Sinister edge to China’s technology ambitions

June 28, 2018

Workers on a tech production line in China.

The dangerous rise in stock market risk aversion when combined with a hypervalued US shares, which I highlighted earlier in the week, is gathering pace on Wall Street as bond yields fall and the US dollar rises.

Accordingly it is time to step back and look more closely at a key cause of the rise in risk aversion----the prospect of a trade war with China.

I am indebted to Paul Mozur of the New York Times and the Seattle Times for providing much of the material that explains why President Donald Trump is ignoring Wall Street and taking a tough stance with China.

We may not agree with the US President, but it’s important to bypass the anti-Trumpism that dominates sections of the media and look at what is actually motivating the President. And, as you will see, the events also explains some of Australia’s actions.

Back in the 1990s I had long conversations with Chinese officials who explained that they were planning to shift large sections of American manufacturing to China. At the time the program was well under way and they were pleasantly surprised that America was turning a blind eye.

The US employment wastelands that were created played a big role in the election of Trump.

Fast forward to 2018 and it’s true that the US will bring back some of its manufacturing, but there is a whole new game in town.

America’s strength is not manufacturing but widely defined computer technology.

China has ambitious plans to compete head to head with the US. A plan known as Made in China 2025 calls for the country to become a global competitor in an array of industries, including semiconductors, robotics and electric vehicles. China is spending heavily to both innovate and buy up technology from abroad.

But as we see with the case of Idaho-based Micron Technology, China 2025 has a sinister edge.

Politicians in Washington, and many US technology companies, now accuse China of veering into intimidation and outright theft to get there. And they see Micron, whose memory chips give phones and computers the critical ability to store and quickly retrieve information, as a prime example of this sinister aggression.

The story starts three years ago when a state-controlled Chinese chipmaker lobbed a $US23 billion takeover offer for Micron. The US company rejected the bid. Micron later also turned down several partnership offers from Chinese companies out of concern for protecting its technology.

Then it gets nasty. As Paul Mozur reveals, after those rejections a Chinese company resorted to theft.

In court documents Micron’s theft accusations focus on efforts by a state-backed chipmaker, Fujian Jinhua Integrated Circuit, to build a $5.7 billion factory in China’s Fujian province.

Two years ago, Jinhua tapped UMC, a Taiwanese company, to help it develop technology for the factory. Instead of going through the lengthy steps required to design the technology, Micron claims that UMC and Jinhua decided to steal it.

Mozur says a UMC spokesman denied the allegations and declined to comment further. Jinhua did not respond to requests for comment.

First, UMC lured away engineers from Micron’s Taiwan operations with promises of pay increases and bonuses. Then, Micron claims UMC asked them to take some of Micron’s secrets with them. The engineers illegally took with them more than 900 files that contained key specifications and details about Micron’s advanced memory chips.

Micron grew suspicious after discovering that one of its departing engineers had turned to Google for instructions on how to wipe a company laptop. Later, at a recruiting event in the United States aimed at Micron employees, Jinhua and UMC showed PowerPoint slides that Micron claims used Micron’s internal code names when discussing future chips it would make.

Alerted by Micron, Taiwanese police tapped the phone of one former Micron engineer.

When investigators showed up at UMC’s offices early last year, police said, some employees rushed to hide what they had taken from Micron. The phone tapped engineer and another former Micron employee gave their laptops, USB flash drives and documents to an assistant engineer, who locked them in her personal locker. She then left the office with the phone that police had tapped, which was quickly tracked down.

The matter is before the courts but the sinister saga gets worse.

In January, in China, Jinhua and UMC hit Micron with a patent-infringement suit over several types of memory. As part of the suit, the companies requested that the Chinese court bar Micron from making and selling the products and pay them damages. A court in Fujian province is hearing the case. The Fujian provincial government is an investor in Jinhua.

China accounts for about half Micron’s $20 billion in annual sales.

And that’s the dilemma Trump faces. The companies whose technology he wants to secure have major stakes in China. But it seems that the current administration is not prepared to allow a repeat of the 1990s manufacturing transfer to taker place in technology.

Unless Trump changes his mind this is not good news for Wall Street.