China's Tsinghua Unigroup Ltd. announced its plans to make a historic $23 billion offer for Boise, Idaho-based chipmaker Micron Technology Inc., which--if approved--would be the largest takeover of any foreign firm by a Chinese company. It's small change, though, compared to the $161 billion the Chinese Government has budgeted to spend on the chip industry over the next decade, according to McKinsey & Co., and the acquisition deal would give China highly desired technology to build memory chips for smartphones and computers.
In 2014, China spent more on importing chips than importing oil, according to a report of Xinhua News Agency, investing more than $231 billion. Helping domestic manufacturers to gain the technology to build smartphones is essential to maintaining the country's overall economic development and global competitiveness. China wants to be known for its hi-tech manufacturing, much as Japanese electronics brands came to dominate the global market in the 1990s.
Hot or Not?
By looking for a juicy acquisition of a struggling yet promising U.S. tech company, however, China is entering a world of strict scrutiny, amidst a market not used to such moves. Is the juice worth the squeeze for Unigroup?
If history is our guide, a deal seems highly unlikely between Unigroup and Micron. The United States has strict rules for foreign capital in its industries, especially from Chinese investors, market analysts told Bloomberg News. Micron is the world's fifth largest chipmaker by revenue and would give China instant entry to compete with global tech giants like Samsung, Toshiba and SK Hynix. Though Micron's profits have waned in the past year, the company is still seen as an important player in the domestic tech industry.
It's up to the Committee on Foreign Investment in the United States (CFIUS) to decide, an inter-agency task force that has the power to stop mergers that might endanger national security.
"It would be very challenging," Stewart Baker, a CFIUS expert with Steptoe & Johnson LLP told Reuters. "I won't say it's impossible."
The committee has already expressed concerns about Chinese government-backed tech firms investing in U.S. industries, especially as the use of "backdoors" becomes more common--encrypted access points that allow easy surveillance of a system's users. While Washington has decried Beijing's moves to force tech firms to install backdoors and share the encryption keys with the government, the United States has also been accused of cyber snooping. Documents leaked by former NSA contractor Edward Snowden revealed that the National Security Agency was building backdoors into Huawei Technologies equipment to monitor communications. This is exactly what Congress had accused the Chinese Government of doing on equipment in the United States.
Still, in the eyes of CFIUS, if smart chips made by a Chinese government-backed manufacturer had these backdoors, "What mischief could you do?" pondered CFIUS expert Paul Marquardt of Cleary Gottlieb.
"This [deal] seems highly unlikely, just given the technology that's involved. This is a massive deal, really important technology and quite frankly, it's the Chinese," Reed Smith partner Leigh Hansson, head of the International Trade & National Security practice, told Reuters.
CFIUS has blocked plenty of U.S.-China tech deals, requiring Chinese networking company Huawei to divest 3Leaf Systems in 2011 and blocking its purchase of 3Com Corp. stock in 2008 over concerns between Huawei's founder and his ties to China's military. The U.S. Government requires any government agencies or "highly regulated" industries to have "end-to-end control" of their technology. Therefore Micron--the last major U.S. maker of memory and storage chips used in PCs, workstations, smartphones, tablets and cameras--could lose its contracts with such U.S. agencies if it comes under foreign ownership. Micron makes chip components that are used by military, defense, law enforcement, government, corporate and consumer agencies.
Tech may be one of the last areas of cooperation between Chinese and U.S. companies. It's an area that is still very sensitive to U.S. lawmakers. They consider an acquisition of Micron a matter of national security as the chip manufacturer claims to have the broadest memory solutions portfolio in the semiconductor industry and holds more than 20,000 patents.
Unigroup already has several links to major U.S. companies, however. The tech firm acquired a controlling stake in Hewlett-Packard's China networking equipment unit in May and tech giant Intel announced last year it would buy a 20-percent stake in Unigroup for $1.5 billion.
The window opens
The proposal also comes on the heels of new research pointing out that Chinese investment into U.S. companies has had a positive impact on the farthest reaches of small-town America. Over the past 15 years, Chinese firms have spent $46 billion on outbound direct investment (ODI) into the United States, 90 percent of which was made in the past five years. More than 80,000 Americans now work for Chinese-affiliated companies, according to a report--New Neighbors: Chinese Investment in the U.S. by Congressional District--commissioned by the National Committee on United States-China Relations.
Though 78 percent of U.S. congressional districts have a Chinese ODI project, public and political sentiment continues to be suspicious of Chinese investment. According to a 2012 Gallup-China Daily USA Poll, only 23 percent of respondents agreed that Chinese investment into the United States creates growth and jobs, while 32 percent did not agree and 45 percent said they didn't know or had no opinion.
The jobs being created are typically blue-collar manufacturing jobs, but now we are seeing more tech and R&D jobs. Chinese companies are increasingly ready and able to pay market prices for technology assets and spend hundreds of millions of dollars funding R&D at U.S. operations and employing America's best and brightest.
A report published by the Asia Society and Rhodium Group showed that Chinese investment is increasingly targeting U.S. hi-tech sectors. More than $6 billion was invested in the first quarter of 2014 alone, in such fields as automotive, information technology, machinery, aviation and medical devices. Chinese investments have created or sustained more than 25,000 U.S. jobs, according to the report entitled High Tech: The Next Wave of Chinese Investment in America.
Last year saw one of the biggest tech deals between China and the United States ever, with Chinese hardware manufacturer Lenovo snapping up Motorola in January 2014. Motorola went from losses of $384 million in the last quarter of 2013 to profitable revenues of $1.9 billion. Lenovo is now gearing up to launch a new Motorola smartphone this year and has climbed to third place in the global smartphone market with 76 million devices sold in the past year.
Are Unigroup's aspirations for Micron just a "fantasy" as analysts claim? Perhaps, but the trend toward increased M&A activity in the tech market is clear. Unigroup won't be the last company to come knocking on the door of U.S. tech manufacturers needing an infusion of fresh investment.
"This ought to be the most positive new trend in the bilateral economic relationship in several decades," said Daniel Rosen, co-founder of the Rhodium Group during the release of the report. "Unfortunately there have been misapprehensions on both sides that took a really positive story and turned it into an anxious story, a fraught one."
Despite fears that Chinese companies will "steal" patents and intellectual property and shut down U.S. factories in favor of cheaper labor back home, experts say investors usually take a localized approach.
"In most of these cases where Chinese companies come in and acquire a U.S. company, they've actually increased local staff post-acquisition," said Thilo Hanemann, research director at the Rhodium Group. "That's exactly why they come here, because there's a lack of talented staff back in China and they're trying to actively tap the talent here in the United States."
While some U.S. regulators assume the way to maintain America's competitiveness is to control foreign investment at the border, Rosen said the opposite approach is key.
"Nothing could be further from the truth," Rosen said. "In fact, America's long-term competitiveness depends on letting those foreign investors into our economy."
The primary value proposition for most Chinese investors is not a quick grab of patents or other removable physical assets but intangible and non-removable assets such as the skills and know-how of staff, management experience, brands, and proximity to local customers, according to the report.
The key for America's long-term competitiveness is to remain an attractive destination for international investors--in all fields, including tech. An environment governed by fair rules, legal protections, a bright and enterprising workforce, support for R&D, a comfortable middle class and a thriving consumer market will do more to advance U.S. interests than hyped-up fears over a Chinese takeover.
The author is a contributing writer to Beijing Review, living in New York City
Copyedited by Kylee McIntyre
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