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March, 2018

US blocks sale of IC maker Xcerra to Chinese investors

Original article: Reuters

The U.S. has blocked the $580 million sale of semiconductor firm Xcerra to a state-backed Chinese investment fund, citing national-security concerns. Hubei Xinyan, the Chinese firm, makes testing equipment for semiconductors but not does manufacture the chips themselves. In a statement, Xcerra chief executive Dave Tacelli said that the company is "disappointed" the deal wasn't approved, but "is discussing alternatives [with Xcerra] to pursue opportunities in new and existing markets in China." 

Analysis:

Chinese investors are struggling to acquire prime U.S. technology assets. Under President Donald Trump, the U.S.'s Committee on Foreign Investment in the United States (CFIUS) has tightened scrutiny of Chinese M&A activity, especially in the tech sector. Washington worries that state-backed Chinese firms will acquire sensitive technology with military applications. Hubei Xinyan is an affiliate of Sino IC Fund, a US$20 billion state-backed fund created in 2014 to boost China's semiconductor industry. Semiconductors figure prominently in military and aerospace equipment, in everything from fighter jets to satellite communications devices. 


Under the Made in China 2025 blueprint, Beijing aims to become an advanced manufacturing powerhouse. Integral to that plan is self-sufficiency in semiconductor production. China imports about US$200 billion in semiconductors annually, according to Asia Times. 


In a February report, Reuters said that CFIUS prevented the deal because Xcerra equipment is used by chip manufacturers who serve the U.S. government and military. 


Xiao Yong, a Hong Kong-based lawyer, told The Financial Times that this case is "surprising," as it is the first time CFIUS has blocked the acquisition of an upstream equipment maker. Xiao said that the jettisoning of the deal would deter future Chinese acquisition efforts. 


To be sure, Washington now considers China as a serious competitor in the technology sector. Consequently, CFIUS will view Chinese acquisition of U.S. technology firms warily. At the same time, there is reciprocity involved in Washington's calculations. Beijing wouldn't likely approve acquisition of prime Chinese technology assets by American firms.  


Meanwhile, China has other options to boost its semiconductor prowess. In a March report, Asia Times said that a state-backed Chinese IC maker - China Industry Investment Company - and the government are discussing the creation of a second fund vehicle to invest in domestic chipmakers. The fund hopes to raise RMB 150-200 billion, the report said. Investment would focus on processor design and manufacturing as well as chip testing and packaging.

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