FINANCE: Xi Jinping’s US Visit in Focus with Chip, Rail Deals

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Bottom line: China’s award of a big US high-speed rail contract reflects improving high-tech ties the 2 sides hope to build in an upcoming presidential summit, which could help prospects for a sale of US chipmaker Atmel to China’s CEC.

Xi Jinping heads to Washington

A couple of Sino-US deals from the sensitive high-tech space are in the news today, ahead of a summit between Presidents Xi Jinping and Barack Obama that could ease some of their recent bilateral tensions over technology issues. Leading the headlines is a breakthrough deal that will see leading Chinese high-speed rail company CRRC (HKEx: 1776; Shanghai: 601776) help to build a planned line linking the western US cities of Las Vegas and Los Angeles.

While timing of that announcement looks squarely tied to the Xi visit and should be welcome by both sides, the second looks more controversial since it could see a mid-sized US chipmaker bought by a Chinese company. That deal, which was disclosed by unnamed sources, would see the state-owned China Electronics Corp (CEC) purchase Atmel (Nasdaq: ATML), in a deal that could value the latter at more than $3 billion.

Both headlines spotlight the growing volume of deals taking place between China and the US in the sensitive high-tech space, as Chinese firms seek to acquire new business and technology from more advanced western markets. But  the rising number of deals comes against a backdrop filled with accusations of cyber spying, hacking and protectionist measures in the name of national security between the US and China. Many of those issues will be on the agenda when Xi meets Obama in Washington next week.

We’ll begin with the deal involving CRRC, the world’s largest maker of railroad equipment that was formed this year through the merger of 2 Chinese companies. CRRC is part of a Chinese group that bid for the project, which will connect Los Angeles and Las Vegas with a 230 mile high-speed rail line that one analyst estimated could cost around $5 billion. (English article)

CRRC last week also broke ground on a US-based manufacturing plant that will make subway cars for the Boston metro, and I expect this latest deal might also involve construction of another US manufacturing facility. This particular announcement appears timed to coincide with Xi’s visit, as the story has many positive elements that both presidents would like to emphasize. That story shows how the 2 sides can work together to promote global trade and technology development.

Controversial Chip Buy

The second story is slightly more controversial, since it would see a Chinese state-run giant purchase a mid-sized US maker of chips used for industrial machinery and cars. News of the deal is coming from unnamed sources, which means that bankers are probably still working on terms for such a purchase. (English article)

Atmel shares rallied as much as 25 percent as speculation about a deal first emerged in late August. But they tumbled 9 percent in the latest trading session after CEC was named as the actual interested buyer. The drop probably reflects disappointment at the potential buyer, whose background as state-run firm is almost certain to generate some controversy. Chinese companies are also famous for their bargain hunting, meaning CEC is unlikely to pay a big premium if and when it makes an offer.

China tech watchers will recall that a similar but much larger deal earlier this year that would have seen Tsinghua Unigroup make a bid for leading US memory chip maker Micron (Nasdaq: MU) quickly ran into trouble due to political sensitivities. (previous post) Atmel’s size is much smaller and the company’s technology also looks less sensitive, which is probably what’s emboldening CEC to move ahead with its bid.

The reports point out that Atmel’s acquisition would be part of a much-needed consolidation wave sweeping the chip-making industry. Atmel is still in the black, but its latest results show its profits are shrinking quickly. I doubt this deal will be on the Xi-Obama agenda, as it’s too small. But a new atmosphere of conciliation that the pair hope to forge could ultimately help this purchase go forward, assuming that no major sensitive technologies are involved.

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