U.S. National Security Concerns Drive Federal Intrusion on Semiconductor Industry Dealings

3 months ago by Luke James

Recent foreign investments have been met by increased scrutiny from the federal government’s Committee on Foreign Investment in the United States (CFIUS).

The trade dispute between the United States and China has rattled the cages of many diplomats and has disrupted companies who make a wide range of products including everything from aluminium foil to household appliances. One product that has surfaced time and time again, however, is the semiconductor. 

But why are two of the world’s most powerful nations coming to blows over such small chips?

 

Engineering’s Greatest Achievement

Arguably, the semiconductor is engineering’s greatest achievement to date; these tiny circuits are found inside virtually every electronic device and without them, electronics as we know them would be very different. 

Governments know this, too. They know that semiconductors are extremely valuable commodities that mean big business, and where they are fabricated can be very significant to economies and wider geopolitics. This doesn’t solely apply to semiconductors, but a whole host of key products that are designed and developed by nations’ leading manufacturers.

Naturally, many countries oversee the sale and transfer of ownership of their own companies because of this, and also because of the potential impact and complications ownership of major companies by a less-than-favourable nation could have in a range of areas. In the United States, the federal government’s Committee on Foreign Investment in the United States (CIFUS) has been doing this since the 1950s—the agency is responsible for reviewing sales to protect the country’s national security interests. 

In recent years under both the Obama and Trump Administration, however, CFIUS appears to have begun placing more scrutiny on pending sales. 

 

U.S. State Department in Washington D.C.

U.S. State Department in Washington D.C. Image Credit: U.S. General Services Administration.

 

Two High-Profile Denials

Last year, it was announced that the German company Infineon Technologies was in talks with California-based Cypress Semiconductor to buy it for $8.7 billion. And in February this year, Infineon’s CEO Richard Ploss confirmed that the deal was in its final stages and was due to go ahead imminently. 

Then, everything suddenly came to a halt when anonymous sources from within Infineon or Cypress spoke to Bloomberg, disclosing that CFIUS had stepped in and that Infineon was in negotiations with the federal government to try and see the deal go through. 

 

Not the First and It Won't Be the Last

Although the deal is now set to go through now that Infineon has agreed to US security concessions—pending a review by China’s regulators—this was not the first time that one was either blocked in full, in part, or temporarily by the federal government, and it is unlikely to be the last. 

Another high-profile denial came in 2018 when Singapore-based fabricator Broadcom attempted to purchase US-based Qualcomm in a deal worth over $100 billion—a deal which at the time was set to be tech’s largest acquisition, period. This came to an abrupt end when the Trump Administration vetoed the deal due to Broadcom’s ties to China, causing Broadcom to withdraw its bid.

 

The corporate headquarters of Broadcomm in Irvine, California.

The corporate headquarters of Broadcomm in Irvine, California.

 

Why Chips Matter

Although we hear an awful lot of news about the Internet and wider tech companies and the power that they wield, those companies make their breakthroughs off the backs of chipmakers. Semiconductors are central to electronics—they lead to innovative products that enable companies to wield this power. 

Also, as was touched upon above, chips are a major economic benefit. The semiconductor industry in the United States directly employs hundreds of thousands of people and generates billions in sales each year, and several sub-industries have been and continue to be built and evolve around serving it. 

 

Security Concerns 

Dominance of the semiconductor industry can give national governments huge amounts of political leverage, too. In 2018, the US Department of Commerce ordered a ban on sales to ZTE, a Chinese company that relied on Qualcomm’s processors to manufacture its smartphones. This caused ZTE to halt production and if it was not for a subsequent reprieve by the Trump Administration, the manufacturer could have gone out of business. 

What is likely driving the increased concerns and levels of scrutiny around semiconductor industry dealings, however, is national security. Although the portion of the US semiconductor industry that has applications in the defense sector is relatively small, it matters a whole lot. Mastery of semiconductor technology in this area can and does help ensure that a country’s military technology remains in the lead—and in this case, perhaps ahead of China. 

As chips become more powerful and manufacturers like Qualcomm and Cypress Semiconductor become more involved in sensitive projects of national importance through government contracts, sales are bound to come under even heavier scrutiny. 

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