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 For more than a decade, China has targeted semiconductor design and
manufacture as a major focus of its industrial policy. Activity has
picked up markedly over the past year with a spate of cross-border
mergers and cooperation deals.
"We've entered an inflection point where government policy has
started to work - it's started to help the local semiconductor
industry," said Nomura analyst Leping Huang.
The deal hashed out by Intel Corp Chief Executive Brian Krzanich
over 24 hours in Beijing in early August extends Intel's beachhead
in China, the biggest battleground in the smartphone industry, and
boosts the company's years-long effort to catch up to leading mobile
chipmaker Qualcomm Inc.
A key visit during the trip was to Yang Xueshan, the deputy chief of
China's Ministry of Industry and Information Technology (MIIT), who
gave his blessing for the deal.
The agreement, unveiled on Sept. 26, gives Intel a 20 percent stake
in Spreadtrum Communications and RDA Microelectronics through shares
in a Tsinghua University holding company, with the aim of jointly
developing and marketing smartphone chips.
China is the world's largest consumer and manufacturer of
smartphones yet relies heavily on imported chips - particularly the
processors that power the latest devices - made by San Diego-based
Qualcomm, South Korea's Samsung Electronics Co, or MediaTek Inc of
Taiwan.
China's ramped-up activity also arrives on the heels of revelations
about the U.S. surveillance program PRISM, which has prompted
Beijing to undertake a slew of actions to enhance the security of
its information technology industry.
For Intel, the world's leading manufacturer of chips for personal
computers, the Tsinghua deal offers an additional path into the
world's biggest chip market after it was slow to recognize the
mobile revolution and design new processors for smartphones and
tablets.
Intel spokesman John Mandeville declined to comment.
NATIONAL TARGETS
The China Semiconductor Industry Association estimates that revenue
from China's chip industry reached 251 billion yuan($40.98 billion)
in 2013, while domestic demand for chips amounted to 917 billion
yuan, representing more than half of global semiconductor
consumption.
Deng Zhonghan, a member of the Chinese Academy of Engineering and
National People's Congress, said in March that China's $210 billion
worth of annual chip imports exceeds the value of the country's
entire yearly petroleum imports.
In June, the State Council offered the country's most comprehensive
guidelines for the development of the semiconductor industry,
outlining specific revenue targets for 2015 and 2020, with chip
revenue set to grow at a better-than 20 percent annual clip, to
reach 350 billion yuan by 2020.
An important part of Beijing's effort, analysts and industry
insiders say, was consolidation of Spreadtrum and RDA, two companies
formerly trading independently on Nasdaq.
The two companies were acquired a year ago for $1.7 billion and $900
million respectively by Tsinghua Unigroup, government-affiliated
private equity group controlled by Tsinghua University in Beijing.
As part of its recent deal, which is expected to close early next
year, Intel and Unigroup will form a new holding company that
contains Spreadtrum and RDA.
Beijing wants the Unigroup companies to become competitive with
Taiwan's MediaTek within five years and overtake Qualcomm within 10
years, according to a person familiar with Unigroup.
TRUE PARTNERS
Since taking over in 2013, Krzanich has aggressively positioned
Intel to catch up with Qualcomm, the leading mobile chipset maker.
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A central part of that strategy is China, where consumers are
snapping up low-end smartphones made with low-cost chips from local
suppliers like Spreadtrum and MediaTek.
Intel started investing in local operations 20 years ago, and
presently operates factories across the country for manufacturing,
assembling and testing microprocessors. Intel also has research and
development operations in Beijing, Shanghai and Shenzhen.
In May, Intel said it reached an agreement with Fuzhou-based
Rockchip to produce chips for tablets based on Intel's architecture.
"With China, what they want is for you to be a true partner,"
Krzanich told reporters in September. "We go in and we partner, we
build factories, we build R&D and we help local companies."
Intel's deal with Tsinghua Unigroup comes three months after
Qualcomm agreed to partner with Shanghai-based Semiconductor
Manufacturing International Corporation (SMIC), China's largest
foundry, to produce some of Qualcomm's smartphone chips.
As part of the agreement, Qualcomm will help SMIC implement its
first high-end 28 nanometer manufacturing technology.
It also coincides with a year-long Chinese anti-monopoly
investigation into Qualcomm. Critics say the probe unfairly targets
foreign companies in order to help domestic companies, which Chinese
authorities flatly deny.
Krzanich first discussed ways to collaborate with the Chinese firms
during a visit to Tsinghua University in April, where he and Intel
China head Yang Xu met Tsinghua Holding's Xu Jinhong, Unigroup's
Zhou Weiguo, Spreadtrum founder Li Liyou, who is also a Tsinghua
University alumnus.
He made a second trip to Beijing, the whirlwind visit in August,
after which the deal fell into place.
"Tsinghua University is an important driving force for the
development of national science and technology, and Tsinghua
Holdings is a key part of that effort," Tsinghua Holdings Chief
Executive Xu Jinhong told Reuters by email.
Xu characterized the Intel investment as "a new model for
cooperation between Chinese and U.S. companies in the chip
industry."
Analysts say that Intel's deal will give the Santa Clara-based
company a moderate boost by gaining a partner with strong
relationships with local phone manufacturers.
The deal should also give Intel enough protection of its
intellectual property through licensing arrangements and other
conditions, said Scott Kennedy, director of the Research Centre for
Chinese Politics and Business at Indiana University.
"There's potential benefits for everyone," Kennedy said.
(1 US dollar = 6.1250 Chinese yuan)
(Additional reporting by Michael Martina and Beijing Newsroom;
Editing by Alex Richardson and Emily Kaiser)
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