Joint venture: SAIC Infineon Automotive Power Modules

Infineon Technologies AG is one of the largest semiconductor manufacturers worldwide and its experience can therefore be used as an example to investigate the Chinese semiconductor industry and the limitations and opportunities that a foreign investor can encounter when entering the market.

Infineon Technologies AG was spun off Siemens AG’s semiconductor operations in 1999. The company’s core business involves the production of semiconductors and systems for automotive electronics, industrial applications and consumers-oriented applications. It has subsidiaries worldwide and several facilities around Europe.

The company first entered the Chinese market in 1995 (while still part of Siemens), establishing a wholly foreign owned enterprise with its first presence in Wuxi. The company subsequently established headquarters in Shanghai, an R&D center in Beijing and a branch in Shenzhen. We estimate that the company has invested around 286 million euros in China throughout the years.

To better serve the dynamically growing market for electric vehicles in China, Infineon Technologies has established a joint venture with SAIC Motor Corporation Limited for the production of power modules. SAIC Motor, the largest car manufacturer in the Chinese market, holds 51% of the joint venture’s shares while Infineon holds a minority share of 49%.

Since the joint venture involves chip manufacturing for NEVs, it is relevant to look at the Chinese government’s current goals in the sector. Despite becoming an increasingly relevant area of competition worldwide, advanced semiconductors still represent a field in which the Chinese economy is largely dependent on external supply.

To make up for this gap and compete with western companies, China has spent tens of billions of dollars to build its own semiconductor industry over the last decade. Despite these efforts, Chinese semiconductor companies have struggled to conquer a relevant market share in the global arena.

To counter its dependence on foreign suppliers, the State Council of China announced a major semiconductor policy in 2014, namely the National Guidelines for Development and Promotion of the Integrated Circuit (IC) Industry. In the “Made in China 2025” initiative, launched the following year, China stated that it will deploy huge efforts and resources to building a national and self-sufficient semiconductor industry.

In order to serve a burgeoning market, China has granted financial benefits to domestic firms operating in the sector and encourages foreign investors to establish their factories within the country’s territories. Cutting edge chips manufacturing is an integral part of the high-end manufacturing field which is included in the list of industries where foreign investment is encouraged.

The financial benefits offered for investing in encouraged fields in China are significant for foreign companies. They include tax exemptions and proximity to end customers that justify European countries’ entry into the market. This can constitute a concern for Europe in terms of technology drain and loss of know-how to a country which, in the near future, can constitute a relevant competitor in the sector.

Infineon’s status as a global leader in the chips manufacturing sector makes it an appealing partner, especially for a relevant actor such as Shanghai Automotive Industry Corporation (SAIC). Being mainly state-owned, SAIC’s activities are geared towards the attainment of broader national policies and goals in addition to purely financial considerations.

The chips produced and supplied by the joint venture will be tailored for  SAIC’s NEVs. Given China’s ambitions in NEV production for the coming years, it is instructive to look at restrictions and regulations concerning foreign investment into the NEV sector in China. This can enhance our understanding of the investment opportunities and risks for foreign companies and aid in assessing the state of the level playing field in the sector.

With the most recent version of the Negative List on Foreign Investment issued in 2020, the Chinese government planned to remove the 50% restriction on foreign ownership within joint ventures in automobile manufacturing activities by 2022. The restriction has already been lifted for foreign companies who solely produce pure electric vehicles in China. Nevertheless, prospects for foreign companies in China’s NEV sector are still limited and affected by market conditions. In fact, new investment projects for NEVs by a foreign firm can only be carried out under specific conditions: first, the utilisation rate of automobile capacity in the considered province has to be higher than the average level of the same product category in the previous two years; secondly, the existing investment projects for pure electric vehicles in the province must all have been completed and the annual output must have reached its projected scale. Lastly, the investment project should be worth no less than USD 1 billion in the proposal stage.

Even though market entry restrictions have been softened considerably with the recent amendment of the Negative List, it is still hard for a foreign company to establish its production activities in China independently when entering the automotive sector.

This is not the case for investments into sub-sectors like semiconductors that still attract and welcome foreign investments, likely in an attempt for domestic firms to access and master relevant know-how and technology from foreign entrants.

Foreign multinationals like Infineon could benefit financially by entering the Chinese market but risk overlooking the knowledge drain when setting up a new entity over which it has no full control. On a broader level this could lead to loss of relevant intellectual capital in Europe.