CHIPS: China Chipmaker Lands in Eye of Trump Trade War

Bottom line: Washington’s punishment of a Chinese chipmaker accused of stealing from Micron Technology is part of a savvy targeted approach by the Trump administration aimed at spotlighting illegal business practices by Chinese tech firms.

I thought I’d begin this Monday with a wrap and look at what’s ahead for a Chinese chipmaker called Jinhua, which fell squarely in the crosshairs of Donald Trump’s trade war with Beijing in a series of breakneck developments last week. This particular case seems to be part of a growing pattern that is seeing Trump pick his battles one at a time, at least when it comes to handling Chinese technology companies.

We’ll review the details on this latest case involving Jinhua and its dispute with US chip giant Micron Technology (Nasdaq: MU) shortly. But the bigger picture is that Trump has accused Chinese companies of stealing US intellectual property and has made that issue central in his current push for a trade deal. Previously US companies with such complaints could only seek assistance from the courts, mostly in the US and EU, since few believe the Chinese court system could handle such cases effectively and objectively. But the government can obviously take action much more quickly and effectively, as Trump is showing with his latest actions.

All that said, let’s review the facts of this complex case before trying to understand what it means and where things might be going. It all began last December when Micron, the largest US maker of memory chips, sued Jinhua in the US on accusations of intellectual property theft. Jinhua responded by countersuing Micron in its home province of Fujian in China. Perhaps not surprisingly, Jinhua got a sympathetic ruling from a hometown judge that locked some of Micron’s memory chips out of China.

All of that is relatively ancient history, and things had settled into the usual legal stalemate until last week, when the Trump administration suddenly decided to get involved. In a series of coordinated moves, the administration first announced that Jinhua was being banned from buying from its US suppliers. That move was reminiscent of another action taken against telecom equipment maker ZTE (HKEx: 763; Shenzhen: 000063) earlier this year, even though reasons for the two actions were quite different.

Just days after taking the new action against Jinhua, the US Department of Justice unsealed an indictment with charges similar to those raised by Micron. (English article) The indictment goes into quite a level of detail, presumably much of it taken from the original Micron lawsuit.

But it essentially says that several former Micron employees took intellectual property from the company before leaving, and then transferred that to Jinhua. An interesting twist is that Taiwan’s UMC (Taipei: 2303) was apparently part of the scheme as a middleman, and has since cut all its R&D ties with Jinhua. Jinhua itself remained mum through most of this, but finally issued a statement over the weekend saying it respects intellectual property and blasting Micron for trying to hinder its development. (Chinese article)

Siding with the Home Team

Obviously I can’t say for sure whether Micron’s claims are valid, though this certainly wouldn’t be the first time this kind of blatant intellectual property theft has occurred. The important thing is that Trump has clearly sided with Micron, and is choosing to make this an example of how executive actions can be taken far more quickly than court actions to address this kind of situation.

Beijing itself spoke out initially but since then has been relatively quiet on the matter, perhaps because all of this comes at a delicate time when it wants to try to reach a new trade deal that would address all of Trump’s complaints. Beijing was far more outspoken during the ZTE case earlier this year, which saw the company nearly put out of business after Washington took similar action to punish it for selling US products to Iran in violation of US sanctions. (previous post)

Trump has also been quite aggressive with this kind of targeted move against Chinese tech companies by vetoing proposed purchases of US tech firms by Chinese buyers. Somewhat ironically, one of those interventions under the previous Obama administration came after a Chinese buyer tried to buy Micron itself. (previous post). If that move had succeeded, perhaps it would have negated the need for a company like Jinhua to steal the property instead through more underhanded means.

At the end of the day, I really do have to commend Trump for this kind of precision approach, which draws attention to individual cases that exemplify China’s bad trade practices without putting entire industries at risk. In this case I doubt the US will have much incentive to reach a deal to end its ban against Jinhua, since it has very little incentive to do so. Accordingly, this company whose high-tech hopes were built upon stolen property will have to either shift its focus or look elsewhere for new non-American suppliers.