Foreign media: China's semiconductor counterattack has courage and strength but cannot be biased

According to the FT, as the US government tightens restrictions on Chinese technology companies, the Chinese government’s 30-year strategy to build a local chip industry has taken on new urgency.

Experts and industry executives believe that even as China plans to invest another $1.4 trillion in its technology sector by 2025, the U.S.'s targeted policy is a means to strangle China's semiconductor supply and manufacturing, making it more difficult for the Chinese government to vigorously develop its domestic chip industry.

Randy Abrams, head of Asian technology research at Credit Suisse, said China's efforts to develop its semiconductor industry used to focus on "basic elements" such as chip manufacturing, packaging and testing. But now, they need to minimize their dependence on the United States.

Rich but in the wrong direction?

Currently, the Chinese government's priorities include strengthening its technological prowess in the field of electronic design automation (EDA) and manufacturing equipment at chip manufacturing plants. EDA is software used to design chips, and U.S. EDA tool makers Cadence and Synopsys dominate the global advanced chip market, while Applied Materials, Lam Research and KLA Tencor dominate the key field of cutting-edge chip manufacturing equipment. 

Analysts say that in the semiconductor equipment and EDA sectors, China is now in the same position as Huawei and ZTE in the late 1990s. Abrams said: "The gap is not only capital expenditure, but you also need time to accumulate experience and cultivate talent."

"Making a breakthrough in semiconductor equipment is the biggest hurdle," said an analyst at research firm Trendforce, adding that less than 10% of semiconductor equipment used in China is domestically produced.

Equipment makers have played a supporting role in Beijing’s past heavy investments in the industry, but they are huge. The central government alone has provided about $50 billion in subsidies to mainland Chinese chipmakers over the past two decades, 100 times the amount received by Taiwanese companies, according to the Semiconductor Industry Association.

A study of 21 chipmakers worldwide by the Organization for Economic Cooperation and Development (OECD) found that four Chinese companies were among the top recipients of government funding. The study found that between 2014 and 2018, SMIC and Tsinghua Unigroup, one of China's leading chip design companies that is also investing in production, received government support totaling more than 30% of their revenue.

Still, China's chip output is far from meeting the country's needs. According to the China Semiconductor Industry Association, only 27% of chips sold in China are made domestically, with the rest imported.

In addition to new tax incentives for chipmakers, Beijing has pledged to step up investment in response to U.S. sanctions, but some have warned that China needs to adjust the way it supports the industry.

Over the past 30 years, hundreds of chip projects in China's semiconductor industry have failed because investors lacked the necessary technical knowledge or redirected subsidies to unrelated real estate projects. Perhaps the situation will get worse as the Chinese government steps up its investment. In the first nine months of 2020, more than 13,000 Chinese companies registered as chip companies, even though many had no previous industry experience.

China's National Development and Reform Commission once responded to reports of unfinished chip projects, saying that domestic enthusiasm for investing in the integrated circuit industry is constantly rising, and some "three-no" enterprises with no experience, no technology, and no talent have joined the integrated circuit industry. Some places do not have enough understanding of the laws governing the development of integrated circuits, and blindly launch projects. The risk of low-level duplicate construction has emerged, and some projects have even stalled and factories have been vacant, resulting in a waste of resources.

In the next step, we will guide local governments to strengthen their awareness of the risks of major project construction, and in accordance with the principle of "whoever supports, whoever is responsible", those who cause major losses or trigger major risks will be notified and held accountable. In response to the current chaos in the industry, we will focus on doing a good job in four aspects: first, strengthening planning and layout, second, improving the policy system, third, establishing a prevention mechanism, and fourth, consolidating the responsibilities of all parties.

The blueprint for a “de-beautification” factory

For years, China's competition with the United States for global technological supremacy has been a boon to China's chip industry.

The rapid development of artificial intelligence, the growing domestic consumer technology market and supercomputer projects have all driven demand for semiconductors, adding to the urgency of producing more chips domestically.

The original strong blow to Huawei is now spreading. On the evening of October 4, SMIC said in an announcement that the company is aware that the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce has sent letters to some suppliers in accordance with the U.S. Export Control Regulations EAR744.21(b), stating that some U.S. equipment, accessories and raw materials exported to SMIC will be subject to further restrictions under U.S. export control regulations, and that they must apply for export licenses in advance before they can continue to supply SMIC.

Machines used to etch, clean or test silicon wafers remain at the forefront of technology, and U.S. companies dominate the market. China also has a group of emerging chip equipment manufacturers, but they accounted for only 8% of the $11.4 billion in equipment investment by Chinese chipmakers last year.

Jefferies analysts predict that plans to expand production capacity in China offer a major opportunity for the country's largest equipment manufacturers, including North Huachuang, Advanced Micro-Semiconductor Equipment, and ACM Semiconductor Equipment. Chinese chipmakers will spend about $100 billion on machinery and equipment between 2021 and 2026. The problem is that none of them have reached that goal yet.

Despite China’s efforts to localise its production, chipmakers such as SMIC prefer to use equipment from global market leaders including Applied Materials, Lam Research and KLA-Tencor in the US, Dutch equipment maker ASML or Japan’s Tokyo Electron.

An executive at a foreign supplier to SMIC said companies, government officials and research institutions are planning to build "de-Americanized" manufacturing plants.

But any such project would have to use machines “fused” from different suppliers, since no single Chinese company can provide equipment for the entire chipmaking process. For some particularly complex market segments, it would have to buy equipment from ASML and Tokyo Electron, or even find second-hand American equipment.

Douglas Fuller said one possibility is to build a production line at SMIC using machines from U.S. companies but manufactured outside the U.S. Any such move could trigger the U.S. government to take steps to plug the loophole.

summary

In any case, with the support of the Chinese government, Chinese chip companies have more than one opportunity to compete, but they must remember to avoid a "Great Leap Forward."

Chu Qing, CEO of Ziguang ZTE, once pointed out that the establishment of a large number of small companies may not be a good thing for the industry, and capital should not become "a heavy hammer that breaks a porcelain bottle."

At the same time, the development of the semiconductor industry also needs to be balanced. "One-sidedness" is not desirable, and the talent issue should also be taken seriously.

Wei Shaojun, vice president of the China Semiconductor Industry Association and professor at the Institute of Microelectronics at Tsinghua University, said that the growth of my country's integrated circuit product segments is unbalanced and the talent shortage is particularly prominent. The enthusiasm for investment and factory construction in various places is high, but a number of manufacturing projects are facing unfinished work and suspension. Blind impulses that violate the laws of semiconductor industry development deserve vigilance.

US sanctions are a catalyst and a stimulant, but they are also addictive. This will be a long and arduous battle.