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Semiconductor industry faces advent of “geopolitics of technology”

  • September 16, 2020
  • , Nikkei , p. 3
  • JMH Translation

By Atsushi Nakayama, Nikkei commentator

 

The era of free, multilateral trade has come to an end. Now international business must be conducted under rules and restrictions imposed by two giants, the U.S and China. Japan’s semiconductor industry now faces the “geopolitics of technology.”

 

Japan’s Sony Corporation and Kioxia have lost more business than most corporations that were impacted by the U.S. export ban on Chinese telecom giant Huawei. The two companies confessed that the blow to their business “had been unexpected.” In an attempt to swiftly exclude the Chinese firm from the market, the U.S. government revised and re-revised relevant regulations, rendering the consequences of the ban less predictable to the companies.

 

Originally, the U.S. export ban was only applicable to products with 25% or more American components. Later, it was revised to include “products whose development process involves U.S. software.”

 

Almost all circuit design software that Japanese companies use comes from the U.S., even though all the product parts are domestically procured. The U.S. government is likely to strengthen relevant regulations going forward, as long as the ultimate goal of the U.S. remains squeezing out Chinese products.

 

Measures to exclude Chinese products are expected in other areas as well. The U.S. government invitations currently posted for public comment on regulatory changes include measures such as presidential directives aimed at blocking cyberattacks on core power networks and next year’s revision of the national defense authorization act.

 

For companies that have business dealings with China, all these measures can affect them when they bid on government procurement contracts.

 

China is about to take similar steps. The U.S. government urges foreign companies to create an information system using cloud networks and IT devices that meet technological standards specified by the U.S. Meanwhile, China is requesting the same companies to upload their business data to the Alibaba Cloud network.

 

Some observers speculate that the Chinese Communist Party would set up a committee inside foreign companies’ local affiliates so that the Chinese government can monitor their corporate management. If a foreign company’s products or services involve use of the internet, the company may become subject to stricter restrictions in funding its local affiliates and be required to appoint Chinese nationals to senior positions at the affiliate companies.

 

How can a company conduct business smoothly with both the U.S. and China? Dividing a company into two groups, one for exclusively conducting business with the U.S., and the other with China, would not be a realistic option. Instead, a company should establish a system of strict separation and information management, incorporating firewalls that can be trusted by the two competing governments.

 

Tama University’s graduate school professor Toshifumi Kokubun said, “There are as many as 160 items in which Japanese companies must make improvements to better conform with new regulations. This surpasses the number for global corporations in other countries.” Kokubun said that in conducting business with the U.S., Japanese companies must swiftly introduce measures to abide by the U.S. laws implemented against China. Those include “e-discovery” to protect digital forensics from tampering and “human rights due diligence” to eliminate illegal labor in company supply chains.

 

In today’s environment, overseas transfers of personnel, business trips, and attendance at conferences that involve crossing U.S. and Chinese borders all require extra caution. M&As that require approval from the U.S. or China will have to be carried out with consideration for the consequences.

 

The Cold War between the U.S. and the Soviet Union lasted over 40 years. The U.S.-China conflict is also expected to prolong. An attempt to simultaneously satisfy the U.S. and China will inevitably force companies to sacrifice some management efficiency. However, under the new normal of a divided world, we must seek to build a durable and flexible structure of corporate governance that meets the requirements of the times. This is one of the lessons the Huawei problem has taught us.

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