Want to understand the Biden administration’s China strategy? Set aside the South China Sea and the Quad. A more useful marker of the administration’s thinking may come from a South Korean company that few in Washington have ever heard of. Magnachip, based in South Korea, produces a type of semiconductor needed in the most advanced screens, such as those for the newest smartphones. It’s a small company, with revenues of around $500 million last year, a tiny fraction of chip industry behemoths like Intel or Taiwan’s TSMC. But the Biden administration is now blocking its purchase by a Chinese private equity fund. The fate of the deal will send a major message about how Washington is thinking about the United States’ economic relationship with China.
Since taking power in January, U.S. President Joe Biden has quietly shelved discussion of “decoupling,” the idea advocated by some aides of former U.S. President Donald Trump of severing economic ties with China. Talk of a trade war with China has been abandoned, too, although Trump’s tariffs remain in place for now. Biden has presided over a deepening of Wall Street’s ties with China, continuing a Trump-era trend. The main new initiative from the Biden administration has been to issue a new report on America’s supply chains, which mentions China but frames the challenge as building resilience, not bashing Beijing.
[For more on the growing rivalry between the United States and China, check out the latest episode of Global Reboot, which features a discussion between Kevin Rudd and FP’s Ravi Agrawal.]
To understand the meaning of the Magnachip deal against this background, start with the company itself. The display technology that Magnachip specializes in is a small slice of the semiconductor market. These display drivers are important but are far less pervasive than the logic or memory chips found in nearly every device or data center. Magnachip’s technology is advanced, but it isn’t particularly unique. If you were to draw up a priority list of companies that you didn’t want to fall into China’s hands, Magnachip wouldn’t be at the top of the list.
Regionally, South Korea produces a big chunk of the most advanced display drivers, like Magnachip’s, which are plugged into smartphones and other consumer electronic devices. China, which manufactures many of the smartphones and tablets that incorporate these displays, would like to break into the market, as part of its effort to move up the value chain from simply assembling devices to building their high-value components. So it was not a surprise when a Chinese investment firm called Wise Road Capital submitted an offer to buy Magnachip this year.
It’s possible to see this proposed deal as a simple business transaction. It is also possible to interpret it through the lens of Beijing’s state-backed semiconductor strategy. China’s Communist Party leadership has identified semiconductors as a focus of competition with its foreign rivals. Government plans such as Made in China 2025 are pouring billions of dollars of state subsidies into China’s chip industry. Chinese President Xi Jinping recently named his top economic advisor, Liu He, as the country’s chip czar, charged with helping China’s semiconductor industry and reducing reliance on foreign tech. Given that semiconductors power everything from advanced computing to autonomous driving to new military technologies, Beijing’s semiconductor efforts aren’t only about building smartphones.
Zooming out still further, the U.S. government has not looked kindly on Chinese firms buying other chipmakers in recent years. In 2015, the U.S. Committee on Foreign Investment in the United States (CFIUS) torpedoed the purchase by China’s Tsinghua Unigroup of Micron, an Idaho-based memory-chip maker. In 2016, the Obama administration rejected a Chinese fund’s proposed purchase of Aixtron, a German company that made semiconductor equipment, on the grounds that Aixtron had facilities in the United States. In 2017, CFIUS blocked a proposed takeover of Oregon-based Lattice Semiconductor, citing national security risks. And in 2018, the Trump administration halted the purchase of Qualcomm by Broadcom, a Singapore-based company. So there is plenty of precedent for CFIUS blocking semiconductor deals.
Magnachip, however, is different from all these deals. It is a small company. It focuses on technology that is not a U.S. core competency. Moreover, it has little if any U.S. presence. The company has stated that “[a]ll manufacturing and research and development activities take place in South Korea.” Most sales are outside the United States, as are all the employees, IT systems, and intellectual property. Unless the company’s disclosures are hiding something, the only substantive connection Magnachip has to the United States is that its shares trade on the New York Stock Exchange.
Yet CFIUS has struck again. On June 15, the committee ordered Magnachip to halt its sale until CFIUS has finished investigating. The next day, South Korea’s regulators issued their own set of demands regarding the proposed transaction. Now the sale of Magnachip is on ice until regulators approve. They may be hoping that the deal dies without them having formally to kill it.
This apparent tag-teaming by U.S. and South Korean regulators seems strange, especially because, despite the CFIUS order, hardly anyone in Washington is aware that the U.S. government is blocking a transaction between a Chinese and a South Korean firm. It isn’t clear whether the initial impulse to block the deal came from Washington or Seoul. But though the two governments have only taken interim steps, it seems unlikely that either government will let the deal go through in its current form.
What does this tell us about the Biden administration’s strategy toward economic relations with China? It says nothing at all about supply chains because Magnachip supplies little if any of its technology to U.S. firms. A small player, Magnachip has little to do with the semiconductor shortage that has been making headlines. There’s no direct military ramification of its technology either. Magnachip doesn’t sell much to firms in the United States, so there’s no impact on American workers and no obvious effect on U.S. intellectual property, either.
The only plausible interpretation is that, apparently in conjunction with the South Korean government, the Biden administration has de facto decided that all chip firms—even if small, seemingly innocuous, and barely linked to the United States—are off limits to Chinese buyers. If Magnachip isn’t allowed to couple up with a Chinese private equity fund, it is hard to imagine anyone else will be allowed to, either. This is bad news for China’s efforts to acquire chip expertise by buying foreign companies. Just don’t expect anyone in the White House to call it decoupling.
