US-China tech war: can China’s chipmaking drive save it from US technology embargo?

 

Beijing is going all in to back a breakthrough in Chinese semiconductor manufacturing as the nation faces US sanctions on hi-tech goodsBut many newcomers to the industry have little experience and some experts say the ‘whatever it takes’ approach shows tolerance for inefficiency

Cissy Zhou

Cissy Zhou

Published: 11:30pm, 28 Sep, 2020 SCMP

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10 Sep 2020

China is investing huge resources into achieving a breakthrough in chipmaking. Illustration: Lau Ka-kuen

China is investing huge resources into achieving a breakthrough in chipmaking. Illustration: Lau Ka-kuen

Over the past year, President Xi Jinping has on multiple occasions described China’s reliance on imported technology with the term Qia Bozi, which translates to being strangled by an adversary. And no industry better reflects this weakness than semiconductor manufacturing – the microprocessors that power the modern economy, from smartphones to cars.China often boasts of having the world’s most extensive industrial value chain and is known as the global leader in assembling mobile handsets, but the country relies on foreign chips, most notably from the United States.

China has spent more than about US$300 billion annually on imported chips over the past two years.

But a rapidly deteriorating relationship with the US is making it increasingly hard for Chinese technology companies to acquire components used in its devices.

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US sanctions on companies like ZTE and Huawei have severely dented production, effectively cutting these companies off from American-made components without a special US government waiver.ADVERTISING

On Friday, Washington imposed new restrictions on exports to China’s most advanced manufacturer of computer chips, Semiconductor Manufacturing International Corporation, citing the “unacceptable risk” its products posed if they were used by the Chinese military, according to media reports.

As it becomes increasingly clear easy access to chips and even the equipment used to make them is vanishing, China is doubling down on support for its domestic semiconductor industry.

Beijing is mobilising the whole country to achieve a breakthrough. Last week it released an ambitious plan to boost investment in several areas, including technology for chip manufacturing, to avoid being strangled by long-standing reliance on imports.

In late July, Beijing introduced a 10-year corporate tax break for established companies that could produce chips of 28 nanometres or smaller. It also expanded tax incentives for the entire semiconductor supply chain, from design to packaging.The semiconductor industry is set to become one of the most prominent features in China’s five-year plan for the period 2021-25, which is expected to be endorsed when top leaders meet next month.

Chang Junfeng, the secretary general of the government-backed Shenzhen Semiconductor Industry Association, said Beijing’s attempt to develop a domestic chip industry was “natural” as it was a clear weak spot for the world’s second biggest economy.

A new investment fever has emerged in the chip industry as Beijing rolls out preferential policies and cheap loans for projects, he said.

There used to be difficulties for the semiconductor industry to obtain enough financing, but now it is a hotter area than property investmentChang Junfeng

 

“There used to be difficulties for the semiconductor industry to obtain enough financing, but now it is a hotter area than property investment,” Chang said.

Across the country, it’s hard to find a province or major city that has not targeted semiconductor manufacturing as a key industry to develop for local economy. Guangdong, for instance, launched a local government fund of 10 billion yuan last week to help finance semiconductor projects in the province.

China’s total investment in the chip industry, from both state and private sectors, could reach 9.5 trillion yuan (US$1.39 billion) in the next five years, according to research by Guosen Securities, a brokerage based in Shenzhen.

In the first eight months of this year, as many as 9,335 companies in China expanded into semiconductor production, growth of 120 per cent compared to the same period last year, the firm said.

If none succeed, the whole industry in China will collapseSheng Linghai

 

But many newcomers have little experience. For instance, Gree, the Zhuhai-based producer of air conditioners, began making chips in 2018 and its chairwoman Dong Mingzhu said in an interview with state television last year that her company would spend 50 billion yuan, or about twice the firm’s 2019 profits, on design.

The flurry of activity in the semiconductor industry has even fanned talk that China is at risk of repeating earlier mistakes in its development, namely the errors of the Great Leap Forward.

In 1958, Mao Zedong mobilised the whole country to rapidly boost the nation’s transition from an agrarian economy to an industrial one. The modernisation programme is most remembered for the small backyard steel furnaces that popped up across the country, which saw peasants with no experience melting kitchenware to answer Beijing’s call.

The policy proved a complete failure, however, and ushered in a three-year famine that killed tens of millions of people.

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China’s latest rush to develop indigenous technology has also stirred memories of Beijing’s development of its atomic bomb in the early 1960s, when the government again sought to mobilise the whole country.

Sheng Linghai, an analyst at research and advisory firm Gartner, said China’s “whatever it takes” approach to developing the chip industry showed tolerance for waste and inefficiency.

“The current market is a bit overheated. There is no way for China to counter the US on the chip market except investing more in the industry,” he said.

“A majority of the companies are just speculating, but there is nothing to worry about because that’s the way Chinese companies grow.”

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Most newcomers entering the industry will fail, but China is hoping a handful will survive, he said.

“If none succeed, the whole industry in China will collapse. The central government’s supportive policies for the semiconductor industry will only keep increasing because the country is facing the possibility of being blocked from technology by the US.”

Meanwhile, debate is raging over whether China can really develop a chip industry alone. Chang, from the Shenzhen semiconductor association, said because the semiconductor value chain was so globalised, no single country – be it the US, Japan, or South Korea – could be totally independent.

China’s quest for semiconductor independence has been long and is dotted by scandals and setbacks. In 2003, a Shanghai professor claimed he had created a Chinese semiconductor and won huge amounts of state funding, but it was later discovered as a fraud.

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Facebook, Amazon, Google and Apple respond to Congress about whether China steals US technology

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Several high profile semiconductor projects have also failed since receiving government subsidies. Construction on a partially-built factory owned by Wuhan Hongxin Semiconductor Manufacturing Company, which was meant to be a key part of a US$20 billion investment that turned Hubei province into a chip manufacturing hub, was halted before the Lunar New Year.

Local authorities said the project had a large funding gap and was facing a capital crunch, while the South China Morning Post visited the factory and found that it was largely abandoned.

Earlier this year, a US$100 million manufacturing plant set up by US chip giant GlobalFoundries and the Chengdu city government ceased operations having remained idle for almost two years. In the country’s east, a US$3 billion government-backed chip plant owned by Tacoma Nanjing Semiconductor Technology went bankrupt in July after failing to attract investors.

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In July, Nanjing-based Tacoma Semiconductor Technology went into bankruptcy after launching a US$2.8 billion government-backed semiconductor project four years ago.

Another state-supported company, Kuntong Semiconductor, that launched two years ago with investment of 40 billion yuan has also suspended production.

However, the failures are regarded as a necessary price to pay by some.

“The development of science and technology is actually a matter of probability,” Guosen Securities said in its report.

“The more people in this industry, the greater the probability of success is. As long as one company breaks through the bottleneck, the entire industry chain will benefit.”

 

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