China is the world’s largest consumer of semiconductors, but relies on imports to meet roughly 85 percent of its consumption.71 The Chinese government is employing a broad range of strategies to break China’s dependence on imports from foreign producers. China strengthened its domestic firms through strong state financing, China-specific standards, localization targets, and government procurement requirements.
In addition, the government is leveraging acquisitions of foreign technology and IP, recruitment of foreign talent, technology transfer and JV requirements, antimonopoly and antitrust reviews, and industrial espionage.72
The challenges faced by Micron, a U.S. semiconductors U.S. company, present an interesting case study. Over the last three years, Micron has been subject to a persistent, wide-ranging technology acquisition campaign from multiple Chinese actors. In its 2018 quarterly statement, Micron noted the increased pressure: “In particular, we face the threat of increasing competition as a result of significant investment in the semiconductor industry by the Chinese government and various state-owned or affiliated entities that is intended to advance China's stated national policy objectives. The activities by the Chinese government may restrict us from participating in the China market or may prevent us from competing effectively with Chinese companies.73”
This pressure has comprised an attempted acquisition in 2015, recruitment of Micron employees, alleged IP theft by two state-owned firms from 2015 to 2016, direct challenge of Micron’s IP in China, and an on-going antitrust case.
Attempted Acquisition of Micron
In July 2015, state-owned Tsinghua Holdings submitted an unsolicited $23 billion takeover bid for Micron, then the fifth-largest semiconductor manufacturer by revenue; in February 2016, Micron rejected the bid due to concerns that CFIUS would not clear it.74 Several Chinese companies subsequently sought to establish partnerships, but Micron turned these offers down because it was concerned about protecting its IP.75 This bid is one of more than 32 proposed mergers and acquisition deals by China-headquartered firms targeting U.S. semiconductor assets since 2014.76
During the acquisition negotiations in 2015, Tsinghua Unigroup recruited Micron employees and allegedly conducted industrial espionage to gain access to Micron’s IP. For example, in October 2015 Tsinghua Unigroup recruited the then head of a JV between Micron and Taiwan’s Nanya Technology Corporation Charles Cheichan Kau to serve as executive vice president.77
Alleged Theft of Micron IP
At least seven former Micron employees have been investigated for allegedly stealing Micron’s IP and selling it to Chinese state-owned firms. In September 2017, Taiwan prosecutors charged five other employees of a Micron subsidiary in Taiwan for theft of trade secrets; the United Evening News reported that these employees shared trade secrets with Tsinghua Unigroup.78 In the case, the five employees allegedly began stealing Micron’s proprietary information in 2016 for a monthly reward of around $6,500—three times their monthly salary—and a promise of future employment.79
In September and October 2015, Taiwan’s United Microelectronics Corporation (UMC)—a DRAM* manufacturer for leading semiconductor designers—recruited two former Micron employees in Taiwan.80 Micron alleges that UMC promised these two engineers raises and bonuses in exchange for proprietary information and files on Micron’s advanced DRAM chips.81 In January 2016, UMC agreed to partner with Fujian Jinhua Integrated Circuit Company (founded in 2015 and owned by the Fujian provincial government).82
Under the agreement, Fujian Jinhua would pay UMC $300 million for equipment and $400 million for DRAM process technology.83 According to Micron, “As a semiconductor foundry with no advanced DRAM process, UMC had no realistic capability to fulfill its commitments under their agreement. Jinhua knew that UMC did not possess the technological resources to develop the promised technology by itself, and understood that the technology would be based substantially on Micron’s DRAM designs and processes.”84
Taiwan prosecutors allege UMC provided Micron’s technology to Fujian Jinhua, which is set to begin DRAM manufacturing in late 2018.85 In August 2017, Taiwan prosecutors indicted UMC and two former Micron employees for conspiring to steal and misappropriate Micron trade secrets and to deliver those trade secrets to Fujian Jinhua.86
In December 2017, Micron sued firm Fujian Jinhua and UMC in the U.S. District Court for the Northern District of California for DRAM trade secret theft and IP infringement.87 Micron alleges that “UMC is prepared to make hundreds of millions of dollars for its purposed ‘development work,’ and Jinhua plans to avoid hundreds of millions of dollars in costs and the many months of R&D [research and development] effort that honest competition would require.”88
Micron’s IP Challenged in China
While Micron has sued Fujian Jinhua and UMC in the United States for IP theft, in March and April 2018, Fujian Jinhua and UMC separately sued Micron’s subsidiaries in Xi’an and Shanghai for patent infringement in China.89 China is Micron’s largest customer; in 2017, China accounted for 51 percent of Micron’s net sales based on customer ship-to location, followed by the United States with nearly 14 percent.90 The case is decided by the Fujian provincial court, where the provincial government is the owner of one of the plaintiffs.91
In all of these cases, Fujian Jinhua and UMC are seeking an injunction prohibiting the sale of certain Micron chips in China.92 On July 5, 2018, Micron confirmed that the Fujian court ruled in favor of UMC and Fujian Jinhua and granted a preliminary injunction on the sale of a select Micron chips in China.93 The ruling will affect around 1 percent of Micron’s annualized revenues.94 Joel Poppen, senior vice president at Micron Technology, noted “The Fuzhou Court issued this preliminary ruling before allowing Micron an opportunity to present its defense.”95
Micron is appealing the decision.96 This case mirrors a 2017 patent infringement case of U.S. semiconductor equipment manufacturer Veeco.97 In April 2017, Veeco sued German-based SGL Carbon and SGL Carge SE in the U.S. District Court for the Eastern District of New York for patent infringement and selling those products to its Chinese competitor, Advanced Micro-Fabrication Equipment, Inc. (AMEC).98 In November 2017, the court granted Veeco a preliminary injunction.99
In July 2017, AMEC filed a patent infringement case against Veeco’s Shanghai subsidiary in Fujian court, seeking an injunction and monetary damages.100 In December 2017, the Fujian court granted AMEC the injunction; the ruling affects all of Veeco’s sales of the EPIK 700 wafer carrier technology system model in China, cutting the firm off from an important, growing market.101 Veeco, AMEC, and SGL Carbon SE settled in February 2018, with all legal actions dismissed or withdrawn.102
Antitrust Investigation in Process
Tight supply and soaring demand for DRAM chips are contributing to price increases, squeezing the profit margins of Chinese smartphone and computer manufacturers that have to purchase these chips from foreign companies.103 In December 2017, China’s National Development and Reform Commission (NDRC)—China’s industrial policymaking body—began investigating price fixing allegations against foreign DRAM chip producers.104 In May 2018, officials from China’s State Administration for Market Regulation—China’s antimonopoly and antitrust body—visited China sales offices of Micron, Samsung Electronics, and SK Hynix.105
China is not the only government concerned with the sudden jump in prices.106 On April 27, 2018, a class-action lawsuit was filed against Micron and other DRAM suppliers in the U.S. District Court for the Northern District of California for price fixing DRAM products from June 1, 2016 to February 1, 2018; two similar cases were filed in Montreal and Toronto, Canada.107 However, unlike the U.S. and Canadian governments, Chinese officials are leveraging antitrust investigations to negotiate for lower prices.
According to South Korean government officials, when Chinese government officials met with Samsung and SK Hynix in May, they requested both companies cut the prices of DRAM chips for their Chinese customers.108 It is unclear whether Chinese officials made the same request to Micron.
China previously pursued antitrust cases against other U.S. technology firms, including Qualcomm, InterDigital, Microsoft, Dolby, and HDMI.109 For example, in February 2015, the NDRC fined Qualcomm—then the world’s largest producer of smartphone chips—$975 million for allegedly using its dominant market share to overcharge Chinese telecommunications firms for its patent royalties.110
In addition to paying the fine, Qualcomm agreed to offer 3G and 4G licenses at a lower price in China than Qualcomm’s normal wholesale figure.