April 19, 2017 1:00 pm JST

Toshiba's fate tied to US-China tussle for chip dominance

Washington's policy has implications for electronics maker's survival

KUNIO SAIJO, Nikkei senior staff writer

Beijing wants the country to have world-leading semiconductor technology by 2030.

TOKYO -- Toshiba needs the sale of its flash memory business to go smoothly if the embattled electronics maker is to avoid disaster as it scrambles to restructure. But another factor, one that is shaping the entire chip sector, will also influence its revival: the battle between the U.S. and China for industry dominance.

To some observers, it may appear that the two countries are locked in a close race, but the reality is that the U.S. is far ahead in development and production capabilities, scale of the intellectual property pool, and depth of related industries, such as semiconductor manufacturing equipment. Still, there is concern in the U.S. that Chinese makers will grow into a formidable force that threatens America's position and destroys the industrial ecosystem that drives the country's innovation.

Beijing's quest for No. 1

In June 2014, Beijing adopted a set of guidelines for developing and promoting the integrated circuit industry, setting out specific targets for the industry. These include mass-producing advanced chips with 28-nanometer line widths by 2015 and 14nm chips by 2020. By 2030, Beijing wants the domestic industry to have world-leading technologies in all segments of the semiconductor business.

After the guidelines were released, there were a series of moves by the central and local governments to set up funds to support industrial endeavors. The U.S. President's Council of Advisors on Science and Technology estimates that these funds will total $150 billion in the next 10 years.

Why is China so driven to be the global leader in semiconductors? It is because there is a sense there that unless the country is capable of turning out advanced chips on its own, it cannot attain the level of industrial sophistication it seeks. In the information technology age, semiconductors are, after all, a fundamental building block of a country's industry.

To provide some context, consider that China's trade deficit for semiconductors and other electronic parts totaled $166.4 billion, far exceeding its $114.3 billion deficit for petroleum, according to trade statistics for 2016.

Of course, China's net trade deficit in electronic parts is much smaller if we take into account the fact that its industry uses imported semiconductor products to manufacture devices such as smartphones and exports many of those goods. Still, it is not difficult to imagine that such a deficit would, for the Chinese, serve as a painful reminder that they are still not capable of making advanced parts on their own, and that this has left them no choice but to resign themselves to a subcontractor-like industrial structure.

To break out of this "rut," China has spent a fortune to acquire technological and human resources, even by buying foreign companies if necessary. All of this forms the backdrop to China's drive in recent years to grow its semiconductor industry.

Wary Taiwan

Taiwan, a semiconductor powerhouse, is wary of Beijing's push. When a Taiwanese company sets up a chip plant in mainland China, it must first obtain approval from the Taiwanese authorities. And even then, the company is not allowed to introduce the most advanced manufacturing technology at the plant. That is how determined Taipei is to not leak Taiwan's semiconductor technology.

But it is the U.S. that represents the biggest obstacle to China's chip ambitions. In January, the aforementioned president's council presented then-President Barack Obama a report titled "Ensuring Long-Term U.S. Leadership in Semiconductors." The working group that compiled it included current and former leaders of such big corporate names as Intel, Qualcomm and JPMorgan Chase.

The report called semiconductors an area of significant importance to the U.S., saying they form the foundation for developing such advanced technologies as robotics and artificial intelligence, and play a vital role in defense technologies. The U.S., the report said, cannot surrender its leadership in semiconductors to any country.

The report also warned of the risk that China's industrial policy may distort market competition, and called on Washington to take countermeasures if necessary.

It is interesting to note that such a message emerged in the U.S. under the Obama administration, which was sometimes perceived as China-friendly, and not the protectionist administration of Donald Trump. This suggests that maintaining leadership in semiconductors is an overarching desire across the U.S. political spectrum.

China containment

Even before that report pointed out the threat of Beijing's semiconductor ambitions, Chinese attempts to acquire U.S. chipmakers had been thwarted. The most prominent of these was the proposed acquisition of Micron Technology by China's Tsinghua Unigroup in 2015, which Washington is believed to have blocked.

Even more striking was Washington's involvement in a failed attempt by a Chinese investment company to buy a maker of semiconductor manufacturing equipment -- a U.S. subsidiary of Germany's Aixtron. In that case, the Committee on Foreign Investment in the United States in November cited national security concerns.

Throughout all this, China has made the case that its manufacturing technology is three generations behind, and that its industry poses no threat to the U.S. Beijing has also said that China welcomes aggressive U.S. investment there by companies looking to make a profit on its soil. But that has not prompted Washington to reciprocate.

Japan cannot remain unaffected by the increasing tension between the U.S. and China. In fact, the report by the president's council called for the U.S. to work with "allies" and "like-minded partners" in reining in China's aggressive moves in the chip industry. Likewise, Washington cannot remain indifferent to the question of who will acquire Toshiba's memory business, which owns 3-D flash memory and other cutting-edge technologies.

Toshiba Corp.

Japan

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