Mo Dakang: China's semiconductor industry sets sail again

Previously, the development of China's semiconductor industry has always been driven by government funds, coupled with a technology introduction strategy. In 2000, SMIC emerged. Its biggest difference was that it tried to break away from the support of state funds and enter market-oriented operations. Looking back now, no matter how you compare it from 2000 to 2005, SMIC was quite successful, because it at least showed that it could succeed in the short term without the support of state funds. In addition, its goal was clear: to catch up quickly, which led TSMC at the time to regard it as a competitor.

Although SMIC was listed in both the United States and Hong Kong in 2004, the technology blockade of the Wassenaar Treaty and the memory foundry strategy implemented by its 12-inch production line at the time led to a break in its capital chain, forcing SMIC to cooperate with local governments for development and seek support from national funds.

New stage of big funds

The launch of the "Big Fund" in 2014 marked a new starting point for China's semiconductor industry. Its launch was not accidental, and there were two factors: one was that funds were one of the main contradictions restricting the development of the industry at this stage, and more investment was needed to develop the industry; the other was that at this stage, it must be guided and driven by state funds.

In addition, the "Big Fund" is completely different from the country's previous "01 and 02 Special Funds". It is an investment and requires a return on investment. It is no longer free use.

On March 15, 2017, Ding Wenwu, President of the National Integrated Circuit Industry Investment Fund, attended the China Industry and Technology Investment Forum in Shanghai and introduced that as of the end of 2016, the National Integrated Circuit Industry Investment Fund had been established for more than two years and had adhered to the principles of market-oriented operation, professional management, and scientific decision-making. It had invested in 35 companies in total, made effective investment decisions in 43 projects, and committed to a total investment of 81.8 billion yuan and an actual investment of 56.3 billion yuan, accounting for 59% and 41% of the total funds raised in the first phase, respectively.

The Big Fund is not perfect. It is essentially a government investment and has its limitations. But it is necessary at this stage. It must promote enterprises to reduce their dependence on government funds and gradually turn to marketization. Therefore, accelerating and shortening this transition process and improving the competitiveness of enterprises are the top priorities.

Local governments are more than enthusiastic

The development of China's emerging industries is still inseparable from the cycle of "ups and downs", which is related to the GDP performance of local government officials and non-market factors. Because some local governments focus on the construction of projects, the success or failure of future projects is the responsibility of enterprises and has nothing to do with them, so they must be very "courageous".

According to preliminary statistics, the Chinese government has been determined to develop the integrated circuit industry since 2013, and issued the Outline for Promoting the Integrated Circuit Industry. At the same time, including the national large fund and local government funds, the total amount of domestic integrated circuit industry funds has exceeded 460 billion yuan, including more than 15 provinces, cities and municipalities directly under the central government have plans to develop the semiconductor industry.

The enthusiasm of local governments to actively participate in the development of the semiconductor industry should be viewed from two aspects. The favorable aspect is that it breaks the relatively dull situation of industrial development, is dynamic and quick, and can make up for the shortage of state funds. The disadvantage is that it leads to the inability to focus on industrial development and form a joint force, disrupts the unified layout of the country, and may cause repeated introduction. More importantly, semiconductors are not an industry that is easy to make profits under China's current conditions, so local governments have no responsibility and cannot support the task of industrial development.

Therefore, it is not objective to deny everything, but letting things go will lead to endless regrets. It is necessary to quickly sort out and adjust each project one by one.

Purple Light does not play by the rules

Compared with advanced regions and countries in the world, China's semiconductor industry has lagged far behind. If it does not make progress, it may lose its "society". Now, in order to narrow the gap, China has begun to catch up with the support of large funds, which should be a good thing for the development of the global semiconductor industry. However, China's actions have received different reactions, sometimes like a "flood beast", which is very unfair. What is the problem?

Tsinghua Unigroup is a "newcomer" in China's semiconductor industry, but its ambition and momentum have attracted the attention of the industry and the world. It is precisely because of this that some of Tsinghua Unigroup's practices may be questionable. It first adopted the strategy of "buy, buy, buy", which is logically correct, trying to stand on the shoulders of others and then move up, but in terms of specific implementation, such as proposing to merge Micron with US$23 billion. Later, it proposed to acquire 25% of the shares of three packaging companies in Taiwan, but it was also rejected. Such an approach makes people feel a little too abrupt, and the method seems a little impatient, which in turn causes them to resist strongly.

In the development of memory projects in China, objectively speaking, it is not Tsinghua's responsibility at this stage, but the responsibility of industrial development, because the probability of loss is too high. A listed company cannot explain to shareholders that it can bear the responsibility of losses for the development of China's memory industry. However, Tsinghua's enthusiasm for developing the memory industry is really commendable and should be encouraged and supported. For example, it is not only the largest shareholder of Wuhan Yangtze Memory, with Zhao Weiguo as chairman, with a total investment of US$24 billion, a monthly output of 300,000 pieces, and 3D NAND flash memory; it also invested another US$30 billion in Nanjing, with US$10 billion in the first phase, to make memory, including 3D NAND and DRAM, with a monthly production capacity of 100,000 pieces, and another 30 billion yuan to build a supporting IC International City.

In addition, Tsinghua Unigroup's development goal is to invest heavily in research and development and recruit talent from around the world. In the next five years, it will invest approximately US$47 billion and will achieve "operating revenue of US$100 billion, becoming the world's number one in the mobile phone chip market share, and entering the top three semiconductor companies in the world."

Such a grand goal may be a bit too ambitious and not beneficial. At this stage, China's semiconductor industry is still a "follower" and there is still a long way to go. What is needed is to do more and talk less to achieve results. As a "newcomer" in the semiconductor industry, Tsinghua Unigroup is even more incredible according to Western logic. What is its motivation? Where does it get its technology? And from common sense, how is it possible for a world-class company to rise in five years? Usually, a memory production line takes 18 months from start to line, and then enters the process ramp-up stage. According to China's current level, the gap in this step is the most obvious, indicating that the speed of capacity expansion to achieve mass production is slowly increasing. Compared with Samsung's 3D NAND flash memory in Xi'an, it achieved mass production in May 2014, and by the end of 2016, its production capacity had risen to 100,000-120,000 pieces per month, and its revenue had exceeded US$3 billion. Therefore, even if Wuhan Yangtze Memory Technologies can succeed, it will be quite impressive to achieve a revenue of 3 billion US dollars by 2020. Therefore, Tsinghua Unigroup’s goal may be too "ambitious", which makes people suspicious. Intel currently has only 55 billion US dollars and TSMC has 30 billion US dollars. Where does Tsinghua Unigroup have the confidence to achieve the goal of annual revenue of 100 billion US dollars?

According to Dr. Wei Shaojun's recent speech, China's semiconductor industry will still be a follower, learner, explorer, and contributor in the next 5 to 10 years. There is still a big gap between China's semiconductor industry and the global advanced level, and this gap will continue to exist for a long time in the next 5-10 years. Such a speech is in line with the current situation and logic, and is acceptable to others. However, Tsinghua Unigroup's actions make people feel "aggressive" and "extraordinary", and it does not seem like a "follower". At least it may lack a true understanding of the semiconductor industry, especially the particularity of the development of China's semiconductor industry.

Tsinghua Unigroup is a new force in China's semiconductor industry. We should cherish and support it. Because its industrial development thinking is logically different from the traditional one. It puts forward the so-called "the wool grows on the pig, and the dog pays the bill". According to my understanding, it also agrees that it may be difficult to achieve profitability by developing chip manufacturing and memory, but hopes to make investors profitable through capital operation methods. I can't understand this new development concept for the time being, but I believe that the development of China's semiconductor industry also needs diversified driving forces, so we should still have a positive attitude towards Tsinghua Unigroup.

The big guys have called for cooling down

On March 15, 2017, Ding Wenwu, President of the National Big Fund, attended the China Industry and Technology Investment Forum in Shanghai, where he described the “overheating” phenomenon of industrial development as follows;

"When developing the IC industry, local governments should avoid the phenomenon of opening factories everywhere, and should also avoid low-level duplication and the formation of bubbles due to a rush to build factories."

Ding Wenwu believes that developing the integrated circuit industry is a good thing, but he recommends that all regions carefully consider their own conditions and develop the integrated circuit industry rationally to avoid disorder, fragmentation and homogenization.

Zhou Zixue, chairman of SMIC, said that China's semiconductor industry is facing a "false fire" of propaganda. "Excessive propaganda by the media, especially self-media, has misled people at home and abroad, causing unnecessary vigilance in advanced countries and regions."

Wei Shaojun, director of the Institute of Microelectronics at Tsinghua University, said that the industry needs rational investment. "The scale of funds in many places should be reduced by 20%, and now there is structural overheating."

Recent speeches by leaders reflect that the national level has already noticed some signs of "overheating" in the development of China's semiconductor industry, which has been widely praised by the industry.

Moreover, it is very timely to point out the chaos in development at this point in time, because most projects are still in the fundraising or construction announcement stage and no actual investment has been made, so timely adjustments can reduce the waste of many resources.

Conclusion

Although the development of China's semiconductor industry is still unsatisfactory and the gap in advanced process technology tends to widen, no one can stop the rise of the industry in the future. This is also one of the fundamental reasons why the United States and other countries are trying their best to hinder its development.

At present, the development stage of China's semiconductor industry is not synchronized with the world. In addition, with the guidance of the "Big Fund" and the enthusiastic participation of many local governments and private capital, the overall situation of the industry is healthy and progressing in a positive direction. The development of China's semiconductor industry is in a dilemma. If it does not support enterprises, it is afraid of not catching up, and long-term support is definitely not conducive to the growth of enterprises' competitiveness. Therefore, it is determined to make a quick decision. However, due to the extremely severe international situation, there is no way out. We must abandon all illusions and rely on our own strength to strengthen research and development for rapid breakthroughs. Recently, there have been some "false fires" and even some "chaos" in the industry. There is no need to be too nervous. It is a problem in the development process. As the overall industry trend is that marketization gradually becomes dominant, I believe that the industry can distinguish right from wrong and make correct judgments. The only thing that is not reassuring is some local government projects, because their purposes are different, they will be "bold" and need timely guidance and adjustment. In addition, I believe that Tsinghua Unigroup will gradually mature in the development of China's semiconductor industry, become a backbone force, and tend to grow rationally.

China's semiconductor industry has already set sail. Its hope lies in enterprises, especially the success of key enterprises. Therefore, we must create all conditions to enable enterprises to easily get started and have upward vitality. The government should intervene as little as possible in the implementation of projects so that market resources can truly play a leading role.

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