the semiconductor industry, but also for

78 Appendix A

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US Trade Representative. (2018). Findings of the Investigation into China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation Under Section 301 of the Trade Act of 1974. https://ustr.gov/sites/default/files/ Section%20301%20FINAL.PDF

83 Researcher Bio: Alex Capri

Alex Capri is a Senior Fellow and Alex has been a panelist and workshop lecturer in the Business School at the leader for the World Economic Forum. National University of Singapore. He He writes a column for Forbes Asia, also teaches at the NUS Lee Kuan Yew the Nikkei Asian Review and other School of Public Policy. publications and is a frequent guest on global television and radio networks. From 2007-2012, Alex was the Partner He holds a M.Sc. from the London and Regional Leader of KPMG’s School of Economics, in International International Trade & Customs Practice Political Economy. He holds a B.Sc. in Asia Pacific, based in Hong Kong. in International Relations, from the Alex has over 20 years of experience University of Southern California. in global value chains, business and international trade - both as an academic and a professional consultant.

He has advised clients on cross-border projects in more than 40 countries and he has worked in some of the most challenging regulatory environments in the world.

He advises governments and businesses on matters involving “upskilling” and developing human capital. Some areas of focus include Alex Capri mobile financial services, peer-to-peer Visiting Senior Fellow, lending scenarios, AI and e-commerce The NUS Business School strategies.

84 Footnotes

1 SIA. (2019). GSR table. 2 OEC. (2019). World profile China. 3 Adapted from WSTS. (2019). WSTS Semiconductor Market Forecast Spring 2019. 4 Adapted from OEC. (2019). World Profile China. 5 Congressional Research Service. (2019). The Made in China 2025 Initiative: Economic Implications for the United States. 6 ABC net. (2018). Made in China 2025: Beijing’s manufacturing blueprint and why the world is concerned. 7 Technode. (2019). China’s ‘Big Fund’ raises RMB 200 billion to fuel chip industry. 8 Crunchbase. (2019). Tsinghua Holdings Capital. 9 Covington. (2019). Export Control Reform Act Is Finalized in Congress. 10 Industry and Security Bureau. (2018). Review of Controls for Certain Emerging Technologies. 11 US Department of Commerce. (2019). Commerce Control List (CCL). 12 Wassenaar. (2019). Website. 13 US Department of the Treasury. (2018). Title XVII—Review of Foreign Investment and Export Controls. 14 Author’s compilation: “Semiconductors: at the Core of all Future Industries” 15 US International Trade Commission Journal of International Commerce and Economics. (2019). Chinese Semi conductor Industrial Policy: Past and Present. 16 US International Trade Commission Journal of International Commerce and Economics. (2019). Chinese Semi conductor Industrial Policy: Past and Present. 17 US International Trade Commission Journal of International Commerce and Economics. (2019). Chinese Semi conductor Industrial Policy: Past and Present 18 Adapted from SIA. (2018). Beyond Borders. 19 Adapted from SIA. (2018). Beyond Borders. 20 Named after Gordon Moore – an engineer who co-founded Intel – who, in 1965, predicted that the capacity of an integrated chip would double approximately every two years while costs stayed the same or, decreased. This theory has held true for almost fifty years, but now, as the state-of-the art ICs reach 7-5 Nanometers, the theory appears to have reached its end. 21 Copyright by Stratfor. (2019). As the US-China Tech war (880) Rages on, the Electronics Industry Braces for Impact 22 SIA. (2016). Beyond Borders. 23 US Census, NAIS Related Party Database, 2017 24 Adapted from SIA. (2019). Trade Poster. 25 Adapted from SIA. (2018). Beyond Borders. 26 Copyright by Stratfor. (2019). As the US-China Tech war (880) Rages on, the Electronics Industry Braces for Impact 27 Adapted from SIA. (2019). Factbook. 28 Amsden and Chu. (2013) Beyond Late Development. Taiwan’s Upgrading Policies. 29 SIA. (2018). Factbook. 30 Adopted from IC Insights. (2018). Nine Top-15 2018 Semi Suppliers Forecast to Post Double- Digit Gains. 31 Author’s compilation, Adopted from SIA, Factbook, (2019). 32 SIA. (2019). GSR table.

85 FOOTNOTES

33 South China Morning Post. Li Tao. (2018). How China’s ‘Big Fund’ is helping the country catch up in the global semiconductor race. & US International Trade Commission Journal of International Commerce and Economics. John VerWey. (2019). Chinese Semiconductor Industrial Policy: Past and Present. 34 US Department of Commerce. (2016). Top Markets Report Semiconductors and Semiconductor Manufacturing Equipment Country Case Study, page 2 35 Market Realist. Puja Tayal. (2019). China Accelerates Its Semiconductor Self-Sufficiency Efforts. 36 Stratfor. (2019). As the US-China Tech war Rages on, the Electronics Industry Braces for Impact 37 CKGSB Knowledge. (2018). Betting All the Chips: China Seeks to Build a World-Class Semiconductor Industry. 38 IC Insights, Electronic Design 39 PWC, China’s Impact on the Semiconductor Industry: 2016 Update, P.20 40 Nikkei Asian Review. Shumei Yamada. (2019). Huawei closes technology gap with Apple on chip design. 41 Nikkei Asian Review. Shumei Yamada. (2019). Huawei closes technology gap with Apple on chip design. 42 Techspot, October 21, 2019, “TSMC will up Capital Expenditure by $4B to Meet Raising Demand for 7 nm and 5 nm chips 43 Semiconductor Engineering, Mark Lapedus, “China’s Foundry Biz Takes a Big Leap Forward”, January 28, 2019, P 1 44 However, no timeline has been provided. 45 https://semiengineering.com/chinas-foundry-biz-takes-big leap/ Page 5 * this project is currently on hold. 46 https://semiengineering.com/chinas-foundry-biz-takes-big leap/ Page 5 47 http://www.taipeitimes.com/News/biz/archives/2018/08/21/2003698874 48 https://semiengineering.com/chinas-foundry-biz-takes-big leap/ 49 Company Filing, IC Insights (2018), https://asia.nikkei.com/Business/China-tech/ Chinese-companies-rush-to-make-own-chips-as-trade-war-bites 50 Asia Watch. (2019). Chinese memory chip production reaches 5% of world total. 51 Electronics Weekly. David Manners. (2019). China to run 4% of world’s memory wafers in 2020. 52 Nikkei Asian Review. Cheng Ting-Fang and Lauly Li. (2019). China memory chip output zooms from zero to 5% of world total. 53 Stella Chemifa. (2019). Financial Results for 2Q of FYE 3/2019. 54 OECD (2019 12-12), Measuring distortions in international markets: The Semiconductor Value Chain, OECD Trade Policy Papers, No. 234 55 US Chamber of Commerce. (2017). Made in China 2025: Global Ambitions Built on Local Protections. 56 ABC net. (2018). Made in China 2025: Beijing’s Manufacturing Blueprint and Why the World is Concerned. 57 Chart, McKinsey analysis, 2018 58 https://en.wikipedia.org/wiki/Belt_and_Road_Initiative 59 McKinsey Analysis, 2018 60 Technode. (2019). China’s ‘Big Fund’ raises RMB 200 billion to fuel chip industry. 61 US International Trade Commission, Journal of International Commerce and Economics, Verwey, ohn, July 2019, 13 62 SIA,org, 2019 63 Crunchbase. (2019). Tsinghua Holdings Capital. 64 OECD, FDI Regulatory Restrictiveness Index, May 16, 2018

86 FOOTNOTES

65 US Trade Representative. (2018). Findings of the Investigation into China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation Under Section 301 of the Trade Act of 1974. 66 US-China Economic and Security Review Commission. Sean O’Connor. (2019). How Chinese Companies Facilitate Technology Transfer from the United States. 67 US-China Economic and Security Review Commission. Sean O’Connor. (2019). How Chinese Companies Facilitate Technology Transfer from the United States. 68 Enright, Michael. (2019). Developing China: The Remarkable Impact of Foreign Direct Investment, Page 33. 69 US International Trade Commission Journal of International Commerce and Economics. John VerWey. (2019). Chinese Semiconductor Industrial Policy: Past and Present. 70 Source: Bart van Hezewijk, Holland Innovation Network China 71 Ned Davies Research, 2018 72 Business Insider. Lisa Eadicicco. (2019). A California-based chip company just took a $2 billion hit following Trump’s Huawei ban. 73 Ned Davies Research, 2018 74 US International Trade Commission Journal of International Commerce and Economics. John VerWey. (2019). Chinese Semiconductor Industrial Policy: Past and Present. 75 US Trade Representative. (2018). Findings of the Investigation into China’s Acts, Policies, and Practices Re lated to Technology Transfer, Intellectual Property, and Innovation Under Section 301 of the Trade Act of 1974. 76 POLITICO. Cory Bennet and Bryan Bender. (2018). How China acquires ‘the crown jewels’ of US technology. 77 POLITICO. Cory Bennet and Bryan Bender. (2018). How China acquires ‘the crown jewels’ of US technology. 78 POLITICO. Cory Bennet and Bryan Bender. (2018). How China acquires ‘the crown jewels’ of US technology. 79 Reuters, “Pompeo Says China’s Trade Policies Predatory”, June 19, 2018 80 Covington. (2019). Export Control Reform Act Is Finalized in Congress. 81 Industry and Security Bureau. (2018). Review of Controls for Certain Emerging Technologies. 82 US Department of Commerce. (2019). Commerce Control List (CCL). 83 Author’s compilation, 2019 84 Forbes. Alex Capri. (2018). How A Growing US-China Rivalry is Reshaping the Global Tech Landscape. 85 Wassenaar. (2019). Website. 86 jqknews.com. (2019). Delayed delivery to SMIC due to US pressure? ASML response of photolithography giant. 87 Forbes, Capri, Alex, How a Growing US- China Rivalry is Reshaping the Global Tech Landscape, Dec. 9, 2018 88 Author’s diagram 89 Author’s compilation, From BIS Designated Entity Lists. 90 US Department of the Treasury. (2018). Title XVII—Review of Foreign Investment and Export Controls. 91 Committee on Foreign Investment in the United States. (2019). Annual report to the Congress. 92 Congressional Research Service. (2019). The Committee on Foreign Investment in the United States (CFIUS). 93 Foster Garvey. Jeffrey Li, Paul Hoff, Jingjie Zhu. (2018). CFIUS’s Concerns with Chinese Investments and Acquisitions in the US. 94 Reuters, Trump Bars Chinese -backed Firm from Buying US Chip Maker, September 13, 2017

87 FOOTNOTES

95 Congressional Research Service. (2019). The Committee on Foreign Investment in the United States (CFIUS). 96 Bloomberg. Jonathan Stearns. (2018). EU Screening of Foreign Investment Approved by Negotiators. 97 Bloomberg. Jonathan Stearns. (2018). EU Screening of Foreign Investment Approved by Negotiators. 98 Bloomberg. Jonathan Stearns. (2018). EU Screening of Foreign Investment Approved by Negotiators. 99 Note that the application of arbitrary discounts or non-arm’s length pricing in the calculation would be unacceptable and would risk violating the de minimis principle. 100 Cybereason. Fred O’Conner. (2018). China increases attacks against US companies as trade war looms. 101 Reuters. Stephen Nellis, Alexandra Alper. (2019). US chipmakers quietly lobby to ease Huawei ban. 102 South China Morning Post. Jodi Xu Klein. (2018). US lawmakers agree to pull back from ZTE ban, in victory for Donald Trump. 103 Federal Register. (2016). Notice of Opportunity to Comment on Proposed Denial of Petitions for Rulemaking to Change the RFS Point of Obligation. 104 Federal Register. (2000). Federal Register: Volume 65, Issues 121-124. 105 Office of Foreign Assets Control. Sanctions List Search. 106 Financial Times. (2019). US pushes to fund western rivals to Huawei. 107 Silk Road Briefing. (2019). Trump Targets Belt and Road Initiative With US$60 Billion International Finance Development Corporation. 108 Financial Times. (2019). US pushes to fund western rivals to Huawei. 109 Financial Times. (2019) EU urges alliance with US to counter Chinese tech dominance. 110 Bloomberg. David Fickling. (2019). Alstom and Siemens Show How Not to Deal with China. 111 US International Trade Commission Journal of International Commerce and Economics. John VerWey. (2019). Chinese Semiconductor Industrial Policy: Past and Present. 112 Mays, Rapid Advance, 2013, Cited from VerWey, July 2019, above. 113 Li, Development of the Chinese Semiconductor Industry, 2011 114 US International Trade Commission Journal of International Commerce and Economics. John VerWey. (2019). Chinese Semiconductor Industrial Policy: Past and Present. 115 Bloomberg. Gabriel Wildau. (2019). China’s Industrial Policies Work. So Copy Them. 116 Council on Foreign Relations. Adam Segal. (2019). Keeping Our Edge. Overview of the Innovation and National Security Task Force Report. 117 Quora, https://www.quora.com/Huawei-assigns-10-000-engineers-to-work-across-3- shifts-a-day-in-order-to-minimize-impact-from-US-restrictions-It-makes-sense-they-can- write-more-lines-of-SW-code-but-how-do-they-get-around-a-lack-of-critical 118 US News. (2019). Originally from Associated Press. Huawei Giving Employees Bonus for Coping with US Sanctions. 119 Information Technology & Innovation Foundation. Robert D. Atkinson and Caleb Foote. (2019). US Funding for University Research Continues to Slide. 120 Information Technology & Innovation Foundation. Robert D. Atkinson and Caleb Foote. (2019). US Funding for University Research Continues to Slide. 121 SIA,org, 2019 122 EETimes. Rick Merritt. (2018). Moore’s Law, China vs. Team USA. 123 EETimes. Rick Merritt. (2018). Moore’s Law, China vs. Team USA. 124 Wall Street Journal. Kate O’Keeffe and Jeremy Page. (2019). China Taps Its Private Sector to Boost Its Military, Raising Alarms. 125 Semiconductor Industry Association. (2016). Beyond Borders: The Global Semiconductor Value Chain – How an Interconnected Industry Promotes Innovation and Growth. 126 Financial Times. (2019). Trade war forces Chinese chipmaker Fujian Jinhua to halt output.

88 FOOTNOTES

127 Financial Times. (2018). Chinese surveillance group faces crippling US ban. 128 Nikkei Asian Review. Cheng Ting-Fang and Lauly Li. (2019). Sources: Fearing spies, Huawei redeploys US-linked executives. 129 Nikkei Asian Review. Cheng Ting-Fang and Lauly Li. (2019). Sources: Fearing spies, Huawei redeploys US-linked executives. 130 Brown University. Foreign Universities Sanctioned by the Commerce Department. 131 Los Angeles Times. Don Lee. (2019). Major US research universities are cutting ties with Chinese telecom giant Huawei. 132 Arms Control Association. Daryl Kimball. (2017). The Wassenaar Arrangement at a Glance. 133 Nikkei Asian Review. Rei Nakafuji. (2019). Quarter of Japanese companies ready to reduce China footprint. 134 Nikkei Asian Review. Shunsuke Tabeta. (2019). Japan chip industry heavyweight joins China’s Unigroup. 135 South China Morning Post. (2019). Originally published in Reuters. Samsung Electronics braces for profit drop as China slowdown chips away at demand. 136 Gsmarena. (2019). Samsung closes its last smartphone factory in China. 137 TSMC. Company Info. 138 Bloomberg. Tim Culpan. (2019). This Star Chipmaker Really Doesn’t Want to Pick Sides. 139 Wikipedia. Taiwan Relations Act. 140 The New York Times. Edward Wong. (2019). Trump Administration Approves f-16 Fighter Jet Sales to Taiwan.

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