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Comms chips

Obama's Tech Advisors Craft Response to China's Semiconductor Ambitions

A panel of President Obama's top science policy advisors say if the US wants to continue to have a competitive semiconductor industry, it is going to have to "push back" against China's semiconductor ambitions while improving the business environment for US semiconductor companies and "helping to catalyze transformative semiconductor innovation over the next decade."

These experts suggest setting up a formal technical advisory committee (TAC) populated by semiconductor industry executives with the Department of Commerce to keep up with the threat.

The President's Council of Advisors on Science and Technology (PCAST) on Friday published its "Report to the President: Ensuring Long-Term U.S. Leadership in Semiconductors." The report is in large part a response to China's 12th Five Year Plan for the Semiconductor Industry. Part of the plan is to spend up to $150 billion to buy into the industry.

The PCAST found that China's industrial policies "are distorting markets in ways that undermine innovation, subtract from U.S. market share, and put U.S. national security at risk."

Among China's market-distorting practices, the PCAST says, is providing subsidies. These include "capital subsidies that encourage foreign companies to locate facilities in China as well as subsidized capital to domestic companies and investment firms to use in the acquisition of foreign companies and technologies."

This can benefit consumers in that it can lead to reduced costs and prices, but the panel contends that long-term subsidization of this sort tends to reduce innovation. Selling below cost can also threaten competitors.

The other problem with China's policies and practices, the PCAST says, is that they tend to be zero-sum, meaning any benefit to Chinese companies will come at a cost to rivals. These include:

  • Forcing or encouraging domestic customers to buy only from Chinese semiconductor suppliers
  • Forcing transfer of technology in exchange for access to the Chinese market
  • Theft of intellectual property
  • Collusion

The US must work with allies to negotiate with the Chinese to minimize these market distortions, the PCAST recommended. The US and its allies must also "coordinate and strengthen inward investment security and export controls, and responding firmly and consistently to Chinese violations of international agreements."

The PCAST notes that Taiwan has instituted specific policies to resist Chinese investment in Taiwanese semiconductor technology, while South Korea has policies to restrict flow of critical semiconductor intellectual property to China.

The panel recommends against actively impeding China's modernization activities. That includes not reflexively blocking every attempt to buy US companies or their technology. "The U.S. government will need to identify areas in which the diffusion of particular semiconductor technologies, or control of particular companies, poses intolerable national-security risks that cannot be mitigated through steps short of stopping their acquisition and, therefore, should be stopped to the extent possible," according to the report.

Chip companies that Chinese investors have bid on so far include Anadigics Inc. (Nasdaq: ANAD), Atmel Corp. (Nasdaq: ATML), Lattice Semiconductor Corp. (Nasdaq: LSCC), Marvell Technology Group Ltd. (Nasdaq: MRVL), Micron Technology Inc. (Nasdaq: MU) and PMC-Sierra Inc. (Nasdaq: PMCS), among others. Chinese investors have typically been rebuffed, with many of the targeted companies stating their expectations of regulatory opposition to sales to Chinese interests. The pending sale of Lattice would be one of China's plans biggest acquisition plan successes thus far. (See Lattice Purchased by Somebody for $1.3B.)


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Ultimately the only way to remain ahead of China is to remain ahead, the PCAST says, by continuing to innovate. "Our core finding is this: the United States will only succeed in mitigating the dangers posed by Chinese industrial policy if it innovates faster. Policy can, in principle, slow the diffusion of technology, but it cannot stop the spread. And, as U.S. innovators face technological headwinds, other countries’ quest to catch up will only become easier. The only way to retain leadership is to outpace the competition."

To that end it recommends several measures, including funding basic research and development, reforming corporate tax laws and a series of “moonshots” such as developing game-changing biodefense systems and cutting-edge medical technologies.

The PCAST notes that the semiconductor business is important not just economically but that cutting-edge semiconductor technology is critical for US military strength and "and the pervasiveness of semiconductors makes their integrity important to mitigating cybersecurity risk."

In its report, the advisory committee notes that China has no tier 1 semiconductor manufacturing equipment vendors (and a single tier 2 supplier -- AMEC).

The context for this observation is Japan. In the 1980s, Japan made a concerted and quite successful effort to develop a domestic market for semiconductor production equipment. With that expertise, it was a relatively easy jump to semiconductor manufacturing.

The implication is that China is likely to target not only chip companies and chip technology, but also semiconductor production equipment and associated tech.

The report notes that IC companies with headquarters in the US represent half of global semiconductor sales. Meanwhile, the trend for semiconductor companies is to go fabless, and as of 2015, only 13% of all ICs are built in the US, down from 42% in 1980.

More and more of those fabs are being built in China -- the PCAST notes there are almost 400, though none of them are capable of building anything close to cutting-edge devices.

More on China's 12th Five-Year Plan
China has identified semiconductors as a "strategic, basic and leading industry for promoting the development of national economy and society," according to a translation of the plan provided by the Semiconductor Industry Association and the United States Information Technology Office.

The 12th Plan includes national coordination of expenditures of up to $150 billion of private capital over ten years to buy semiconductor-related companies and technology. The 12th Plan covers the years 2016 through 2020, but assumes the same policies will be pursued through 2025 and beyond.

One of China's goals is to be able to supply 70% of its internal needs (it currently supplies roughly 9% to 10%). Another is to be at a world-class level in all aspects of the semiconductor business by 2030.

— Brian Santo, Senior Editor, Components, T&M, Light Reading

brooks7 1/19/2017 | 11:32:59 AM
Re: Reducing innovation?  

@ky4ym,

Imagine that all semiconductors are made in China.  Including those used in US military equipment.  Now say that China wants to blackmail the US and cuts off all semiconductor shipments to the US military so that no new or replacment equipment can be manufactured.  That is the ad absurdum case and is used to illustrate a point.

Now reverse the situation and imagine you are China and want to ensure that communications equipment (Huawei) and semiconductors (TBD) are available to you no matter what happens in conflict with the Western world.  The worst case scenario for this lies in North Korea - assuming they can actually make an ICBM work.

seven

 
kq4ym 1/19/2017 | 11:16:54 AM
Re: Reducing innovation? Noting that Chinese industrial policies may "subtract from U.S. market share, and put U.S. national security at risk," I can see the market share changing, but not so sure that the security risk is quite so. If we place "national security" as a point, it seems to me that may be more hype and scare than a reality. Sure, there's some danger that can be found as other nations get a leap ahead of the U.S., but not sure we need to worry so much about being number one in everything?
inkstainedwretch 1/12/2017 | 1:33:09 PM
Re: Reducing innovation? There is a large body of research on the subject, and I'm not going to pretend I've read it, but if you do a quick scan of summary results (gotta love Google), there is evidence that subsidies to a specific company can sometimes support R&D at that company -- although some dispute that that's true for every company -- some cite evidence that some companies inflate the prospects for R&D just to get R&D subsidies. 

Meanwhile, the majority of most frequently-cited research on the market-wide effects of subsidization (that I saw) is skeptical of subsidization, suggesting that it does reduce innovation.

Again, I haven't read the specifica case studies, but from a philosophical standpoint it's axiomatic that it's hard to prove a negative.

-- Brian Santo

 
Mitch Wagner 1/12/2017 | 12:58:18 PM
Re: Reducing innovation? Is there evidence to suggest subsidized industries are less innovative? Or is this simply an article of faith?

 
brooks7 1/11/2017 | 12:30:47 AM
Re: Reducing innovation? "It's worse when the subsidies are so great that the company being subsidized can sell goods & services below cost.* They end up stealing market share, crippling or even killing competitors that would prefer to compete on functionality/features"

So, suppose you decided that this was a critical industry....it might be interesting to drive every single other competitor out of key markets this way.  So, that everybody must buy their technology from you.  Then when there are startups, you just give away their products and eliminate them regardless of their technology.

seven

 
inkstainedwretch 1/10/2017 | 5:24:47 PM
Re: Reducing innovation? I didn't see an explicit explanation in the report. Part of the philosophical argument however goes like this: A company recieving subsidies has less incentive to innovate to compete -- with the subsidization it can compete more on price, less on functionality/features.

It's worse when the subsidies are so great that the company being subsidized can sell goods & services below cost.* They end up stealing market share, crippling or even killing competitors that would prefer to compete on functionality/features. So not only do the subsidized companies have less incentive to innovative, it might make it harder for other companies to continue to innovate, depending on the extent of the subsidization.

Without the subsidies, you get this virtuous circle -- innovation (which serves the market) can result in better (or at least consistent) profits, which can be plowed back into more innovation.

The counter to that is: If the market is only concerned with price, then it is indicating that it isn't interested in increased functionality/features. The response to that is those functions and features might be of benefit to consumers. You can go around and around on that... 

-- Brian Santo

* When you think about it, this is part of the network neutrality argument. Is it fair for a service provider to "subsidize" services on their own networks? You might not use the word subsidization in context, but for some that's just a semantic argument.
Mitch Wagner 1/10/2017 | 4:43:58 PM
Reducing innovation? How does government subsidy reduce innovation? Does the report say?
danielcawrey 1/8/2017 | 3:51:08 PM
Re: Wonderful information. One of the things China has done to be competitive in certain markets is provide low-cost solutions. It does this by subsidizing pricing. We've seen this in networking with Huawei and I think they will do this with M&A in the semiconductor industry. 

Can the likes of Intel compete with that?
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