(What’s Left of) Our Economy: Has Intel Been Cutting its Own Throat in China?

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America Competes Act, China, Digitimes, Intel, microchips, national secuity, semiconductors, subsidies, tech, tech transfer, Vladimir Lenin, {What's Left of) Our Economy

There’s one crucial fact missing from this crucial news item – which features an Intel executive’s prediction that, within five years, strong Chinese rivals will emerge to the giant U.S.-owned semiconductor manufacturer. This development, which has massive implications for America’s national security and economy, will stem in no small measure from Intel’s own major transfers of technology to the Chinese economy.

Just as important: Intel’s tech transfers are continuing even though the company has been lobbying hard to secure huge U.S. government subsidies it claims it needs to build more advanced microchip production in the United States – in order to improve its competitiveness versus China. But since money is fungible, these taxpayer dollars could indirectly find their way into China’s tech sector if – as likely – a big legislative package of support for American technology development is approved by Congress.

Like many big U.S. tech companies, Intel has been helping strengthen China’s technology prowess for literally decades. In 1998, the company announced plans to build a $50 million research center in Beijing, and by 2007, had opened another in Shanghai. According to the above linked account, Intel was focusing on developing software, not semiconductors. But the same piece reported that this work aimed at helping Chinese programmers “get ready for processors wih multiple cores,” and that “Some of the work surrounding Intel’s so-called terascale research–most recently showcased through its 80-core chip prototype–is also being done” in Beijing.

More broadly, an Intel China executive said that “The company is spending a lot of time and money working with the local university education system on science and technology education” – including electrical engineering programs.

Since then, as RealityChek has reported, Intel’s research and development operations in China have expanded significantly. A 2014 post contained the news that the company was working with a state-owned Chinese partner to produce microchips “for the cheapo but technologically advanced phones selling so well in low-income countries like China.” Its involvement in this venture, moreover, built on its “establishment earlier this year of a Smart Device Innovation Center and $100 million venture fund in the same field, and tie-up with a Chinese fabless chip-maker.” Although the semiconductors in question were not cutting-edge, who can doubt that teaching Chinese engineers how to build so-called legacy semiconductors was bound to increase their ability to build more advanced devices down the road?

The following year, I summarized a post from the Taiwanese tech website Digitimes.com (also the source for the Intel prediction leading off this piece) that detailed how Intel had committed a total of nearly $1.8 billion to help Chinese entities develop advanced new products and services. They included unmanned aerial vehicles, smart devices, robotics, cloud computing services, artificial intelligence, machine vision, three-dimensional modeling, virtual reality technologies, and advanced optics.” None of these could ever be relevant to semiconductor production – or advanced weapons systems – could they?

And just last November, I mentioned a Wall Street Journal piece finding that Intel is ntel “is among the active investors, backing a Chinese company now called Primarius Technologies Co., which specializes in chip-design tools that U.S. companies currently lead in making.”

As I’ve written repeatedly, such activities amount to U.S. companies – and U.S. administrations that ignored or approved them – selling China the rope with which to hang America (paraphrasing the famous prediction of Vladimir Lenin, leader of the Bolshevik Revolution that created the Soviet Union). In Intel’s case (and it’s not alone here), the companies keep undercutting their own fortunes. And unless Washington conditions handouts for Intel and other tech companies on halting these giveaways, American taxpayers will finance much of it.

Full disclosure:  Investment-wise, I’m neither long nor short Intel, though I am long TSMC – the Taiwanese chip manufacturer that’s Intel’s top competitor, and that recently replaced it as the world leader in semiconductor production technology. 

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Our So-Called Foreign Policy: Shocking New Findings on How Corporate America Keeps Strengthening China’s Military

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AI, artificial intelligence, Biden adminisration, Center for Security and Emerging Technology, China, export controls, Georgetown University, innovation, Intel, investment, national security, Nvidia, Orbcomm, Our So-Called Foreign Policy, semiconductors, Silicon Valley, software, tech, venture capital, Xilinx

Recent weeks have seen an impressive burst of new information about how U.S.-owned businesses are fueling the technological and military strength of China, a country whose armed forces American soldiers, sailors, and airmen and women could be fighting on the battlefield before too long.

The first source of this information comes from Georgetown University’s Center for Security and Emerging Technology (CSET) in an October report called Harnessed Lightning: How the Chinese Military is Adopting Artificial Intelligence.

The study focuses on China’s own efforts to develop artificial intelligence (AI) capabilities and incorporate them into its military operations and systems, and goes into fascinating detail about how much money is spent on these efforts, and how many Chinese entities of all kinds are involved in the campaign. The authors also make clear – just in case it wasn’t screamingly obvious already – how widespread these applications can be, and their incredible potential to revolutionize warfare and hand victory to the power possessing the best knowhow.

But as one of the team explained in a summary magazine article two days ago:

“Our research also highlights that U.S. companies are inadvertently powering Chinese military advances in AI. The overwhelming majority of advanced computer chips at the heart of China’s military AI systems are designed by U.S. firms like Intel, NVIDIA and Xilinx, and manufactured in Taiwan. We found that suppliers actually depicted NVIDIA-branded processors in photos of their products, providing clear evidence of the role U.S. technology plays in powering China’s advances. One company, which won a contract to supply chips for the PLA Strategic Support Force, even bought the domain ‘nvidiagpu.com.'”

Moreover, much more than simply semiconductors are involved. So is machine-learning and intelligent text-processing software, along with systems for “real-time monitoring” of “millions of global shipping and related users” with the help of 108 satellites from the American company Orbcomm.

My only objection: It’s inconceivable that these U.S. firms don’t fully understand the national security implications of their activities. The report itself notes that

“Because most institutions that supply AI-related equipment are new and not subject to end-use controls, the Chinese military is frequently able to access or acquire technology from abroad, including from the United States. Some Chinese suppliers make a business out of sourcing foreign data or components and reselling them to sanctioned Chinese defense companies or PLA [People’s Liberation Army] units.”

But the U.S. businesses must be aware that any of their products sold to any Chinese entity are going to be made available to the Chinese military simply because that’s the way China has operated since the Communists have been running the place. So this rationale can be easily laughed off.

The same cynical reaction is justified for claims that U.S.-owned firms don’t know that the capital they’re steering into the Chinese tech sector will also benefit the Chinese military. And these capital flows are both impressive and coming both from finance companies and from the huge semiconductor manufacturer Intel – which is hoping to receive billions in U.S. government subsidies and tax breaks to help restore its competitiveness in microchip production largely (of course) to bolster national security.

As reported by The Wall Street Journal this morning, Intel is “is among the active investors, backing a Chinese company now called Primarius Technologies Co., which specializes in chip-design tools that U.S. companies currently lead in making.” RealityChek regulars, moreover, know that Intel has been investing in other defense-related Chinese entities for years.

Not that American investment firms aren’t also doing their part to strengthen China’s tech prowess and therefore military capability and potential. Including the Intel deal, the Journal found, American companies “participated in 58 investment deals in China’s semiconductor industry from 2017 through 2020, more than double the number from the prior four years….”

And on top of these transactions, according to the Journal, “the China-based affiliates of Silicon Valley venture firms Sequoia Capital, Lightspeed Venture Partners, Matrix Partners and Redpoint Ventures have made at least 67 investments in Chinese chip-sector companies since the start of 2020….” In all, the sums involve run into the billions.

And in case you still doubt that these U.S. firms fully understand how valuable their investments are to a country that’s increasingly hostile to America, the Journal article quotes the head of one of these Chinese recipients as saying that his operation is working with the Chinese regime and other partners “to help our country get rid of its dependence on foreign high-performance chips.” Since the United States is still ahead in this sector, a China that no longer relies on American high tech products is going to be a China that’s caught up – and possibly grabbed the lead.

What’s the U.S. government doing about this dangerously unacceptable situation? It’s true that Washington has long maintained a system of export controls aimed at preventing China and other worrisome countries access to critical, militarily relevant goods and knowhow. But as the CSET study documents, this system is being completely overwhelmed – in part because of sorely inadequate funding and staffing, and in part because it’s never switched from a case-by-case approach to the kind of much broader denial strategy that’s clearly needed for a systemic threat like that posed by China.

There’s legislation in the works to plug some of the holes, and according to the Journal, the Biden administration seems supportive. Let’s just hope that the government gets its act together sometime before weapons powered by American technology and funded by American investors start killing American servicemen and women somewhere in East Asia.

BTW, thanks to friend Bill Holstein for calling my attention to these two items. 

 

Those Stubborn Facts: How the U.S. Lost the Global Semiconductor Manufacturing Tech Lead

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capex, capital spending, China, infotech, innovation, Intel, investment, manufacturing, microchips, national security, Samsung, semiconductors, South Korea, Taiwan, Taiwan Semiconductor Manufacturing Company, tech, Those Stubborn Facts

“North America-” (i.e., U.S.-) Owned Firms’ Share of Global Semiconductor Capital Spending, 1990: 31 percent

“North America-” (i.e., U.S.-) Owned Firms’ Share of Global Semiconductor Capital Spending, 2019: 28 percent

“Asia-Pac/Others*- Owned Firms’ Share of Global Semiconductor Capital Spending, 1990: 10 percent

“Asia-Pac/Others*-Owned Firms’ Share of Global Semiconductor Capital Spending, 2019: 63 percent

*Excludes Japan. Includes Taiwan, South Korea, and China

(Source: “A Path to Success for the EU Semiconductor Industry,” by Michael Alexander and Thomas Kirschstein, Roland Berger, February 12, 2021, https://www.rolandberger.com/en/Insights/Publications/A-path-to-success-for-the-EU-semiconductor-industry.html)

Im-Politic: The U.S. Still Isn’t Even Running in the Global Semiconductor Supremacy Race

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appropriations, authorization, Chuck Schumer, Congress, Defense Department, House of Representatives, Im-Politic, innovation, Intel, microchips, semiconductors, Senate, subsidies, Taiwan Semiconductor Manufacturing Company, technology, TSMC

In a week, the United States will mark an anniversary that no American should want to celebrate: It was last June 10 and 11 that companion bills were introduced in both the House and Senate to increase greatly the U.S. government’s support for domestic semiconductor manufacturing. Since I’m a strong backer of such efforts, why am I so downbeat? Because despite the importance of strengthening the American footprint in this sector for both national security and future prosperity, and despite seemingly strong bipartisan support for this effort (at least in principle) nearly a year later, not a single penny has been been spent.

It would actually be reasonable to argue that the federal government took way too long to take even that preliminary step. After all, as I documented in this article last October, America’s global leadership in producing (as opposed to designing) the microchips increasingly crucial to so many defense-related and civilian products and services – and indeed, entire industries – had been waning for decades, and was finally lost in 2017. That’s the year when U.S.-owned Intel became unable to keep up with Taiwan’s Taiwan Semiconductor Manufacturing Company in turning out semiconductors featuring the world’s smallest circuit sizes – the main indicator of a chip’s capabilities.

So it’s not terribly impressive that American political leaders took two years to begin responding in a serious way. (And P.S. – the executive branch, under President Trump, clearly wasn’t johnny-on-the-spot, either, in using the bully pulpit to sound the alarm and generate support for action.)

Still, the bipartisan nature of the legislative effort – at a time of heated partisanship on virtually every other national issue – seemed cause for encouragement. Even better: Just a month later, the House and Senate passed their respective semiconductor bills.

Since then, however, progress has been sluggish. The Representatives and Senators didn’t manage to get their acts together before that session of Congress ended in order to draft and pass the consensus bill needed to go to the President’s desk for signing. Therefore, the measures died, and work needed to begin all over again this past January, when the new Congress convened.

Semiconductor work was proceeding along another track in late 2020, and resulted in key provisions of the expired bill being incorporated into legislation authorizing the Defense Department’s levels and kinds of spending for this fiscal year. That bill became law this New Year’s Day (over a Trump veto for unrelated reasons), but according to Congress’ procedures, authorizing bills can’t trigger any spending. That requires an appropriations bill – which also must be passed in identical form by both chambers before enactment.

Six months later, there’s still no money flowing. The story is excrutiatingly difficult to follow, but it appears that Senate Majority Leader Chuck Schumer of New York tried to speed up the process in May with an emergency funding measure. Passage seemed likely at month’s end, before the Senate’s scheduled Memorial Day recess, but was stymied at the last minute by a sadly typical array of political shenanigans from both the minority Republicans (whose support was needed because of the Senate’s filibuster provision requiring super-majorities to pass most legislation) and Democrats. (See here and here for good accounts.)

Passage of a similar measure by the House looks to be easier, because of the Democrats’ slightly bigger majority. But there the process is less advanced, since the House Democrats’ own technological competitiveness proposals were only introduced in committee May 25.

It’s not like the U.S. private sector has been standing still. Intel, most significantly, seems determined to reemphasize manufacturing again, and has committed to put lots of money where it’s mouth is. But without a major helping hand from Washington, this campaign is sure to be swamped by the massive amounts of foreign government subsidies for promoting advanced semiconductor manufacturing that have been announced lately. (Here’s a useful summary.)

I’m generally a fan of the cautious approach to policymaking fostered by the U.S. Constitution’s separation of powers and checks and balances principles. And I wouldn’t be so fast, like so many Democrats, to junk the Senate’s filibuster rule (which is not found in the Constitution). Yet time is not America’s friend when it comes to regaining lost ground in a fast-moving industry like semiconductors, and if Washington continues its business-as-usual approach on this issue, history will likely conclude that the American political system failed a big test.

Full disclosure:  I own a not-trivial number of shares of TSMC common stock.

Making News: New Article Spotlights America’s Second-Rate Semiconductor Manufacturing

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Asia-Pacific, China, globalism, innovation, Intel, Making News, manufacturing, offshoring, semiconductors, Taiwan, Taiwan Semiconductor Manufacturing Company, technology, The National Interest

I’m pleased to report that a new article of mine has just been published in the November-December, 2020 issue of The National Interest. The focus: America’s loss of its longtime global lead in manufacturing semiconductors. Given the central role played by microchips to the constantly acclerating information technology revolution, this setback threatens both the nation’s prosperity and its security — especially since the world’s most advanced semiconductors are now produced a grand total of 100 miles from China.

Click here to read.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

Our So-Called Foreign Policy: Why America’s Stakes in East Asia’s Security are Looking Vital Again

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allies, America First, China, East Asia, East Asia-Pacific, extended deterrence, free-riding, globalism, Intel, Japan, Joe Biden, manufacturing, Michele Flournoy, nuclear weapons, Our So-Called Foreign Policy, protectionism, Samsung, semiconductors, South Korea, Taiwan, Trump, TSMC

News flash! This past week I read a newspaper column by George F. Will that didn’t prompt me to say “What an ignoramus!’ In fact, not only did I learn something. I learned something so important that, in conjunction with some other recent developments, is causing me to rethink some long and deeply held ideas I’ve had about America’s grand security strategy in the East Asia-Pacific region.

Specifically, although Will’s own focus in the September 8 piece was who Joe Biden would pick as Secretary of Defense, the piece itself described some ominous changes in the U.S.-China military balance in Asia that call into question my main concerns about America’s approach to region, and especially what I’ve depicted as an increasingly dangerous reliance on nuclear weapons to deter Chinese aggression. Meanwhile, as I’ll detail in a forthcoming freelance article, two U.S. Asian allies – Taiwan and South Korea – whose value to the United States I’ve long insisted doesn’t remotely justify running such risks, are looking for now like critical assets.

To review, since the Cold War began, the United States has resolved to defend its East Asian allies in large part by using the threat of nuclear weapons use to persuade potential attackers to lay off. Presidents from both parties agreed that the conventional military forces needed to fight off China and North Korea (and early on, the Soviet Union) were far too expensive for America to field. Moreover, the Korean War convinced the nation that fighting land wars in Asia was folly.

Before China and North Korea developed nuclear weapons able to reach the U.S. homeland, or approached the verge (the case, it seems, with the latter), this globalist policy of extended deterrence made sense whatever the importance to America of Asian allies. For the United States could threaten to respond to any aggression by literally destroying the aggressors, and they couldn’t respond in kind.

As I noted, however, once China and North Korea became capable of striking the continental United States with nuclear warheads, or seemed close to that capability, this U.S. policy not only made no sense. It was utterly perverse. For nothing about the independence of South Korea and Taiwan, in particular, made them worth the incineration of a major American city – or two, or three. The security of much larger and wealthier Japan didn’t seem to warrant paying this fearsome price, either.

Greatly fueling my opposition to U.S. policy and my support for a switch to an America First-type policy of military disengagement from the region was the refusal of any of these countries to spend adequately on their own defense (which, in combination with U.S. conventional forces, could deter and indeed defeat adversaries without forcing Washington to invoke the nuclear threat), and their long records of carrying out protectionist trade policies that harmed the American economy.

As Will’s column indicated, though, the threat, much less the use, of nuclear weapons is becoming less central to American strategy. Excerpts he quotes from recent (separate) writings by a leading Republican and a leading Democratic defense authority both emphasize dealing with the Chinese threat to Taiwan in particular with conventional weapons. The nukes aren’t even mentioned. Especially interesting: The Democrat (Michele Flournoy) is his recommended choice to head a Biden Pentagon – and she’s amassed enough experience and is well regarded enough among military and national security types to be a front-runner. I also checked out the journal article of hers referenced by Will, and nuclear weapons don’t come up there, either.

Moreover, neither Flournoy nor her Republican counterpart (a former aide the late Senator John McCain) shies away from the obvious implication – accomplishing their aim will require a major U.S. buildup of conventional forces in East Asia (including the development of higher tech weapons). In fact, they enthusiastically support it.

Any direct conflict involving two major powers has the potential to escalate beyond the expectations of the belligerents. But certainly bigger and more capable American forces in East Asia would reduce the chances that war with China will go nuclear. So in theory, anyway, the nuclear dimensions of my concerns could be reduced.

Moreover, my willingness to run greater risks to safeguard Taiwan and South Korea in particular, and pay the needed economic price – even if they keep free-riding on defense spending – is growing, too. That’s because of the theme of that forthcoming article I mentioned: Intel, the only major U.S.-owned company left that both designs and manufactures the most advanced kinds of semiconductors, has run into major problems producing the last two generations of microchips. In fact, the problems have been so great that the company has lost the technological lead to South Korea’s Samsung and in particular to Taiwan’s TSMC, and their most advanced facilities are in South Korea and Taiwan, right on China’s rim.

Given the importance of cutting edge semiconductors to developing cutting edge tech products in general, and ultimately cutting-edge weapons (including advanced non-weapons electronic gear and cyber warfare capabilities), acquiring the knowhow to produce these microchips by whatever means – outright conquest, or various forms of pressure – would make China an even more formidable, and even unbeatable challenge for the U.S. military, at least over time.

So until Intel, whose most advanced factories remain in the United States, figures out how to regain its manufacturing chops, or some other U.S.-owned entrant rides to the rescue, there will be a strong argument on behalf of protecting South Korea and Taiwan against Chinese designs at very high risk and cost. And as noted above, Americans may even have to tolerate some more military free-riding along with, in the case of South Korea, fence-sitting in the overall U.S.-China competition for influence in East Asia.

At the same time, because of the military (including nuclear) risks still involved, seizing back control of the semiconductor manufacturing heights ultimately is the best way out of this bind for Americans. So shame on generations of U.S. leaders for helping this vulnerability develop by swallowing the kool-aid about even advanced manufacturing’s obsolescence and replacement by services. But this grave mistake can’t be wished away, or overcome instantly, either – though efforts to regain this lost tech superiority need to be stepped up dramatically. So shame on current leaders, their advisers, and wannabe advisers – whatever their favored foreign policy strategy – if they fail to acknowledge that dangerous new circumstances may be upon the nation, and the sharp imperatives they logically create. And that includes yours truly.

Glad I Didn’t Say That: Intel Struggling to Handle the Truth on the Trade War

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China, Glad I Didn't Say That!, global value chains, Intel, manufacturing, semiconductors, sourcing, supply chain, tariffs, tech, trade war, Trump

“Intel Corp. is reviewing its global supply chain amid the growing trade war between the U.S. and China, Chief Executive Officer Bob Swan said.”

–Bloomberg.com, June 16, 2019 

“‘Intel doesn’t believe tariffs are an ‘effective way to drive global trade,’ Swan said.”

– Bloomberg.com, June 16, 2019

 

(Source: “Trade War Has Intel Reviewing Global Supply Chain, CEO Says,” by Gwen Ackerman, Bloomberg.com, June 16, 2019, https://www.bloomberg.com/news/articles/2019-06-16/trade-war-has-intel-reviewing-global-supply-chain-ceo-says )

(What’s Left of) Our Economy: More Evidence of the Crucial U.S. Role in China’s Tech Rise

Tags

Broadcom, China, Daniel Strumpf, Huawei, Intel, Qualcomm, Silicon Valley, tech, tech transfer, The Wall Street Journal, Trade, Trump, {What's Left of) Our Economy

If you need any further evidence that American technology firms have played vital roles in China’s transformation into a major technology power capable of threatening U.S. national security as well as economic interests, check out Dan Strumpf’s article in The Wall Street Journal today. In the process, he inevitably exposes gaping holes in President Trump’s China strategy that need to be closed up pronto if the President is serious about checking China’s dangerous rise.

Here are just some of the highlights of Strumpf’s piece – which is limited to U.S. tech firms’ contributions to the emergence of Huawei, whose CFO (and founder’s daughter) was arrested in Canada a week ago on charges of helping the entity use fraud to evade U.S. sanctions on Iran. (As always, I refuse to use words like “company” or “business” in describing Chinese economic actors, since they have nothing in common with corporate organizations in free market economies.)

>”Silicon Valley giants from Intel Corp. to Broadcom Inc. and Qualcomm Inc. are top suppliers of Huawei, which buys their components to make equipment such as base stations and routers and Huawei mobile phones.”

>”Qualcomm and Intel are also working with Huawei on its development of next-generation 5G technologies, a field in which the Chinese company’s aim to be a global leader has alarmed some in Washington.”

>”Huawei still relies on imports from U.S. chip companies such as Broadcom, Xilinx Inc. and Analog Devices Inc. for components used in its telecom equipment…Huawei buys equipment from data-storage equipment maker Seagate Technology PLC for use in its enterprise business, and uses memory chips made by Micron Technology Inc. in its smartphones….”

>”Intel and Qualcomm, which draw huge revenue from China, are seen by Huawei as more than suppliers. In Huawei’s annual report, Intel is described as a ‘strategic partner,’ and the companies work together in a range of areas, including next-generation 5G technology.”

>”In 2015, Qualcomm, Huawei and China’s largest chip maker, Semiconductor Manufacturing International Corp., launched a joint venture in Shanghai to work on next-generation chip technology.”

And lest you think it’s just Huawei, click here and here for numerous examples of similar assistance rendered by such American corporations to other Chinese entities and industries.

Strumpf’s article also makes clear the flip side of these American companies’ operations: Chinese entities like Huawei have become major customers and sources of revenue for the U.S. tech sector.

Nonetheless, it’s inconceivable that any Trump administration policy to address the China tech threat can succeed if these sales and partnerships are allowed to continue. Silicon Valley will of course cite these earnings in its inevitable campaign to any attempted curbs on its China activities (while simultaneously urging Washington to “do something” about the Chinese intellectual property theft- and extortion-fueled tech ambitions that has these companies scared silly for their own selfish reasons). And that’s why the President urgently needs to get on TV from the Oval Office, explain comprehensively how the tech firms’ massive giveaway of critical knowhow has undermined their country’s future, how his globalist predecessors’ indulgence has enabled this risky business, why the course change he’s engineering in China policy is so essential, and what his end-game is.

Trade wars may not be easy to win, contrary to the President’s recent boast. But can anyone reasonably doubt that this message will be easy to sell?

(What’s Left of) Our Economy: Intel – & Often China – Inside Your Hackable Electronics

Tags

China, computers, counterfeits, cyber-security, Defense Department, electronics, globalization, hacking, Intel, microchips, semiconductors, smart phones, technology, Trade, {What's Left of) Our Economy

OK, who out there has an electronic device like a computer or a smartphone? I thought so. And who uses them like…nearly all the time? And engages in lots of financially or personally sensitive activity on-line? Thought so again. And you no doubt weren’t thrilled to find out yesterday that the computer chips vital to the operations of virtually all of these devices have some big security flaws that make them eminently hackable.

Well, here’s worse news: There’s an excellent chance that the hackers could be working for the Chinese government. And for that, you can thank decades of stupefyingly boneheaded American trade and globalization policies.

I can’t tell you how excellent the chances are, because one of the completely unnecessary failures of these policies has been pre-Trump Washington’s complete lack of interest, from either major political party, in tracking and letting the American public know how dependent they and their economy have become on products from potentially dangerous countries.

But I feel confident in claiming that the chances are at least pretty excellent. The reason? Private sector specialists have published detailed studies on subjects like the Chinese electronics industry. Thanks to them, it’s well established that, although China has yet to become a top global player in manufacturing semiconductors, and especially cutting-edge microchips, it’s a powerhouse in what’s known as “back end” semiconductor production – relatively low-tech phases of the process that involve activities like packaging, assembling, and testing.

So many U.S. and other non-Chinese information technology companies do so much of this activity in China that, according to a report from the consulting firm PwC, in 2015 (the latest available data) China-based facilities accounted for 44.6 percent of total global revenues from these back end operations. That’s up from just 20.3 percent in 2009. In other words, Chinese employees of these companies have ample opportunity to insert all sorts of bugs in them, and these opportunities have been growing rapidly.

Think I’m paranoid? Or just anti-Chinese? Then you need to learn that the Defense Department had admitted that, over a recent two-year period, its weapons systems had been studded with some 1 million counterfeit electronics parts and components – some 70 percent traceable to China. DoD now claims it’s solved much of the problem with a “trusted supplier” program. But good luck reliably inspecting the gargantuan Chinese electronics production complex over any serious length of time.

Longstanding American trade and globalization policies deserve most of the blame because, through priorities like indiscriminately expanding U.S. commerce with and export-oriented investment in China, they actively encouraged much of the world’s electronics industry to migrate to the People’s Republic.

The world’s current Number Two semiconductor producer, likes to tout “Intel Inside” a huge share of the world’s electronics devices. Maybe it, and others, should start to advertise “China Inside”?

Following Up: More on Why Tariffs Can Bring Back Much U.S. Manufacturing

Tags

Andrew Grove, China, Defense Science Board, exports, Following Up, Foxconn, globalization, innovation, Intel, manufacturing, offshoring, reshoring, subsidies, tariffs, Trade

What a shame that David Barboza’s New York Times article on all the help from government in China that powerfully shaped Apple’s investment decisions was published during the holiday week – when so many Americans are paying so little attention to the news . A Pulitzer-worthy piece of reporting, it also adds to the abundant evidence debunking two critical claims often made about the globalization of manufacturing.

First, the article makes clear how much offshoring of American industry has taken place due to foreign government decisions that clash violently with the idea of “free trade.” And second, it exposes further weaknesses in a related, though more recent, claim that most offshoring during the 21^st century has stemmed not from foreign tariffs and similar interventionist economic policies, but from technological innovations that enable effective management over far-flung international manufacturing operations. This second claim is especially important, since it’s also been used to demonstrate that American tariffs will be unable to reverse this offshoring significantly.

Apple’s chief manufacturing partner in China, Foxconn, claims that the government supports it receives in the PRC are “no different than similar tax breaks all companies get in locations around the world for major investments.” And Barboza mistakenly seems to confirm this argument, characterizing China’s various market-distorting practices as “not unlike” those “in other countries, “including the United States, where states and cities vie for companies” – except that they are much greater in scale and much more secretive.

But the author himself provides key examples to the contrary. For instance, the Chinese province in which Apple’s manufacturing is concentrated is actively encouraging Foxconn to export. And when the company meets these targets, it gets hefty bonuses. Exports were also fostered via rebates for the value-added tax Foxconn would otherwise pay for at least the first five years of its operation.

Nor was China’s central government simply a bystander. Of course, the value of its currency was manipulated – which artificially lowered the price of goods China exported (including those from factories affiliated with foreign companies like Apple) and raised the price of imports for Chinese individual and certain business consumers. But there was also this scheme described by Barboza:

“Since China began opening its economy to the outside world in the 1980s, the government’s policies have encouraged manufacturing and exports with the creation of special economic zones. But those same policies have discouraged domestic consumption of overseas brands.

“Most products made in China by big multinationals had to be physically shipped out of the country and then brought back so that they could be taxed as imports — hence, the U-turn employed by many companies.”

Revealingly, these arrangements stayed in place well into the 21^st century, and similar export-focused zones can still be found all over China.

Barboza’s reporting also bears out arguments I made in a post last week on this subject – that technological change has been a necessary, but not sufficient, condition for the export of advanced manufacturing capacity, and that much offshoring was encouraged by the guarantees of wide-open access to the U.S. market provided by trade policy decisions like backing China’s entry into the World Trade Organization.

As the author notes, “When Apple first moved into China, the country was largely a low-cost production site.” That was in the late-1990s. He also quotes a former long-time executive for Wal-Mart and other multinationals as stating that most of these firms’ China investments represented “supply chains good at making things in the East and selling them in the West.”

China’s domestic market has of course developed impressively since then. But as I observed last week, the continuing importance of exports to these firms’ business models has been spotlighted by their loud protests of Donald Trump’s plans to erect trade barriers against production they aim at American customers.

But it’s also crucial to point out that this initial offshoring of production set in motion a dynamic with huge future implications for America’s economy and for today’s claims about “knowledge-based” offshoring of scientific and technical knowhow – and jobs – that supposedly are immune to trade policy overhaul. Simply put, the offshoring of production made the export of manufacturing’s more knowledge-based activity inevitable in case after case.

The two main reasons: First, super low-cost developing countries are full of smart, people that are highly educable, and trainable by multinational corporations; and second, manufacturing production and innovation rarely exist in isolation. Their relationship is typically interactive, and fueled by continuing and close contact between the researchers and engineers and product designers etc who come up with new products and processes, and the production supervisors and other workers who need to translate their ideas into real world products.

And don’t take my word for it. Listen instead to the late Andrew Grove, founder of Intel. Or Hank Nothhaft, retired Chairman and CEO of Tessera Technologies. Or former Allegheny Technologies executive Jack Schilling. Or the Defense Science Board (both quoted in this 2010 study).

In other words, Apple has found success in locating its manufacturing “brain work” thousands of miles from its production work.  But that formula appears to be the exception, not the rule, in manufacturing, including in advanced manufacturing.  And interestingly, this tech giant has recently announced it’s building its first two research and development centers in China.  

So the United States has a fundamental choice ahead of it.  It can keep listening to multinational companies and their hired guns, pretend that the keys to long-term prosperity move around the world purely or even largely due to market forces, and run ever greater risks of sliding into second-class status.  Or it can finally recognize Washington’s immense potential power over globalization, and use it to make sure this process works for its own citizens and domestic producers as well.