China’s Chip Race

　　Chipmakers are becoming new favorites of overseas acquisitions by Chinese companies

　　Chinese companies are changing their interests from oil and gas resources into nail-size chips. As the global chip industry remains in the doldrums and China is issuing various favorable policies， Chinese chip industry is bracing significant opportunities for takeoff.

　　Trendsetters

　　Since 2014， Chinese firms have been buying more foreign integrated circuit (IC)， or chip， companies.

　　In May 2014， STATS ChipPAC Ltd.， a leading service provider of advanced semiconductor packaging design， assembly， test and distribution solutions headquartered in Singapore， disclosed that some companies were offering to buy but didn’t specify the names of the buyers. When disclosed later， the buyers turned out to be two Chinese firms， Jiangsu Changjiang Electronics Technology Co. Ltd. and Tianshui Huatian Technology Co.

　　In August， California-based OmniVision Technologies Inc.， an image censor chip supplier for iPhones， announced the receipt of a non-binding acquisition proposal worth of $1.67 billion from a Chinese consortium. The investment group was led by Beijing-based Hua Capital Management Ltd. and included Shanghai Pudong Science and Technology Investment Co. Ltd.

　　On December 23， Jiangsu Changjiang Electronics Technology Co. Ltd. announced it was entering into a co-investment agreement to form an investment consortium with Siltech Semiconductor (Shanghai) Co. Ltd. and National Integrated Circuit Industry Investment Fund Co. Ltd. in connection with the proposed acquisition of STATS ChipPAC Ltd.

　　A Bloomberg report on December 3， 2014 said Chinese companies spent almost $5 billion in five major chip-related takeovers in the past 18 months.

　　According to a report of Economic Information Daily， chips have been the most imported products by China for more than 10 years.

　　Serving as the “heart” of all electronic devices， chips are widely used in computers， consumer electronics， network communications and automobile electronics. According to a research by the International Monetary Fund， a semiconductor chip with production value of $1 translates into $10 in growth for the related information industry， and adds $100 to a country’s GDP.The chip industry is crucial to both stimulating economic growth and ensuring information security and national security.

　　Various countries and regions， including the United States， Europe， Japan， South Korea， Singapore and Taiwan， regard the chip industry as a major strategic one and invest heavily in the industry， said the Economic Information Daily report.

　　Policy support

　　A series of favorable policies issued by the State Council since 2014 have encouraged Chinese companies make overseas acquisitions.

　　On June 24， 2014， the State Council published a set of rules called the National Guidelines for the Development and Promotion of the Integrated Circuit Industry， proposing eight major measures， such as putting in place a special national industry investment fund， to stimulate the dynamism and creativity of IC companies and accelerate the pace of China’s IC industry to catch up with international leaders.

　　On October 14， the Ministry of Industry and Information Technology announced the establishment of a national IC industry investment fund worth 120 billion yuan ($20 billion).

　　Acquiring powerful overseas chipmakers seems to put the IC industry on the fast track. An anonymous vice president of a Shanghai-based chip firm told Economic Information Daily that mergers and acquisitions represent the general trend. For instance， after being merged， two IC industrial leaders in Taiwan--MediaTek and MStar Semiconductor--squeezed almost all the other companies out of the region. However， Chinese companies have frequently encountered “encirclement” by international giants with the strategy of patent.

　　“To be stronger， the best option for China’s chip industry is to acquire powerful foreign companies with patent technologies，” the anonymous executive said.

　　Gu Wenjun， chief semiconductor analyst with market research agency iSuppli， said the global chip industry is now lagging， with more than 100 chip factories worldwide being closed. But in East Asia， about 60 chip factories are in business. Robust market demand in Asia makes the region crucial to chipmakers. The global chip industry is shifting its focus to Asia， where China is the focus of the Asian market.

　　“In the past three decades， the industry has experienced several cyclical recessions， and each time of industrial restructuring has brought opportunities to Asia，” said Gu. “Japan， South Korea and China’s Taiwan have grasped such opportunities and contributed to the takeoff of chip industry， and now， China is facing the same opportunities.”

　　Wang Yanhui， Secretary General of Mobile China Alliance， said in recent years， there are frequent threats to national security， such as the Prism spying scandal and the leak of 2 million emails and documents from Britain’s offshore financial industry. China is now accelerating its production of information technologies， and chips are the cornerstone of the country’s information security. In the government’s future procurement， a large amount of domestically produced chips will be purchased. This will increase the demand for China’s chip industry.

　　According to Wang， China’s top leadership has made the chip industry part of its national strategy， and vows to support its development. The Central Government has issued several policies， while various local governments are preparing supporting measures to nurture large makers of core competitiveness through industry investment funds and overseas acquisitions.

　　Multiple challenges

　　Despite huge potentials and bright prospects， China’s chip industry still faces severe challenges in taxes and suppression of international giants.

　　Li Liyou， CEO of China’s biggest chip designer Spreadtrum Communications， Inc.， told Economic Information Daily that domestic chip firms have to pay a 10-percent income tax and a 5-percent business tax， while their overseas rivals have much lower tax burdens. For instance， Taiwan’s MediaTek only pays a 2-percent tax， because according to Taiwan’s Statute for Upgrading Industry， IC companies can deduct income taxes with costs of research and development (R&D) as well as mergers and acquisitions.

　　Chipmakers on the Chinese mainland call for more tax cuts and other supporting measures. An anonymous president of a Guangzhou-based chip company suggested China follow practice of other countries， allowing chipmakers to deduct income taxes with R&D costs， or give tax rebates to domestic chipmakers. He also suggested the government not directly reduce the tax rate， but deduction of income taxes with R&D costs will encourage chip firms to make innovations.

　　It is more challenging for Chinese chipmakers， who are competing with international giants. In the Chinese market， international giants and domestic companies have the same target clients， and foreign firms， with their monopoly-like position in the market， often discourage Chinese clients from buying Chinese products.

　　Li cites an example that after his company began negotiating a contract with Chinese electronics company TCL. Senior executives of Taiwan’s MediaTek soon required TCL to stop the cooperation with Spreadtrum， threatening that it would stop supplying its products to TCL and offering an extra sum of marketing allowance as incentive for keeping their business.

　　Hostile takeover is also a challenge. In recent years， many foreign firms have acquired emerging Chinese chipmakers with independently developed technologies. For example， American global semiconductor company Qualcomm has been attempting to acquire Chinese industrial leader Spreadtrum.

　　Wang said some foreign companies are also participating in China’s industry investment funds， such as IC investment funds， established by governments of different levels. According to Wang， once overseas rivals successfully enter the government IC investment funds， they may use the funds to acquire emerging Chinese chip firms to consolidate their monopoly positions in the market. Wang warned that the government must watch out for such possibilities.

　　By Wang Jun