Manufacture This

The blog of the Alliance for American Manufacturing

The Idaho-based chipmaker was ripped off by a state-sponsored competitor.

The Trump administration is hosting a high-level delegation from the Chinese government for trade negotiations this week. The administration, acting on the results of a U.S. Trade Representative report into widespread allegations of intellectual property theft, has leveled 10 percent tariffs on a broad list of imports from China, and 25 percent tariffs on imports of machinery, semiconductors, and other tech products. And if substantial progress isn’t made during these talks, more tariffs will go up on March 2. As Reuters describes it, those additional tariffs will essentially cover all of China’s exports to the United States.

That’s a big deal if they do – but so is IP theft, which American companies complain is a chronic problem when doing business with or in China. A lot of money gets sunk into R&D, and losing your proprietary information to a rival vying for dominance in your industry sticks in the craws of a lot of American business executives.

There was a big, public example of this that unspooled last year, just as the Trump administration was laying out its IP case against China: the case of Micron, an Idaho-based semiconductor manufacturer that in June sued a state-owned (SOE) Chinese competitor and a Taiwanese company. Micron claims the former hired the latter to poach Micron engineers working in Taiwan and encouraged them to take Micron’s IP with them on their way out the door. It would then be passed to the Chinese SOE.

To add insult to injury, the Chinese SOE and its Taiwanese partner preemptively hit Micron with a patent infringement suit in a Chinese court that sought to bar Micron from making its chips and selling them in China! The court hearing the suit, naturally, was in Fujian Province, which is an investor in the Chinese SOE.

And that caused Idaho’s congressional delegation to take notice. In a letter to President Trump, Senators Mike Crapo and Jim Risch wrote:

“If the case against Micron moves forward, and the Chinese government once again rules in favor of itself, it would cause substantial damage to Micron and the U.S. tech industry as a whole.”

There’s a reason for all this economic subterfuge: China doesn’t yet have a lot of semiconductor-production capacity, and these things go into nearly every consumer gadget you can purchase. As such, Beijing has designated this as an industry in which it wants to become competitive as part of its Made In China 2025 plan. It is pumping money into its domestic industries in an effort to catch up.

But it takes an incredible amount of money (and time) to perfect semiconductor fabrication, and the Micron case suggests that some in China were fine cutting corners to get there … even if that meant theft.

It’s an illuminating story, and it’s still playing out as the U.S.-China trade dispute has simmered. In late October, the U.S. Commerce Department banned sales of American-made components to that Chinese competitor, Fujian Jinhua, citing national security concerns.

Then in November, the Justice Department followed up directly on Micron’s IP theft allegations and indicted Fujian Jinhua and its Taiwanese partner for stealing trade secrets.

And now, a few months later, it looks like the pressure – and more specifically, that American sales ban – is working. Fujian Jinhua, reports the Financial Times, will have to halt production by March because its gone through its stockpile of American-made components. That’s another big deal, as it throws a wrench in those Made in China 2025 plans.

What’s more, it suggests the Trump administration’s hardball tactics in dealing with the Chinese government on trade are working – especially when such bans are allowed to play out. The Fujian Jinhua news, as well as Monday’s announcement that the U.S. government will be charging an enormous Chinese communications equipment company with fraud, are certain to add extra weight to this week’s bilateral trade negotiations.  

At any rate, the Micron case clearly raised the attention of Idaho's Senator Crapo, who recently joined a few other colleagues in raising the alarm over the potential sale of  a Metro train car contract to another Chinese state-owned manufacturer.

That's good! It's a good thing that Congress is watching. Attempts at economic integration by SOEs into the American economy should be met with a healthy dose of skepticism.