A congressional investigation has decided that 5 American enterprise capital companies invested greater than $1 billion in China’s semiconductor trade since 2001, fueling the expansion of a sector that the US authorities now regards as a nationwide safety risk.
Funds provided by the 5 companies — GGV Capital, GSR Ventures, Qualcomm Ventures, Sequoia Capital and Walden Worldwide — went to greater than 150 Chinese language firms, based on the report, which was launched Thursday by each Republicans and Democrats on the Home Choose Committee on the Chinese language Communist Celebration.
The investments included roughly $180 million that went to Chinese language companies that the committee mentioned instantly or not directly supported Beijing’s navy. That features firms that the U.S. authorities has mentioned present chips for China’s navy analysis, gear and weapons, akin 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 aimed toward reducing 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 companies 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 known as for elevating tariffs on China, focused Ford Motor and others for doing enterprise with Chinese language firms, and spotlighted pressured labor considerations involving Chinese language purchasing websites.
The report really helpful that Congress curb investments in all Chinese language entities which might be topic to sure U.S. commerce restrictions or included on federal “purple 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 pressured labor in China’s Xinjiang area. The U.S. authorities must also contemplate 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 personal funding, that it could separate its China arm from its U.S. operations and rename it HongShan. A couple of months later, GGV Capital mentioned it could 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 making an attempt to promote its stakes in three firms mentioned within the report.
A Sequoia spokeswoman mentioned the agency took U.S. nationwide safety points critically and had at all times had processes in place to make sure compliance with U.S. legislation. The agency accomplished its cut up from HongShan on Dec. 31.
A Qualcomm spokeswoman mentioned its investments have been small in contrast with these of the enterprise capital companies 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 personal Chinese language know-how firms as problematic, arguing that China has tried to attract on the experience of the personal sector to modernize its navy.
Committee leaders conceded that many of those investments have been made when the US 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 financial 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 believe there’s no excuse anymore.”
The 57-page report attracts on data offered to the committee by the companies about their investments, in addition to interviews with senior executives at a number of companies.
The committee’s report checked out simply among 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 companies, based on PitchBook, which tracks start-up funding. That funding peaked in 2021.
Enterprise capital companies pursued aggressive world enlargement, notably into Asia, for a number of a long time. However they’ve identified because the Trump administration took a extra aggressive stance towards China that investments in Chinese language firms can 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 know-how 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 put money into 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 overseas buyers within the Chinese language chip sector. Walden is led by Lip-Bu Tan, a former chief government of Cadence Design Methods, 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 a long time, the committee discovered, in addition to tens of tens of millions of {dollars} to SMIC associates. Mr. Tan additionally served on SMIC’s board of administrators.
He’s credited with bringing SMIC and different companies a mix of financing, instruments and mental property for chip design, in addition to worthwhile connections with clients.
Whereas the U.S. authorities labeled SMIC a “trusted buyer” in 2007, skepticism of the corporate’s actions has grown in Washington in newer years. At this time, the corporate is essential to China’s ambitions to create a thriving chip sector and reduce its dependence on the US.
Walden, together with Qualcomm Ventures, the investing arm of chipmaker Qualcomm, invested tens of tens of millions of {dollars} into Superior Micro-Fabrication Gear, 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 trade after the US positioned restrictions on promoting China essentially the most superior chip-making machines.
China’s semiconductor firms are properly funded by the nation’s authorities. However ties with U.S. enterprise capital companies present Chinese language firms with managerial experience in addition to entry to know-how and the American and European markets. American enterprise capital companies have additionally tried to sway U.S. officers and regulators on behalf of Chinese language firms of their portfolio, like TikTok.