How Will China Spend $120B?

It’s daunting to consider how much Chinese VC and government money is ready for investment around the globe. With the total now estimated somewhere in the neighborhood of $120 billion, that’s a huge stockpile of cash. Just to put that in perspective, roughly $48.3 billion was invested by U.S. investors in 2014, according to a report issued by the National Venture Capital Association and PricewaterhouseCoopers.

But having a supply of cash, and being able to actually use it, are not the same thing. When it comes to China, money and global politics are intricately connected, which makes it harder to dispense money even if it is readily available.

While China has some very successful big-name companies, including Huawei, SMIC, Xiaomi, and Haier, among many others, there is far too little infrastructure to sustain a robust electronics industry. How to build that infrastructure isn’t clear, though. Not all of it can be bought. The United States and EU will likely allow investments, but they won’t allow China to buy up companies deemed necessary for national security. (China has done the same for the last quarter century.)

None of this is public, of course, and what constitutes national security isn’t clear. In fact, Semiconductor Engineering requested information about what Chinese investors were attempting to buy in the United States. The information is considered classified, meaning freedom of information requests are useless. All of this information is protected by the Foreign Investment and National Security Act of 2007 and overseen by the Committee on Foreign Investment in the United States, which is a division of the Treasury Department. The President of the United States has the final say.

The only information available is in aggregate, and it shows there have been attempts by Chinese investors to buy into U.S. tech for years. The chart below actually shows a downward trend in 2013, the most recent year for which data is available. While these attempts occasionally do rise to the surface, as in Tsinghua’s recent bid for Micron, they quietly fizzle out.

Source: Committee On Foreign Investment In The United States, Annual Report To Congress, Feb. 2015 (public/unclassified version)

So how much China’s fund can buy, and what it can build, isn’t clear. China needs memory technology and it needs equipment and process technology to build advanced chips. But if it can’t buy all of that outright, it will have to buy smaller pieces and assemble them from around the globe. This is much more difficult, and as anyone building a complex SoC knows, all the pieces don’t always go together as expected.

China’s VCs and state investment funds will have to work much, much harder to acquire the technology they are seeking, and they will need a much deeper understanding of what they’re buying, what will likely be the next successful technology trends, and how to stage that technology rollout in an industry that is almost constantly in flux. This is incredibly difficult without the political intrigue, but it’s far harder when not all of the pieces are for sale and expertise has to be generated or bought.

The bottom line: Having plenty of cash on hand is great, but how effectively that cash is doled out, and what the outcome of those investments and purchases will be, remains opaque at this point.