SAN FRANCISCO—The White House on Friday (Jan. 6) made public a strongly worded report on the U.S. semiconductor industry and the threat posed to it by China’s aggressive ambition to become a global player in the chip space.
The report, made to U.S. President Barack Obama by the President’s Council of Advisors on Science & Technology (PCAST), argues that the U.S. semiconductor industry needs to innovate and “run faster” in order to counter the threat posed by Chinese policies that distort the market in its favor.
"The core finding of the report is this: only by continuing to innovate at the cutting edge with the United States be able to mitigate the threat posed by Chinese industrial policy and strengthen the U.S. economy," wrote John Holdren and Eric Lander, PCAST co-chairs, in a letter to Obama that accompanies the report.
The report broadly recommends a strategy built on three pillars: push back against "innovation-inhibiting" Chinese industrial policy, improve the business environment for U.S. chip companies and "help catalyze transformative semiconductor innovation over the next decade." This final pillar entails the funding of "moonshots" such as the development of new bio-defense systems and medical technologies that would have their own merit but would also result in advancements in semiconductor technology that would have broader applicability.
The report was widely expected after Obama in October convened a group of semiconductor veterans to study the top issues affecting the chip industry in the U.S. Earlier this week, the Wall Street Journal reported that the report could recommend strategies that curb Chinese investment in U.S. semiconductor and related companies.
The report does not contain specific recommendations for limiting Chinese investment in the U.S. chip industry. However, it does recommend using the tools of national security such as the Committee on Foreign Investment in the U.S. (CIFUS) and working with allies to deny China access to the capabilities required to undermine cutting-edge and defense critical U.S.-based companies through policies deemed anti-competitive.
"We found that Chinese policies are distorting markets in ways that undermine innovation, subtract from U.S. market share and put U.S. national security at risk," the report reads.
"This report hits the mark very correctly in identifying the two big challenges facing our industry," said John Neuffer, president of the Semiconductor Industry Association (SIA) trade group, in an interview with EE Times. Neuffer went on to describe those two issues as the increasing cost/complexity of innovation and the entry of China into the global semiconductor market.
John Neuffer, SIA
"We are very supportive of China building its own semiconductor industry, but we just want to make sure they do it in a way that's market based," Neuffer said. "Some of the things that China has been rolling out to support its semiconductor industry don't look particularly market based and, frankly, give some people in the industry significant heart burn."
China has made no secret of its ambition to build a large domestic semiconductor to support its own massive internal market and become a global player in the space. China’s central government last year announced plans to pump $161 billion into developing a domestic semiconductor industry over the next years.
Over the past two years, this ambition has taken shape also in the form of direct acquisitions of U.S. or Western chip companies by financial firms with ties to the Chinese government. The U.S. has grown increasingly wary of this, and several deals have been struck down or abandoned due to objections raised by CIFUS, an inter-agency government committee that is authorized to review and reject any transaction or investment that could result in the control of any U.S. businesses or assets by a foreign entity.
Last month, Obama took the extraordinary step of blocking the acquisition of the U.S. portion of a German semiconductor equipment supplier by a Chinese investment firm partially owned by the Chinese government.
Rather than respond to the threat by trying to slow China’s growth in the semiconductor market, the report recommends that the U.S. should "win the race by running faster" through sustained innovation. The report further argues that the U.S. should not reflexively oppose China’s ascent in the semiconductor market but should oppose Chinese actions that violate rules of open trade and investment.
"These recommendations are all about helping the industry pedal faster," Neuffer said.
The report argues that Chinese competition could, in principle, benefit both consumers and producers of semiconductors. “But Chinese industrial policies in this sector, as they are unfolding in practice, pose real threats to semiconductor innovation and U.S. national security,” it states.
The report is critical of subsidies provided by China to prop up its domestic firms and encourage foreign companies to locate facilities in China, arguing that in the long run these subsidies hinder innovation.
The report also describes “zero-sum” tactics encouraged by China’s industrial policies, including collusion, theft of intellectual property, forcing or encouraging Chinese companies to buy only from domestic chip suppliers and forcing the transfer of technology in exchange for access to the Chinese market.
Other recommendations outlined in the report include:
- The creation of a standing committee of semiconductor industry experts to advise the government on semiconductor policy.
- Boosting the transparency of global advanced technology policy through organizations like the World Trade Organization (WTO) and the U.S.-China Joint Commission on Commerce and Trade.
- Reshaping U.S. national security mechanisms to deter and respond forefully to China’s industrial policies, including closer examination of whether Chinese acquisitions would undermine defense-critical U.S.-based companies.
- Working with U.S. allies to strengthen export controls and inward investment security
- Policies that encourage attracting talent from all over the world to the U.S.
- Increased government investment in R&D.
- Corporate tax reform.
- Cutting red tape pertaining to permitting of new manufacturing and research facilities.
The working group that developed the report was chaired by Holdren, the President’s top science and technology advisor, as well as Paul Otellini, former Intel Corp. president and CEO. It included 10 other semiconudcotr industry veterans, including:
- Rich Beyer, former chairman and CEO of Freescale Semiconductor
- Wes Bush, CEO of Northrop Grumman
- John Hennessy, President Emeritus of Stanford
- Paul Jacobs, Executive Chairman of Qualcomm
- Ajit Manocha, former CEO of GlobalFoundries
- Craig Mundie, a former senior advisor to Microsoft
- Mike Splinter, former CEO of Applied Materials
- Laura Tyson, a professor at UC Berkeley and NEC Director
The full report is available here.
—Dylan McGrath covers the semiconductor industry and business news for EE Times.