A big part of President Donald Trump's economic message during the campaign was his promise to get tough on China, which he singled out for drawing jobs from the U.S. with the lure of cheap workers and generous government subsidies and for erecting trade barriers that favor exports from that country over imports.
If he wants to fend off threats, he might send his White House staff searching for a Jan. 6 report issued by President Barack Obama's White House science officers. The web link to the report, which recommended steps U.S. officials can take to protect the U.S. semiconductor industry, no longer works, no doubt because of the new president's zeal to scrub all things Obama from the White House's communications outreach. A link to copy from The Deal, owned by The Street, is here.
But Trump would likely be receptive to the report's theme: that China's industrial policy designed to quash the U.S. lead in the global semiconductor market and place itself in that role is a threat to U.S. economic and national security and the U.S. should counteract those efforts.
Regulators' wariness of semiconductor sector acquisitions by buyers with Chinese ties already has killed many recent deals. But, typically, the challenges are targeted at only deals involving products sold to the military or that are critical to the U.S. telecommunications infrastructure. Fujian Grand Chip Investment Fund LP on Dec. 8 dropped its €670 million ($717.5 million) bid for German chipmaking equipment supplier Aixtron SE after President Obama said he would block the Chinese investment fund from acquiring the Aixtron's U.S assets. Lam Research Corp. (LRCX - Get Report) and KLA-Tencor Corp. (KLAC - Get Report) spiked their $10.6 billion merger in October due to an extended investigation by the Committee on Foreign Investment in the U.S. In January 2016, Royal Philips NV backed out of its $3.3 billion agreement to sell its Lumileds lighting components business to a Sino-U.S. consortium, citing opposition by Cfius. Others deals halted under U.S. government threat include Fairchild Semiconductor International Inc.'s (FCS) $2.46 billion takeover offer from China Resources Microelectronics and Hua Capital Management, China's Unisplendour Corp. Ltd planned investment in Western Digital Corp. (WDC - Get Report) , and Tokyo Electron Ltd.'s 2015 effort to acquire Applied Materials Inc. (AMAT - Get Report) for $9.4 billion.
It's not as if semiconductor deals involving Chinese buyers can't get done. In December 2015, GlobalWafers Co., Ltd. was cleared for its $683 million acquisition of SunEdison Semiconductor Limited (SEMI) , and three other semiconductor-related deals involving Chinese and other foreign buyers were approved in 2015: Globalfoundries Inc.'s acquisition of IBM Corp.'s (IBM - Get Report) microelectronics business, NXP Semiconductors N.V.'s (NXPI - Get Report) $1.8 billion sale of its RF Power unit to Jianguang Asset Management Co. Ltd. and Integrated Silicon Solution Inc.'s (ISSI) acquisition by Uphill Investment Co.
According to the report, economic threats should be added to the list of national security concerns that could result in an acquisition of U.S. assets by foreign buyers being blocked by Cfius, particularly if the buyer's home country (China) is violating international trade agreements. Under the Obama administration's plan, the U.S. would only expand the definition of national security threat to take much more widespread action blocking deals involving China when the negotiated rules have been violated. The report hinted that China's noncooperation on economic and trade issues would provide more proof of a national security threat. Trump's only real reservation about the plan might be to quibble with the some of the steps Obama's team recommended as being too plodding and requiring naive faith in China's willingness to negotiate and follow a set of rules governing such issues as each countries' import restrictions and use of government subsidies.
China has stated that it intends to have "advanced world-level" semiconductor capability in all segments of the industry by 2030. Its government has committed $150 billion over 10 years to subsidize investment and acquisition and also conditions access to its market on local production and technology transfer.
Coupled with these initiatives, China's gambit is timed to take advantage of the fading phenomenon of Moore's Law, the expectation that the semiconductor industry will double the number of transistors on a chip every 18 to 24 months. That pace is much harder to keep up today as industry R&D is spread across more numerous types of products. Because semiconductor technology is advancing more slowly, it is now easier for China to narrow the gap in its capabilities, according to the report.
Anne Salladin of Stroock & Stroock & Lavan LLP said the report could launch an important conversation within the Trump administration.
"Cfius is intended to deal with acquisitions on a transaction-by-transaction basis," she said. "This is an inexact tool for dealing with repeated purchases by a determined government like those we have seen over the past year," she said. While the CFIUS process is designed to prevent deals that could put a specific military or telecom technology in the hands of a hostile government, the statutory criteria it relies on to challenge a transaction were not designed to prevent a string of acquisitions that could supplant U.S. economic leadership bit by bit.
Trump, however, is unlikely to adopt the report without making major revisions, particularly to recommendations urging U.S. and Chinese officials to engage first in dialogue to agree in principle to measures that are reasonable for protecting national security. Under the Obama administration report, if China fails to adhere to these agreed-upon norms, one way that the U.S. could respond would be to allow China's policy to affect national security threat assessments of Chinese acquisitions. "On its face, it seems as if the report's goals would be aligned with President Trump's, but certain recommendations in the report are not necessarily a blueprint for action. These recommendations rely on norms agreed to by the two countries," Salladin said. "That process could take time to put in place and would not immediately apply higher scrutiny to deals."
Nevertheless, Trump would be wise to seek a formal framework to make clear that most inbound investment is still welcome. Otherwise, said Salladin, overseas investors may believe their efforts are better directed elsewhere.