Friday, May 24

American companies invested $1 billion in Chinese potato chips, lawmakers find

A congressional investigation has found that five American venture capital firms have invested more than $1 billion in China’s semiconductor industry since 2001, fueling the growth of an industry that the U.S. government now considers a national security threat. .

The funds provided by the five firms – GGV Capital, GSR Ventures, Qualcomm Ventures, Sequoia Capital and Walden International – went to more than 150 Chinese companies, according to the report, released Thursday by both Republicans and Democrats on the House Select Committee on the Party Chinese Communist.

The investments included about $180 million to Chinese companies that the committee said directly or indirectly supported Beijing’s military. This includes companies that the U.S. government says supply chips for China’s military research, equipment and weapons, such as Semiconductor Manufacturing International Corporation, or SMIC, China’s largest chipmaker.

The House committee’s report focuses on investments made before the Biden administration imposed broad restrictions aimed at cutting China’s access to American financing. It does not infer any illegitimacy.

In August, the Biden administration banned U.S. venture capital and private equity firms from investing in Chinese quantum computing, artificial intelligence and advanced semiconductors. It also imposed worldwide limits on sales of advanced chips and chip-making machines to China, arguing that these technologies could help improve the capabilities of China’s military and spy agencies.

Since it was established a year ago, the committee has called for increased tariffs on China, targeted Ford Motor and others for doing business with Chinese companies and highlighted forced labor concerns involving sites Chinese traders.

The report recommends that Congress curb investments in all Chinese entities subject to certain US trade restrictions or included on federal “red flag” lists, as well as their parent and subsidiary companies. This would include companies that work with the Chinese military or have links to forced labor in China’s Xinjiang region. The U.S. government should also consider imposing controls on other industries, such as biotechnology and fintech, said Rep. Raja Krishnamoorthi of Illinois, the committee’s ranking Democrat.

Sequoia said in June, before the commission announced its investigation into private financing, that it would separate its China subsidiary from U.S. operations and rename it HongShan. A few months later, GGV Capital said it would separate its Asia-focused businesses.

Walden did not respond to a request for comment. A GSR representative declined to comment. GGV provided a list of corrections and clarifications to the report and stated that it complied with all applicable laws. GGV is also looking to sell its stakes in the three companies mentioned in the report.

A Sequoia spokesperson said the company takes U.S. national security issues seriously and has always had processes in place to ensure compliance with U.S. law. The company completed its split from HongShan on Dec. 31.

A Qualcomm spokesperson said its investments were small compared to those of venture capital firms and made up less than 2% of the investments discussed in the report.

Washington officials also see trade ties with private Chinese technology companies as increasingly problematic, arguing that China has sought to tap private sector expertise to modernize its military.

The committee’s leaders admitted that many of these investments were made as the United States encouraged greater economic engagement with China.

“We all made this bet 20 years ago on China’s integration into the global economy, and it made sense,” said Rep. Mike Gallagher of Wisconsin, the committee’s chairman. “It just happened to fail.” He added: “Now, I just think there’s no more excuses.”

The 57-page report is based on information provided to the committee by companies about their investments, as well as interviews with senior executives from several companies.

The commission’s report examined only some of the funding flowing to China. Between 2016 and July 2023, Chinese semiconductor companies raised $8.7 billion in deals that included U.S. investment firms, according to PitchBook, which tracks startup funding. That investment peaked in 2021.

Venture capital firms have pursued aggressive global expansion, particularly in Asia, for several decades. But they know since the Trump administration took a more aggressive stance on China that investments in Chinese companies would be subject to increasing scrutiny.

“No one is touching China now,” said Linus Liang, an investor at venture capital firm Kyber Knight Capital.

Splitting investment entities with ties to China, as Sequoia and GGV have done, may not resolve the committee’s concerns that American funding and technology will end up in Chinese companies, the report said. The Chinese company HongShan, recently separated from Sequoia, counts US investors among its supporters. And HongShan and GGV’s new unit, GGV Asia, may still invest in US startups, the report said.

Much of the report focuses on Walden International, a California-based company that was one of the earliest and most influential foreign investors in China’s chip sector. Walden is led by Lip-Bu Tan, former CEO of Cadence Design Systems, a chip design company, and current member of Intel’s board of directors.

Walden International has created various funds for the chip industry in collaboration with the Chinese government and Chinese state-owned companies, including a major military supplier, the report said.

He was a founding shareholder and an early source of funding for SMIC, which is now subject to U.S. trade restrictions because of its ties to the Chinese military. Walden donated $52 million to SMIC over several decades, the committee found, as well as tens of millions of dollars to SMIC affiliates. Mr Tan also served as a member of SMIC’s board of directors.

He is credited with offering SMIC and other companies a combination of funding, tools and intellectual property for chip design, as well as profitable connections with customers.

While the US government called SMIC a “trusted customer” in 2007, skepticism about the company’s activities has grown in Washington in recent years. Today, the company is central to China’s ambitions to create a thriving chip sector and reduce its dependence on the United States.

Walden, along with Qualcomm Ventures, the investing arm of chipmaker Qualcomm, has invested tens of millions of dollars in Advanced Micro-Fabrication Equipment, or AMEC, a Chinese company that makes the machines needed to make chips. AMEC, a supplier to SMIC and other Chinese chipmakers, is vital to China’s efforts to develop its own chipmaking industry after the United States imposed restrictions on the sale of China’s largest chipmaking machines. advanced.

Chinese semiconductor companies are well funded by the country’s government. But ties to U.S. venture capital firms provide Chinese companies with management expertise and access to American and European technology and markets. American venture capital firms have also sought to influence U.S. officials and regulators on behalf of Chinese companies in their portfolio, such as TikTok.