US government scuttles Chinese-German semiconductor deal
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Photo Credit: Aixtron

Photo Credit: Aixtron

Germany and the US turned against the deal because of missile technology concerns

The US government vetoed a German-Chinese deal where Fujian Grand Chip would acquire the German semiconductor company Aixtron. Following an earlier recommendation from the Committee on Foreign Investment in the United States (CFIUS) against the acquisition, Fujian Grand Chip said it would appeal to President Barack Obama himself. This appeal has now failed, with the administration citing the national security risk of letting the Chinese manufacturer have access to the company’s US assets.

Aixtron earlier said that if and when such a presidential order arrived, it would back away from the deal.

While China has stepped up its high-end technology and logistics investments in the EU with only moderate opposition there, the US has been pushing its European partners to back away. The American intelligence community is increasingly stepping into influence, if not to scuttle, deals like these due to concerns about industrial espionage and unsecured supply chains.

Fujian Grand Chip was willing to pay up to $730 million for a 65% stake in Aixtron, a deal that seemed likely to succeeded at the time and that Chinese officials argued was a normal commercial transaction. But Handelsblatt reported in October that the US government intervened behind the scenes with the Germans to put a halt to the deal.

All of this leaves Aixtron’s future in question. Reuters reports that the company needed the deal to stay afloat financially, and will now have to look elsewhere or start making deep cuts. So far, there is no indication that “elsewhere” will entail direct support from the governments that turned against the deal, the United States and Germany’s, on national security grounds.

The US might mistrust them, but it also depends on Chinese companies

Although Aixtron has sold chip-making machinery to customers worldwide, including China, the US is concerned that anything more than that would be detrimental to sanctions and other measures meant to keep China from developing more advanced military systems. The US is also concerned about its own long-running troubles to properly source microchip supplies globally without inadvertently purchasing large quantities of Chinese-made ones.

But with so much of the US military’s supply chain going abroad to save money and cut development time down, this was inevitable. Other foreign companies, like the Emirati-owned Globalfoundries Incorporated, are permitted to develop sensitive ICT tools for the US military. (The company now owns two big IBM plants in the US that supply a lot of microchips to the Pentagon.) Even though the UAE is a US ally, this arrangement is all the more surprising given the furious pushback a decade ago against letting the Emirati logistics major Dubai Ports World handle private port security in the US.

Times, it seems, have changed. But not for Chinese companies. The Aixtron news comes after Reuters uncovered Chinese government connections to the proposed acquisition of Lattice Semiconductor Corporation by Canyon Bridge Capital Partners. The microchips the company makes have military applications, and in light of the (indirect) link between Canyon Bridge and China’s civil-military aerospace complex, approval for this deal could draw equal scrutiny.

Despite such concerns, the US has nonetheless issued waivers that benefitted Chinese companies, in order to make deadlines for new weapons systems like the F-35 fighter project, as well as more conventional yet often overlooked materials, like chemicals and rare minerals.

Ironically, while Chinese firms like ZTE and Huawei are barred from bidding on telecom contracts in the US, their chipsets still turn up in the US military’s supply chains, according to The Cyber Defense Review. One is reminded of the conundrum the British military faced in World War One when it went to war with Germany, yet was still importing most of its military-grade optics from Germany.

1914 ad for German optics in UK. Credit: Company Seven

1914 ad for German optics in UK. Credit: Company Seven

So desperate were the British that for a time, they seriously considered violated their own embargo laws to trade their rubber, which the German army badly needed, for that glass. So the Germans would have delivered thousands of binoculars used to sight and kill their soldiers with, while the British would have fed tons of rubber into a war machine they were trying to starve through a naval blockade.

The deal ultimately collapsed, but one can only wonder how the US and China would react in such a situation given their far greater level of interdependence in all aspects of the economy: even the military-industrial end of it.

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