Huawei builds out secretive semiconductor network in China

Company aiming to evade US sanctions

Telecommunications company Huawei is establishing a clandestine network of semiconductor fabrication facilities in China using state funding, in an attempt to realise its semiconductor ambitions. The US Commerce Department placed Huawei on its entity list in 2019, preventing almost all US companies from interacting with the company. In 2020, the US expanded its Foreign Direct Product Rule, effectively banning the export of all US technology to Huawei. To circumvent those sanctions, Huawei has since last year been acquiring plants under the names of other companies. Huawei has acquired fabrication plants from chip companies Fuijian Jinhua and Qingdao Si’En and built fabrication facilities with other semiconductor companies including Pengxinwei and Shenzhen Pensun Technology. Huawei is using these facilities to buy chipmaking equipment from US companies to manufacture less-advanced 28-nanometre chips, often used in EVs and military equipment. Huawei is receiving an estimated US$30 billion in state funding from Beijing and local governments.

Huawei’s semiconductor buildup may amplify fears in Washington that its chip export controls need to be further tightened. The Biden administration’s CHIPS and Science Act, instituted last year, prohibits the export of semiconductor equipment to China that can be used to make DRAM memory chips smaller than 18 nanometres (nm), logic chips smaller than 14/16 nm and NAND memory chips with more than 128 layers. However, Huawei aside, there is broader concern in Washington that China may grow its capabilities for manufacturing less advanced chips to the point that it would dominate the market. Based on plants under construction, by 2030 it will account for 50 percent of global capacity in 28-nanometre and 45-nanometre semiconductors. Though less advanced, these mature chips are the mainstay of many electronics and military products.

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US states’ offshore wind targets in jeopardy amid contract renegotiations

A perfect storm of increasing costs, delays and grid connection times

Several US states are now at risk of missing their offshore wind targets. Offshore wind developers in the US are attempting to renegotiate or cancel 9.7 gigawatts of offtake contracts, aiming for better terms. Over half of the contracted pipeline of four states - New York, Massachusetts, New Jersey, and Connecticut – is affected. New York state’s target appears most at risk. Aiming for 9 gigawatts of offshore wind capacity by 2035, it has awarded 4.3 gigawatts of projects in two tenders. Developers of 95 percent of the contracted capacity in the state are trying to renegotiate their contracts.

A number of issues led to the efforts to alter terms. The levelised cost of electricity (LCOE) of subsidised offshore wind projects in the US has increased nearly 50 percent from 2021 to 2023 to US$114.20 per megawatt hour. Interest rate rises have had the greatest impact on the LCOE, followed by increasing capital expenditure and operating expenses. Extensive environmental impact studies and long approval processes for grid connection - which now take five years on average – have caused long delays. State regulators find themselves in a difficult position amid increasingly imminent renewable energy targets. Far greater state support may be required to keep their longer-term installation targets on track.

EV battery companies in China shift operations to South Korea to utilise IRA subsidies

Ability of Chinese companies to qualify for IRA tax credits still in question

Chinese EV battery companies are investing in South Korea, in an attempt to take advantage of subsidies under Washington’s Inflation Reduction Act (IRA). The IRA stipulates that critical minerals and battery components must be manufactured and refined in the US or one of its free trade partners to qualify for the IRA’s tax credits. South Korea, which possesses a free trade agreement with the US, is an attractive location for Chinese companies. It also has an established EV and battery manufacturing and export industry. In an attempt to tap into the US market, Chinese cathode material maker Ronbay Technology is considering plans to separate its South Korean operations into its own South Korean-listed company over the next two years and pump Rmb 5.42 billion (US$745 million) into the new entity. South Korea’s Posco this year entered a US$1.2 billion joint venture with China’s CNGR Advanced Material. In March, China’s GME Resources and South Korea’s SK On jointly announced plans to build a battery materials plant for US$907.4 million.

The success of Chinese companies’ strategies will depend on how Washington defines “foreign entity of concern”. From 2024, companies in the US will be prevented from sourcing battery components from a “foreign entity of concern” or battery materials from any such entity from 2025 in order to qualify for the IRA’s tax credits. The US Treasury is expected to make its final decision in the next few weeks. Preliminary definitions defined a “foreign entity of concern” as any entity with over 25 percent Chinese ownership. Chinese companies continue to dominate the refining of critical minerals and occupy a foundational location in global battery supply chains. How the Biden administration choses to define “foreign entity of concern” will be an important test of how it weighs national security against energy transition imperatives.

Beijing commences anti-graft crackdown in healthcare industry

Campaign could dissuade foreign investment

China last month launched a sweeping anti-corruption campaign on its healthcare sector. China’s Central Commission for Discipline Inspection (CCDI) has in the past three weeks handed out punishments to nearly 30 people in the sector accused of bribery, exploiting the government’s medical insurance fund and illegal sales. The campaign has been enacted in a range of organisations including government departments, hospitals and drug manufacturers both foreign and locally owned. The investigation is part of a larger anti-corruption campaign by the CCDI. The commission has charged over 170 professionals and officials in the healthcare sector since the start of the year. Bribery has been a particular focus of the CCDI’s campaign. Drug and medical device manufacturers have for decades handed out bribes to doctors at public hospitals, who are incentivised to accept bribes because of low salaries.

The opaque nature of the campaign adds to deterrents facing foreign investors in China. In May, China expanded its anti-spying laws that broadened the legal definition of espionage to include the purchase or provision of “documents, data, materials, or items related to national security”. This resulted in the immediate arrest of five employees at US due diligence company Mintz Group and one worker at Japanese drugmaker Astellas Pharma. Stricter data laws have also banned workers at foreign firms from moving their company laptops outside of China and have forced companies to create new versions of their digital applications specifically for use in the country.