Chinese Venture Capitalists Make Technology Bets

03 September 2015

Silicon Valley's venture capital (VC) community has long set the standard for making technology bets and laying out cash for startups or mature companies that may have the next wonder product in their portfolios. Recently, Chinese VCs have found their way to the table and could start causing waves in the high-tech supply chain.

Several noteworthy announcements have drawn attention to the potential scale of Chinese investors wanting to broaden their reach.

In the spring, Royal Philips have announced an agreement with a consortium led by GO Scale Capital to acquire an 80.1% interest in Philips Lumileds, which makes LED components and automotive lighting products. GO Scale Capital is a new investment fund sponsored by China-based GSR Ventures and U.S.-based Oak Investment Partners. The deal’s consortium partners are Asia Pacific Resource Development, Nanchang Industrial Group and GSR Capital.

In July, GSR Capital’s name came up again. The company, claiming to be one of the most active technology investment firms in China, launched a $5 billion mergers and acquisitions (M&A) fund to target cross-border buyouts and M&As of industrial and emerging technology companies with multi-billion dollar scaling opportunities in China. The GSR Global M&A fund, says to be one of the very few large-scale buyout funds in China, it will focus on international investments in clean energy, bio-pharmaceutics and life sciences, bulk commodity investment, traditional and internet finance, wireless communication and cultural industry, according to a company statement.

Though not in the VC category, it is still showing the financial might of perspective Chinese buyers, talk of another potential deal rattled cages in the semiconductor industry. In August, China’s state-owned chipmaker Tsinghua Unigroup Ltd. was reported to be preparing a $23 billion bid for U.S. chipmaker Micron Technology, according to various news reports. If completed, which many speculate is a long shot, the deal would mark the largest Chinese acquisition of an American company, says Bloomberg.

A Closer Look

The timing of these activities is worth noting too. They coincide with news of China’s slowing economic growth, falling corporate sales, devalued currency and government measures to stabilize financial markets. Taken together, these activities point to the shifting role China seems to want to play in the global economy and how it is planning to move up the high-tech value chain.

“Today’s landscape with China is not too different from what we saw with Japan in the 1980’s. Lots of money is being sent to the West for investment. I think the chip companies will be shielded by ‘national interests’ from foreign investment/ownership, but other tech companies will look at Chinese investment dollars much the same way they would with U.S. investment dollars,” notes Mike Howard, director of DRAM and memory at IHS Technology. “China has deep pockets and they’re looking to move up the value-add food chain. They’ve been vocal been getting about at least half of the country’s semiconductors from local companies (not local production by a foreign company). I think the Micron bid was a ‘test the water’ move, and I do not think there was much hope that it would go through. However, it does show how serious China is about getting into memory.”

What the $23 billion dollar offer—a significant amount of money in its own right–might do is help loosen the technology—licensing log jam often seen in semiconductor and memory sectors, Howard says.

“China needs two things. First, it needs some IP [intellectual property] so it can credibly build semis without getting sued immediately. Since its initial goal is to satisfy local demand, there may be some wiggle room here in that if they do not have to export then the bite of sanctions will be far less severe. Second, it needs manufacturing expertise. To an extent China can just buy its way to this goal,” he says. “I expect China will get some IP via M&A (small companies) and will attempt to build its semi business rather organically. There is not that many large semi companies out there that they could buy easily. Intel? No. Samsung? No. SK Hynix? No. Micron? No. Toshiba? No. Qualcomm? No. TSMC? No. Ideal for China would be some sort of licensing agreement wherein a large semi company agrees to license technology and expertise to China for a fee thereby taking care of IP concerns and helping China get up the learning curve much faster. I am not sure who would agree to this however.”

The Lumileds deal also appears to open the IP door wider and allow the country and investors to pave a way into emerging technologies.

“For LED components, this means some shift of power towards China,” says Jamie Fox, principal analyst for LEDs and lighting at IHS Technology. “The new consortium has now effectively bought some intellectual property of much higher caliber than what it had before.”

On a day-to-day basis, the Lumileds deal may not make a huge difference to many of the players in the lighting sector, but there is ongoing concern about IP going to China and profit margins being lost for Western players, Fox says. While there is no suggestion that Lumileds’ IP will be shared with other Chinese companies, this will not stop inevitable speculation, even though it may be unfounded, he says.

GSR Capital officials did not respond to several emails requesting for an interview, but Sonny Wu, co-founder and managing director of GSR Ventures, chairman of GSR Capital and chairman of GO Scale Capital, who will serve as interim chairman of Lumileds when the transaction closes, stated in a press release that the Lumileds acquisition will be “a perfect example of how GO Scale turns cutting edge technologies into world class companies. GO Scale Capital will focus on expanding Lumileds’ opportunities by investing in its global centers of operation and in the fast growing general lighting and automotive industries. Through Lumileds’ world-leading technology in key verticals such as LED chips, LED mobile flash and automotive lighting, together with a customer base including the likes of BMW, Volkswagen and Audi, we expect to see significant growth and unparalleled inroads into new opportunities such as electric vehicles.”

To contact the author of this article, email engineering360editors@ihs.com

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