New US-China rivalry: a technology race

As the United States and China look to protect their national security needs and economic interests, the fight between the two financial superpowers is increasingly focused on a single area: technology.

The clash erupted in public on Tuesday after the US government, citing national security concerns, called for a full investigation into a hostile bid to buy the American chip stalwart Qualcomm - a review that is often a death knell for a corporate deal.

The proposed acquisition by the Singapore-based Broadcom would have been the largest deal in technology history, creating a major force in the development of the computer chips that power smartphones and many internet-connected devices. But a government panel said the takeover could weaken Qualcomm and give its Chinese rivals an advantage.

"China would likely compete robustly to fill any void left by Qualcomm as a result of this hostile takeover," a US Treasury official wrote in a letter calling for a review of the deal. The fight over technology is redefining the rules of engagement in an era when national security and economic power are closely intertwined.

China, under President Xi Jinping, has launched an ambitious plan to dominate mobile technology, supercomputers, artificial intelligence and other cutting-edge industries, putting huge resources behind an effort that it considers crucial to the country's government, military and economy. Beijing wants to build its own technology champions and is encouraging companies to acquire the engineering, expertise and intellectual property from big rivals in the US and elsewhere.

The aggressive push has set off alarms in Washington, with policymakers and lawmakers fearful that American giants could lose their edge. US President Donald Trump is now building up the country's defences, as the government investigates potential violations of US intellectual property rights and intensifies scrutiny of overseas deals.

The secretive panel that is reviewing the Qualcomm deal, the Committee on Foreign Investment in the US (CFIUS) has taken on a central role in the resistance to Chinese investment. The panel, led by the Treasury Department and made up of representatives from multiple agencies, has the authority to block foreign acquisitions of US companies for national security reasons; it has effectively killed several acquisitions linked to Chinese buyers over the past year.

Lawmakers are also calling to expand the powers of CFIUS to reflect the broader scope of China's interests. "The Trump administration turbocharged it," Tony Balloon, the head of the corporate China practice at the law firm Alston & Bird, said, referring to CFIUS. "There is now a recognition in government that foreign investors, particularly from China, are getting more and more sophisticated on how they get access to technology in the US"

With Qualcomm, the government has articulated its evolving vision for global economic leadership. The company, which is a major supplier to the US government, is a leading player in the race to build the next generation wireless technology, known as 5G.

These high-speed mobile networks will form the infrastructure backbone that ultimately connects home appliances, streetlights and driverless cars to the internet. And Qualcomm's chips will be in the multitude of devices and machines that will run on those networks.

"Having a well-known and trusted company hold the dominant role that Qualcomm does in the telecommunications infrastructure provides significant confidence in the integrity of such infrastructure as it relates to national security," the Treasury official wrote in the letter.

The government specifically cited Huawei, the Chinese telecom-equipment giant, as a potential competitor that could move into a breach created by a merger. The Chinese company has spent heavily on 5G, and the government said it owns 10% of the essential patents.

"It is the new paradigm," said Paul Triolo, head of global technology policy at Eurasia Group, a geopolitical risk consulting company. "That implies technologies with 5G, artificial intelligence, biotech and automation are now considered more sensitive and part of a national innovation base that needs to be protected."

Broadcom said it was cooperating with CFIUS, saying it was "making the combined company a global leader in critical 5G and other technologies." Qualcomm, in an earlier statement, said the review was a "very serious matter."

Forceful position

The letter and the call for an investigation reflect the newly forceful position of CFIUS. In most cases, the panel weighs in after a deal is announced. With Qualcomm, CFIUS is taking a proactive role and investigating before an acquisition agreement has even been signed. CFIUS has stymied several deals in the past year.

MoneyGram, the money transfer company, and Ant Financial, the Chinese electronics payment company, called off their merger in January, citing regulatory concerns of CFIUS. If the deal had gone through, Ant Financial would have had access to reams of financial data, which could have created security problems. Ant Financial has said that consumer data would have stayed in the US.

Last year, the White House blocked a Chinese-backed investor from buying Lattice Semiconductor, which is a supplier to the US government. China Venture Capital Fund Corp., which was part of the investment group, is owned by state-backed entities.

"It's very much an expansion of what is considered to be national security," said Tai Ming Cheung, director of the Institute on Global Conflict and Cooperation at the University of California at San Diego. "This is about China's efforts to invest and acquire key parts of the US innovation system."

Technology companies are stuck in the middle of the fight between the US and China. While there are concerns about Chinese encroachment, the industry also recognises that such deals are the price for entry to the world's second-largest economy. Companies have protested the proposed changes to CFIUS, saying an expansion of its powers could be misused.

IBM has said the bill would limit the "ability of American firms to do business abroad while empowering foreign competitors to capture global markets." The Information Technology Industry Council, a tech trade group, has lobbied against the changes, saying they add complexity for Silicon Valley companies that often have intricate business ties in China.

"They are between a rock and a hard place," said Rob Atkinson, president of the Information Technology and Innovation Foundation, a think tank that is sponsored by technology firms like Microsoft. "The Chinese government says you have to do this to operate here. The US says, 'But you can't do that.'"