When Chinese Communist Party delegates meet on Monday to finalize their economic plan for the next five years, the semiconductor industry will be high on the agenda.
Beijing’s 30-year efforts to build a local chip business have taken on a new sense of urgency as Donald Trump’s administration tightens its grip on major Chinese tech groups.
Washington has banned companies around the world from making chips for Huawei, the telecommunications industry, in what is a potential death sentence for its subsidiary HiSilicon, China’s largest chip designer. The United States has also banned American companies from supplying Semiconductor Manufacturing International Corporation, China’s most advanced chipmaker, with the machines needed to make chips.
Experts and industry executives estimate that even with China set to invest an additional $ 1.4 billion in its tech sector by 2025, this targeted U.S. effort to strangle the country on both semi supplies -conductors and the means to manufacture them pushes Beijing to develop the domestic chip industry much more difficult.
China’s efforts to develop its semiconductor industry in the past have prioritized “building blocks” such as chip manufacturing, packaging and testing, said Randy Abrams, head of Asian technology research. at Credit Suisse. “But now they have to try to become less dependent on the United States where they can.”
Beijing’s priorities now include bolstering its technological prowess in electronic design automation (EDA) – the software used in chip design – and in the manufacturing of machines deployed in chip-making factories. US EDA toolmakers Cadence and Synopsys have a stranglehold on the global advanced chip market, while Applied Materials, Lam Research and KLA Tencor dominate critical segments of advanced chip manufacturing equipment.
Analysts said in semiconductor and EDA equipment, China is now where Huawei and ZTE were in the late 1990s, a low-cost supplier still lagging behind its overseas peers in matters. of technology. “The gap isn’t just about a certain dollar amount, you also need time to develop experience and talent,” Mr. Abrams said.
The tools offered by Huada Empyrean, China’s most advanced EDA company, are well behind the capabilities required by SMIC, China’s largest chip maker and industry leader, Taiwan Semiconductor Manufacturing Corporation, to manufacture their most advanced products.
“Making a breakthrough in semiconductor equipment is the biggest hurdle,” said Zeng Guan-wei, analyst at research firm Trendforce, who added that less than 10% of these machines used in China are made by companies. national.
Equipment makers were nothing more than an afterthought in Beijing’s past spending on the industry – and it was huge. According to the Semiconductor Industry Association, Chinese chipmakers have received around $ 50 billion in grants from central government alone over the past 20 years. That’s 100 times the amount received by companies in Taiwan, which, along with South Korea, is the world’s largest chipmaking center.
An OECD study of 21 chipmakers around the world identified four Chinese companies among the largest recipients of public funding. The OECD found that the SMIC and Tsinghua Unigroup, one of the leading chip design companies in China which has now also invested in production, received state aid representing more than 30% of their income between 2014 and 2018.
Despite this, the production of chips in China falls far short of meeting the country’s needs. According to the China Semiconductor Industry Association, only 27 percent of the chips sold in the country were manufactured domestically, with the rest covered by imports.
Beijing has pledged to invest heavily as part of its response to pressure from Washington, in addition to new tax incentives for chipmakers. The 14th five-year plan should provide more support.
But some warn that China needs to recalibrate the way it supports the industry.
“I think funding is no longer a problem now,” said an engineer from the SMIC. “But how will these support funds be distributed? Will some of the relatively backward but key elements of China’s chip industry receive more attention, like EDA or manufacturing equipment? “
For example, he added, software experts could make a lot more money working in internet companies than in EDA ones.
The industry has also suffered from its inefficiency. Over the past three decades, hundreds of chip projects have failed because investors lacked the technical knowledge or after shifting grants to independent real estate projects.
The promise of increased government support for the industry could actually make matters worse. In the first nine months of 2020, more than 13,000 Chinese companies have registered as chip companies, although many have no prior industry experience.
The National Development and Reform Commission, the Chinese state’s main planning body, said this week that the latest initiative should focus on preventing such waste.
“There seems to be a trend in China for enterprising people to take the opportunity to present themselves as patriotic investors when there is nationalist rhetoric,” said Douglas Fuller, a professor at the University of Hong Kong and expert on Chinese industrial policy in the chip. sector. “I hear over and over how bad things are in most other industries, so the prospect of significant funding in the chip business works like a magnet.”