By Eva Dou in Beijing and Don Clark in San Francisco
As China tries to forestall foreign governments from tapping its
phones, it has turned to a man named Leo Li.
The chief executive of Chinese chip maker Spreadtrum
Communications Inc. said China's central government asked his
company last year to begin making special-order "safe phone"
processors for some officials' smartphones, replacing in one to two
years widely used chips from U.S. suppliers that Beijing fears
could have built-in "back doors" to aid foreign spies.
"The security of handsets is very much on the minds of Chinese
officials, " said Mr. Li in an interview this month.
China's Ministry of Industry and Information Technology didn't
respond to a request for comment.
Cybersecurity concerns are helping to shape a new wave of
technological development in China, adding another impetus to a
well-financed government campaign to reduce the country's
dependence on foreign components. Semiconductors have emerged as a
focus, both because of their economic importance and in controlling
key functions of smartphones, televisions, computers, networking
equipment and other products.
Most recent disclosures about intelligence-gathering have
focused on software vulnerabilities rather than computer chips,
which are much more difficult to modify. But Chinese officials are
nonetheless trying to reduce the risks, following revelations about
U.S. surveillance activities by former National Security Agency
contractor Edward Snowden.
China Vice Premier Ma Kai declared semiconductors a key sector
in September 2013, three months after Mr. Snowden alleged U.S.
authorities hacked millions of Chinese phone messages. These hacks,
however, had nothing to do with chips, and it is unclear if chips
have ever been used for spying purposes.
The push dovetails with China's growing aspirations to move
beyond the factory floor and foster homegrown innovation. Though
the country has become a dominant maker of smartphones and other
products, the vast majority of chips inside them come from foreign
suppliers including Qualcomm Inc.
Chinese chip designers and manufacturers are years away from
fulfilling the country's needs, analysts and industry executives
say. But the government's uneasiness about foreign chip makers--and
the push to create competition for them--adds to pressures facing
U.S. companies trying to do business in the country.
A Chinese agency is investigating Qualcomm, which supplies the
vast majority of advanced wireless chips for smartphones as well as
many processor chips, under the country's antimonopoly law. The
government is expected to accuse the company of abusing its market
dominance over smartphone patents.
The country has tried to spur semiconductor development in the
past, but remains far behind foreign competitors in both design and
manufacturing technology. This time, though, the government's
funding is more generous and its tactics more sophisticated,
analysts say. Since the fall of 2013, China has announced plans to
funnel more than 160 billion yuan ($25.6 billion) into a variety of
chip-related initiatives, with further investment expected.
"The growth goals are ambitious, but are very real," said Handel
Jones, chief executive of the Silicon Valley consultancy
International Business Strategies, who has written two books about
technology in China and spoke recently with government officials
there.
Some progress has been made already. China's semiconductor
imports fell 5.9% last year compared with a 20.5% rise in 2013,
according to Chinese customs data. The country still gets more than
90% of semiconductors from abroad, Mr. Jones of IBS estimates, but
the percentage of homegrown chips--which stood at 4.5% in
2010--reached 8.6% in 2014.
For Spreadtrum, the government assistance has made a difference,
says Mr. Li. The Nasdaq-listed company was acquired at the end of
2013 by a Chinese state-owned firm, Tsinghua Unigroup. Since then,
government grants have helped Spreadtrum increase its staff by a
third last year to 4,000, with plans to hire an additional 1,500
this year, he said.
The company has also been able to accelerate its chip
development. Though Spreadtrum still lags years behind leading U.S.
firms, Mr. Li says his company will be able this year to match a
key selling point of companies like Qualcomm: the ability to handle
speedy long-term evolution--or LTE--cellular connections on a new
multifunction "system-on-a-chip."
Previously, only one Chinese chip firm had LTE capability, a
Huawei Technologies Co. subsidiary named Hisilicon that makes chips
almost exclusively for Huawei-branded devices.
Foreign giants in the roughly $350 billion global semiconductor
business seem to have little to fear soon from Chinese competition.
Chinese chip design companies only held 8% of the global market in
2014, according to research firm IC Insights, and this was mainly
low-end chips.
Samsung Electronics Co., SK Hynix Inc. and Intel Corp. have chip
factories in China, and they are stepping up investments and joint
ventures aimed at penetrating the Chinese market. This could also
improve local expertise in semiconductor manufacturing and
design.
One of the most sanguine about Chinese competition is Intel,
whose x86 chip designs are found in almost all personal computers
and can't easily be copied by Chinese designers.
"The fact that they want to develop that capability, we don't
feel threatened by that," Andy Bryant, Intel's chairman, said in a
December interview with Wall Street Journal editors.
The Silicon Valley giant has lagged behind in mobile chip market
share though, and has looked to China for growth. Last year, Intel
bought a 20% stake in Spreadtrum's parent company Tsinghua Unigroup
and announced a partnership with a smaller Chinese chip maker,
Fuzhou Rockchip Electronics Co., to make tablet chips together.
Intel officials say the potential boost for sales in China
outweigh any risks about sharing technology for the company, which
has largely dodged the harsh government scrutiny faced by
Qualcomm.
The U.S. government has long operated programs to make sure that
chips used in military systems are produced in Pentagon-monitored
domestic factories. It is also helping to fund research in ensuring
that chips made in foreign factories for other kinds of devices
haven't been improperly modified, though there is little evidence
such tampering has occurred.
Qualcomm representatives declined to comment on security
concerns of Chinese officials. But Henry Samueli, co-founder and
chairman of rival Broadcom Corp., dismisses the issue as largely
"hype." He said it is much easier to exploit vulnerabilities in
software and other parts of high-tech products than tamper with
chips.
Broadcom sells a broad range of communications chips used in
networking devices and other systems built in China, and Mr.
Samueli says he has noticed little hesitance to buy his company's
products. "In the end, if you deliver the products that they want,
they will use them," he says.
Still, Spreadtrum's Mr. Li hopes to benefit from the security
concerns. He said the Chinese government hopes to have "safe
phones" for officials in a couple of years that use vetted chips
made by Spreadtrum, as well as a secure operating system and
encryption technology designed in China.
It is unclear what company might manufacture these "safe
phones."
A basic version will also be available for Chinese consumers, he
said.
"Whether it's the government or regular consumers, they worry
about their privacy," he said.
Write to Eva Dou at eva.dou@wsj.com and Don Clark at
don.clark@wsj.com
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