ARTICLE: As the United States steps up its campaign to block China from acquiring key technological know-how, the winding journey of a pioneering Silicon Valley computer chip firm is showing just how tough a task that can be.

Co-founded over 35 years ago by Stanford University professor John Hennessy, who is currently the Chairman of Alphabet Inc, MIPS Computer Systems Inc had developed a new approach to chip architectures that remains in wide use.

In late 2018 and 2019, as the U.S.-China tech trade war was in full swing, the core technology of MIPS was licensed to a Shanghai-based firm, CIP United Co Ltd, via a complex series of transactions involving companies in the Cayman Islands and Samoa.

For a graphic on MIPS' changing ownership, click on https://tmsnrt.rs/2Ythl9G

Today, CIP controls full MIPS licensing rights for all new and existing customers in China, Hong Kong and Macau, as well as the ability to develop new derivative technologies based on the MIPS architecture, according to four people with knowledge of the situation.

"A license for all of mainland China has already been sold, lock stock and barrel," one of the people said. The deal was worth $60 million.

The details of the MIPS licensing deal and the transactions that preceded it - revealed in U.S. bankruptcy proceedings involving MIPS' parent company, Wave Computing Inc, and interviews with nearly two dozen people - offer a rare glimpse into how foreign firms were able to gain access to one strategically important American technology.

CIP United declined to comment about the MIPS licensing deal. Wave, through a public relations firm, said the company and its law firms believe its new management team "is confident the company has complied and is compliant with" rules on export, import and foreign investments regarding the MIPS licensing deal.

A 2019 CIP investor presentation, seen by Reuters, shows how the company was intent on using MIPS to help China catch up to the United States in advanced semiconductor technology, which is critical for everything from smartphones to sophisticated weaponry.

The MIPS license promises to provide "core technology" that will help China "implement the ambitious goal of Made in China 2025," the presentation stated, referring to a government program to achieve self-sufficiency in strategic industries.

The United States has often cited the 2025 program as the reason for national security measures aimed at stopping China from accessing U.S. technology. A June 2018 document from the White House Office of Trade and Manufacturing Policy, states: "In policy documents such as Made in China 2025, China has articulated the target list of technology sectors it seeks to dominate. Much of recent Chinese investment behavior appears consistent with this target list."

Increasingly mindful that it has triggered U.S. backlash, Beijing began to downplay Made in China 2025, Reuters reported in 2018. https://reut.rs/3grYrWF

Since Washington tightened restrictions on direct Chinese investments into U.S. tech startups in late 2018, licensing agreements and offshore entities have become a popular avenue for technology transfer, according to Silicon Valley venture capitalists, lawyers, and tech startup CEOs interviewed by Reuters. That was also the case with MIPS.

The Committee on Foreign Investment in the United States (CFIUS), a U.S. interagency panel led by the Treasury Department, reviews proposed transactions to ensure they do not harm national security. But licensing deals are not typically subject to CFIUS review and considered legal as long as they aren't designed to skirt regulations and comply with U.S. export control laws, which regulate the shipment of strategically sensitive goods.

"China is using joint ventures or licensing agreements to transfer technology to China rather than work long-term with a U.S. partner, and it will be important to examine those agreements more carefully to keep company technology onshore," said Michael Brown, a veteran tech executive who now heads an innovation unit at the U.S. Department of Defense.

CFIUS didn't reply to request for comment on this issue, or on any specifics related to the MIPS technology transfer.

Hennessy told Reuters he sold all his MIPS related shares by 2005 and was not aware of the details of licensing deals in China.

COMPLEX DEALS

Wave filed for Chapter 11 bankruptcy protection in late April after it was forced to return $40 million to an investor as a funding deal related to the acquisition of MIPS went sour, according to court documents.

The agreement with CIP in China, however, remains in place, with numerous Chinese companies - including telecoms giant Huawei Technologies Co Ltd - licensing the MIPS technology from CIP, according to a former CIP engineer. Huawei has faced U.S. accusations of pilfering tech secrets and using its own gear to help the Chinese government's spy network. Huawei has denied these allegations. Huawei confirmed to Reuters that it is a royalty paying customer, but declined to elaborate further.

MIPS has been an important foundational technology for China as it ramped up its domestic chip efforts, according to a former senior engineer for Huawei and two American chip consultants who have worked closely with China. China has been striving to build up a chip industry that's independent of the United States and has tried in the past to use the MIPS architecture to build its own microprocessors, the complex chips that are the brains of most electronic devices, according to independent chip consultant Nick Ilyadis.

The path to sending the MIPS core technology to China started out with a maneuver to help ease U.S. concerns about technology transfer.

Canyon Bridge, an investment firm which Reuters has reported was founded partly with Chinese government funds, announced in September, 2017 that it was buying Imagination Technologies, a UK-based graphics chip company that was then the owner of MIPS. https://reut.rs/2EbNStx

Acquiring MIPS would have subject the transaction to a review by CFIUS. The deal was ultimately made contingent on completing a reorganization "to separate MIPS from the remainder of the group," according to an Imagination press release dated September 22, 2017 announcing the MIPS sale.

Imagination's chief executive Ray Bingham, who is also a partner of Canyon Bridge, did not reply to requests for comment.

From the Imagination spin-off, MIPS changed hands multiple times before ending up inside Wave Computing, a company that counts Canyon Bridge and China's Alibaba Investments Limited as minority investors.

Reuters could not determine if Alibaba or Canyon Bridge were aware in advance of Wave's plan to license the MIPS technology to a Chinese company. Alibaba didn't reply to a request for comment and Canyon Bridge declined to comment about the MIPS license.

The Alibaba and Canyon Bridge investments in Wave did not require a CFIUS filing because their investments were passive and below the 10% threshold that would require such a filing, according to CFIUS experts.

Two former CFIUS members, who declined to be named, said they would have looked into the Wave investments to determine if the investments were in the purview of CFIUS' scope. CFIUS had already denied Canyon Bridge's takeover of U.S. chip maker Lattice Semiconductor after Reuters had reported Canyon Bridge was backed by the Chinese government. https://reut.rs/2E6QRDZ

"I wanted a harder line" for CFIUS oversight of tech investments, said James Lewis the director of the technology policy program at Washington-based Center for Strategic and International Studies. He helped draft some of the language of a 2018 bill that strengthened regulation of direct foreign investments, but did not resolve U.S. oversight of licensing deals.

"It's no surprise when you closed one avenue," said Lewis, referring to direct investments into tech start-ups, "the Chinese looked for another."-Reuters