Intel gains a new ally in China's chip wars: Beijing

Intel gains a new ally in China's chip wars: Beijing

BEIJING/SAN FRANCISCO - Intel's investment of up to US$1.5 billion (S$1.9 billion) in two fast-growing Chinese mobile chipmakers has effectively aligned the US giant with a third party - a Beijing government intent on producing a viable domestic challenger to the likes of Qualcomm and Samsung.

For more than a decade, China has targeted semiconductor design and manufacture as a major focus of its industrial policy. Activity has picked up markedly over the past year with a spate of cross-border mergers and cooperation deals. "We've entered an inflection point where government policy has started to work - it's started to help the local semiconductor industry," said Nomura analyst Leping Huang.

The deal hashed out by Intel Corp Chief Executive Brian Krzanich over 24 hours in Beijing in early August extends Intel's beachhead in China, the biggest battleground in the smartphone industry, and boosts the company's years-long effort to catch up to leading mobile chipmaker Qualcomm Inc.

A key visit during the trip was to Yang Xueshan, the deputy chief of China's Ministry of Industry and Information Technology (MIIT), who gave his blessing for the deal.

The agreement, unveiled on Sept. 26, gives Intel a 20 per cent stake in Spreadtrum Communications and RDA Microelectronics through shares in a Tsinghua University holding company, with the aim of jointly developing and marketing smartphone chips.

China is the world's largest consumer and manufacturer of smartphones yet relies heavily on imported chips - particularly the processors that power the latest devices - made by San Diego-based Qualcomm, South Korea's Samsung Electronics Co , or MediaTek Inc of Taiwan.

China's ramped-up activity also arrives on the heels of revelations about the US surveillance programme PRISM, which has prompted Beijing to undertake a slew of actions to enhance the security of its information technology industry.

For Intel, the world's leading manufacturer of chips for personal computers, the Tsinghua deal offers an additional path into the world's biggest chip market after it was slow to recognise the mobile revolution and design new processors for smartphones and tablets.

Intel spokesman John Mandeville declined to comment.

NATIONAL TARGETS

The China Semiconductor Industry Association estimates that revenue from China's chip industry reached 251 billion yuan(US$40.98 billion) in 2013, while domestic demand for chips amounted to 917 billion yuan, representing more than half of global semiconductor consumption.

Deng Zhonghan, a member of the Chinese Academy of Engineering and National People's Congress, said in March that China's US$210 billion worth of annual chip imports exceeds the value of the country's entire yearly petroleum imports.

In June, the State Council offered the country's most comprehensive guidelines for the development of the semiconductor industry, outlining specific revenue targets for 2015 and 2020, with chip revenue set to grow at a better-than 20 per cent annual clip, to reach 350 billion yuan by 2020.

An important part of Beijing's effort, analysts and industry insiders say, was consolidation of Spreadtrum and RDA, two companies formerly trading independently on Nasdaq.

The two companies were acquired a year ago for US$1.7 billion and US$900 million respectively by Tsinghua Unigroup, government-affiliated private equity group controlled by Tsinghua University in Beijing.

As part of its recent deal, which is expected to close early next year, Intel and Unigroup will form a new holding company that contains Spreadtrum and RDA.

Beijing wants the Unigroup companies to become competitive with Taiwan's MediaTek within five years and overtake Qualcomm within 10 years, according to a person familiar with Unigroup.

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