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Trump’s China deal creates collateral damage for tech firms

Trump’s China deal creates collateral damage for tech firms
Business
WASHINGTON — Among the corporate titans recognized last week by US President Donald Trump during a White House signing ceremony for his China trade deal was Sanjay Mehrotra, the chief executive of Micron Technology, whose Idaho semiconductor company is at the heart of Trump’s trade war.

China’s treatment of American companies like Micron fed Trump’s decision to unleash a punishing trade war with the world’s second-largest economy, a fight he said would halt Beijing’s use of unfair practices to undermine the United States. But that two-year conflagration may wind up being more damaging to American technology companies.

The initial trade deal announced last week should make operating in China easier for companies like Micron. The deal contains provisions meant to protect American technology and trade secrets and allow companies to challenge China on accusations of theft, including older cases like Micron’s that precede the agreement.

But Trump’s aggressive trade approach has also accelerated a technology arms race between the two countries, putting American companies like Micron at risk as the two nations try to decouple their economies. In an effort to reduce its reliance on American components, China has expedited efforts to produce its own semiconductors, driverless cars, artificial intelligence and other technologies. Those efforts, along with the Trump administration’s desire to restrict the sales of American tech products to China, could hurt the very companies Trump set out to protect.

“Let’s be clear, the trade war has been very bad for the semiconductor industry in several ways,” said Robert D. Atkinson, president of the Information Technology and Innovation Foundation, a think tank funded by the tech industry. “It’s like China woke up and said, ‘We’ve relied too much on the United States.’”

The trade deal does nothing to curtail China’s use of subsidies, industrial plans and state-owned companies, which have helped it build formidable industries in steel, wind turbines and solar panels. Those state-directed efforts, which put many American manufacturers out of business, are now being harnessed for high-tech industries.

The Trump administration is constructing its own walls around American technology, reducing access to the lucrative Chinese market out of security concerns. It is restricting exports of sensitive technologies, barring sales to certain Chinese companies and blocking Chinese entities from investing in the United States.

The administration is considering further restricting sales to Huawei, the Chinese telecom company that relies on components from Micron and other American suppliers. And the China trade deal leaves tariffs on more than $360 billion in Chinese goods in place as Trump tries to push American companies to bring manufacturing back home.

Semiconductor sales to China, which represent more than half the global chip demand, have fallen, and semiconductor stocks have been whipsawed by the trade war.

Trump and his supporters say that conflict is no longer avoidable, and that the president’s unconventional approach is necessary to take on a growing threat from China. Officials across the administration look with suspicion on Chinese industrial plans, including Made in China 2025, which called for $300 billion in financing and other support for 10 advanced industries, including semiconductors.

U.S. officials worry that gaining an advantage in semiconductors would give China both a commercial and military edge.

Chips, which serve as the tiny sensors, brains and memories of all high-tech devices, are crucial to next-generation telecom networks, supercomputers, artificial intelligence and driverless cars, as well as military ships, satellites and aircraft. They are also one of the United States’ largest exports, along with airplanes, oil and cars.

While China’s ability to make chips is still far behind the United States’, the Chinese government, its state-owned enterprises, and provincial and private equity funds have been pumping billions of dollars into the industry, particularly the kind of memory chips that Micron makes. In areas where Chinese companies cannot develop or buy technology, companies say, some will simply steal their intellectual property.

For the Trump administration, which was looking for a fight with China, Micron’s story proved a formative one. As officials prepared an investigation into Chinese intellectual property theft that would ultimately spiral into the trade war, Micron provided a “camera ready” case that fit everything the administration was looking for, one industry executive said.

In 2015, Micron was the target of a $23 billion takeover attempt by a Chinese state-owned company, but the overture was withdrawn over U.S. national security concerns. In 2016, another Chinese state-owned company, Fujian Jinhua Integrated Circuit, allegedly worked in concert with a Taiwanese company to steal the American company’s designs and market them as their own.

According to Taiwanese authorities, Fujian Jinhua used Micron’s proprietary designs to build an enormous $5.7 billion microchip factory in China. In 2018, the Department of Justice charged the Chinese company and others with stealing trade secrets from Micron, and the Commerce Department blacklisted it for national security concerns.

The same year, a Chinese court temporarily blocked Micron from selling some products in China, after Fujian Jinhua and another company accused Micron of patent infringement.

Through 2017 and 2018, Micron employees met repeatedly with administration officials, sometimes with the National Security Council and National Economic Council. The company’s case was discussed in internal planning meetings attended by Robert Lighthizer, the U.S. trade representative, and Peter Navarro, a top Trump trade adviser.

In July of last year, Trump met at the White House with Mehrotra of Micron, as well as the chiefs of Intel, Google and Broadcom, to discuss the trade clash with China and the administration’s policies toward Huawei.

Two months later, in an address to the United Nations, Trump described the Micron theft as a rationale for the trade war.

“To advance the Chinese government’s five-year economic plan, a company owned by the Chinese state allegedly stole Micron’s designs, valued at up to $8.7 billion,” the president said. “Soon, the Chinese company obtains patents for nearly an identical product, and Micron was banned from selling its own goods in China. But we are seeking justice.”

“For years, these abuses were tolerated, ignored or even encouraged,” Trump added. “But as far as America is concerned, those days are over.”

Chipmakers initially supported the Trump administration’s willingness to take on China. Companies had long grumbled about intellectual property theft and unfair treatment in the Chinese market, but they had little recourse: Going public about their troubles could spook investors and invite Chinese retaliation.

Then, in April 2018, the administration announced $50 billion in tariffs that would directly hit semiconductor companies by raising prices for imported equipment and materials. A chip finished in China would be subject to a 25-per-cent tariff, even if its components had been made in America.

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The tariffs caught the industry by surprise. The Semiconductor Industry Association, a trade group, pushed back, telling the U.S. trade representative in July 2018 that the tariffs would “undermine U.S. technological leadership, cost jobs, and adversely impact U.S. consumers of semiconductor products and the U.S. semiconductor producers.”

Some industry executives grew more nervous as Trump escalated his trade fight and the prospect of an economic rupture between the United States and China became more real. Chinese customers shifted their purchases to suppliers in South Korea, Taiwan and elsewhere.

Trump’s trade pact did ink some victories — it includes greater protections for companies like Micron, including preliminary injunctions and expanded legal recourse for theft of trade secrets. It also contains new promises from China to refrain from pressuring American businesses to transfer their technology to Chinese companies, and it allows American companies to sue individuals, including former employees and hackers.

Semiconductor companies said they would press the administration to make more gains in the next phase of negotiations, including subsidies, which Trump said he plans to address. Just getting China to acknowledge and agree to forgo unfair practices was progress, they said.

In a statement, Micron said it applauded the deal.

“We look forward to additional discussions between the countries on significant issues that are important to Micron and the semiconductor industry, such as intellectual property protection and subsidies,” said Jon Hoganson, Micron’s managing director of global government affairs.

But the fight has spilled over into more damaging areas. Last May, the Commerce Department placed Huawei, which makes handsets and telecom equipment, on a national security blacklist that bans it from buying some American products. Other Chinese technology companies were added to the list, and the government began planning which types of advanced technologies it would no longer allow companies to export overseas.

Micron had so far experienced limited effect from Trump’s tariffs since it does not ship the products it makes in China to the United States. But Huawei’s blacklisting was potentially devastating — 13 per cent of Micron’s microprocessor sales are to the Chinese company.

In its fourth-quarter earnings call with investors in September, Micron warned that the clash could damage its bottom line.

“We see ongoing uncertainty surrounding U.S.-China trade negotiations. If the Entity List restrictions against Huawei continue and we are unable to get licenses, we could see a worsening decline in our sales to Huawei over the coming quarters,” Mehrotra said. Micron’s stock sank 11 per cent after his remarks.

Micron, Intel and other companies with global operations initially found a way to keep selling to Huawei since the rule did not restrict products containing less than 25 per cent of certain types of American content. But the Commerce Department is considering lowering that threshold and expanding the number of goods subject to the ban, according to five people with knowledge of the plan.

Like other Chinese companies, Huawei has worked to curtail its dependence on the United States. By substituting parts from Japan and other countries, the company has recently produced handsets and telecom equipment that do not contain any American components.

Its internal semiconductor unit, HiSilicon, has also developed replacements for advanced chips that Huawei once bought from American companies. Huawei said its 2019 sales topped $120 billion, representing 18-per-cent growth over the year before — less than its initial target, but not by much.

American companies say they are sympathetic to the administration’s complaints about China. But they must compete globally, and they are not willing to forgo access to China, the hub of the global electronics supply chain and probably one of the world’s fastest growing markets for decades to come.

Jim McGregor, the chairman of Greater China for APCO Worldwide, said the trade war and other restrictions were already shaping investment decisions by American technology companies. When deciding where to put their money next, many companies have quietly been looking to invest outside the United States to secure access to China.
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