American Firms Invested $1 Billion in Chinese Chips, Lawmakers Find

A congressional investigation has decided that 5 American enterprise capital corporations invested greater than $1 billion in China’s semiconductor business since 2001, fueling the expansion of a sector that america authorities now regards as a nationwide safety risk.

Funds provided by the 5 corporations — GGV Capital, GSR Ventures, Qualcomm Ventures, Sequoia Capital and Walden Worldwide — went to greater than 150 Chinese language firms, in response to the report, which was launched Thursday by each Republicans and Democrats on the Home Choose Committee on the Chinese language Communist Get together.

The investments included roughly $180 million that went to Chinese language corporations that the committee mentioned immediately or not directly supported Beijing’s navy. That features firms that the U.S. authorities has mentioned present chips for China’s navy analysis, tools and weapons, comparable to Semiconductor Manufacturing Worldwide Company, or SMIC, China’s largest chipmaker.

The report by the Home committee focuses on investments made earlier than the Biden administration imposed sweeping restrictions geared toward chopping off China’s entry to American financing. It doesn’t allege any illegality.

In August, the Biden administration barred U.S. enterprise capital and personal fairness corporations from investing in Chinese language quantum computing, synthetic intelligence and superior semiconductors. It has additionally imposed worldwide limits on gross sales of superior chips and chip-making machines to China, arguing that these applied sciences may assist advance the capabilities of the Chinese language navy and spy businesses.

Because it was established a yr in the past, the committee has referred to as for elevating tariffs on China, focused Ford Motor and others for doing enterprise with Chinese language firms, and spotlighted compelled labor considerations involving Chinese language purchasing websites.

The report advisable that Congress curb investments in all Chinese language entities which can be topic to sure U.S. commerce restrictions or included on federal “pink flag” lists, in addition to their mum or dad firms and subsidiaries. That would come with firms that work with the Chinese language navy or have ties to compelled labor in China’s Xinjiang area. The U.S. authorities must also take into account imposing controls on different industries, like biotechnology and fintech, Consultant Raja Krishnamoorthi of Illinois, the committee’s rating Democrat, mentioned.

Sequoia mentioned in June, earlier than the committee introduced its investigation into non-public funding, that it will separate its China arm from its U.S. operations and rename it HongShan. A number of months later, GGV Capital mentioned it will separate its Asia-focused enterprise.

Walden didn’t reply to a request for remark. A consultant from GSR declined to remark. GGV offered an inventory of corrections and clarifications to the report and acknowledged that it had been in compliance with all relevant legal guidelines. GGV can also be attempting to promote its stakes in three firms mentioned within the report.

A Sequoia spokeswoman mentioned the agency took U.S. nationwide safety points significantly and had all the time had processes in place to make sure compliance with U.S. regulation. The agency accomplished its break up from HongShan on Dec. 31.

A Qualcomm spokeswoman mentioned its investments have been small in contrast with these of the enterprise capital corporations and made up lower than 2 p.c of the investments mentioned within the report.

Officers in Washington more and more see enterprise ties even with non-public Chinese language expertise firms as problematic, arguing that China has tried to attract on the experience of the non-public sector to modernize its navy.

Committee leaders conceded that many of those investments have been made when america was encouraging better financial engagement with China.

“All of us made this guess 20 years in the past on China’s integration into the worldwide economic system, and it was logical,” mentioned Consultant Mike Gallagher of Wisconsin, the committee’s chairman. “It simply occurred to have failed.” He added, “Now, I simply I feel there’s no excuse anymore.”

The 57-page report attracts on data offered to the committee by the corporations about their investments, in addition to interviews with senior executives at a number of corporations.

The committee’s report checked out simply a number of the funding flowing to China. Between 2016 and July 2023, Chinese language semiconductor firms raised $8.7 billion in offers that included U.S. funding corporations, in response to PitchBook, which tracks start-up funding. That funding peaked in 2021.

Enterprise capital corporations pursued aggressive world growth, notably into Asia, for a number of many years. However they’ve recognized for the reason that Trump administration took a extra aggressive stance towards China that investments in Chinese language firms could be topic to rising scrutiny.

“Nobody is touching China now,” mentioned Linus Liang, an investor on the enterprise agency Kyber Knight Capital.

Splitting off funding entities with ties to China, as Sequoia and GGV did, could not resolve the committee’s considerations that American financing and expertise will find yourself in Chinese language firms, the report acknowledged. Sequoia’s newly separated Chinese language-based agency, HongShan, counts U.S. buyers amongst its backers. And HongShan and GGV’s new unit, GGV Asia, may nonetheless spend money on U.S. start-ups, the report mentioned.

A lot of the report focuses on Walden Worldwide, a California-based firm that was one the earliest and most influential international buyers within the Chinese language chip sector. Walden is led by Lip-Bu Tan, a former chief government of Cadence Design Programs, a chip design agency, and a present member of Intel’s board.

Walden Worldwide created numerous funds for the chip sector in partnership with the Chinese language authorities and Chinese language state-owned firms, together with a distinguished navy provider, the report mentioned.

It was a founding shareholder and early supply of financing for SMIC, which is now topic to U.S. commerce restrictions due to its ties to the Chinese language navy. Walden gave $52 million to SMIC over a number of many years, the committee discovered, in addition to tens of thousands and thousands of {dollars} to SMIC associates. Mr. Tan additionally served on SMIC’s board of administrators.

He’s credited with bringing SMIC and different corporations a mix of financing, instruments and mental property for chip design, in addition to worthwhile connections with prospects.

Whereas the U.S. authorities labeled SMIC a “trusted buyer” in 2007, skepticism of the corporate’s actions has grown in Washington in more moderen years. At this time, the corporate is essential to China’s ambitions to create a thriving chip sector and reduce its dependence on america.

Walden, together with Qualcomm Ventures, the investing arm of chipmaker Qualcomm, invested tens of thousands and thousands of {dollars} into Superior Micro-Fabrication Tools, or AMEC, a Chinese language firm that makes the machines wanted to fabricate chips. AMEC, a provider to SMIC and different Chinese language chipmakers, is significant to China’s efforts to construct up its chip-making business after america positioned restrictions on promoting China probably the most superior chip-making machines.

China’s semiconductor firms are effectively funded by the nation’s authorities. However ties with U.S. enterprise capital corporations present Chinese language firms with managerial experience in addition to entry to expertise and the American and European markets. American enterprise capital corporations have additionally tried to sway U.S. officers and regulators on behalf of Chinese language firms of their portfolio, like TikTok.