Chinese Acquisition of Semiconductor Firm Poses Security Risks, US Treasury Warns

By Eva Fu
Eva Fu
Eva Fu
China Reporter
Eva Fu is a New York-based writer for The Epoch Times focusing on U.S.-China, religious freedom, and human rights.
August 31, 2021 Updated: September 1, 2021

The U.S. Treasury Department said the sale of Magnachip Semiconductor Corp. to a Chinese private equity firm poses “risks to national security,” as Chinese investments in critical technologies meet with enhanced U.S. scrutiny.

Magnachip, a South Korean producer for display and power chips, sold its controlling stake in late March to Chinese private equity firm Wise Road Capital in an all-cash deal worth about $1.4 billion.

The Committee on Foreign Investment in the United States (CFIUS), the U.S. interagency panel overseen by the Treasury Department that scrutinizes foreign deals for national security implications, sent a letter to Magnachip on Aug. 27, saying it had “identified risks to the national security of the United States arising as a result of the Merger” and would seek President Joe Biden’s decision on the issue, the company disclosed in its latest filing with the U.S. Securities and Exchange Commission (SEC).

CFIUS said it hadn’t identified measures that “adequately mitigate the identified risks.”

Magnachip, in its filing, said it is “assessing the next steps” but couldn’t give an assurance that it would agree to U.S. proposals to facilitate clearance from the agency.

Regulators in the United States and South Korea have both been reviewing the sale. CFIUS ordered to put the merger on pause in June as it probes the deal, a process the company expects to complete within the coming two weeks.

The SEC filing didn’t give details on the nature of such risks.

Smaller than postage stamps, microchips are nonetheless essential in modern electronics such as cars, smartphones, computers, 5G infrastructure, and artificial intelligence, creating a source of tension between the United States and China as the two powers rival for tech dominance.

While the United States is the market leader for semiconductor design and research, companies have largely outsourced their manufacturing to Asia. The pandemic-fueled global chip shortage has highlighted issues with such dependence and ignited calls for the United States to rely less on China.

A new type of 300 millimeter wafer with semiconductor chips and finished microchips of the semiconductor German manufacturer Bosch is pictured in Dresden, eastern Germany on May 31, 2021. (Jens Schlueter/AFP via Getty Images)
A new type of 300-millimeter wafer with semiconductor chips and finished microchips of the semiconductor German manufacturer Bosch is pictured in Dresden, eastern Germany on May 31, 2021. (Jens Schlueter/AFP via Getty Images)

The U.S. Senate in June passed the U.S. Innovation and Competition Act to set aside $190 billion in provisions to fortify U.S. technology and research, plus $54 billion specifically to increase production of semiconductors, microchips, and telecommunication equipment. On June 29, the House also passed a version of the act and a separate bill aimed at boosting U.S. scientific competitiveness against China.

Over the past few years, concerns from the U.S. security panel and U.S. presidents have caused several proposed semiconductor deals to be dropped.

In 2018, the CFIUS blocked a $580 million sale of U.S. semiconductor testing company Xcerra Corp. to a Chinese state-backed semiconductor investment fund, Hubei Xinyan.

In 2017, U.S. President Donald Trump blocked a Chinese-backed private equity firm from buying Lattice Semiconductor Corp., a chipmaker based in Oregon.

After the Magnachip deal was announced in March, South Koreans began a petition to the government objecting to the merger. It collected 33,451 signatures in a month.

Financial Information Technology Alliance (FITC), the parent company of Wise Road Capital based in Beijing, had previously expressed support for advancing China’s local semiconductor testing industry following its September 2020 acquisition of Singaporean semiconductor testing firm, UTAC.

Two dozen Chinese companies sit as board members for FITC, including China’s biggest and partially state-owned chipmaker, SMIC.

Eva Fu
Eva Fu
China Reporter
Eva Fu is a New York-based writer for The Epoch Times focusing on U.S.-China, religious freedom, and human rights.