China's "chip" situation: sober reflections amid the boom

2020 is the year to complete the building of a moderately prosperous society in all respects and the end of the 13th Five-Year Plan. It is the decisive year for achieving the first centenary goal and the year to achieve the goal of poverty alleviation. Standing at this historical intersection, China's semiconductor industry has also delivered its answer.

Wei Shaojun, chairman of the Integrated Circuit Design Branch of the China Semiconductor Industry Association, recently stated that during the 13th Five-Year Plan period, the sales scale of China's chip design industry increased from 132.5 billion yuan to 381.9 billion yuan, with an average annual compound growth rate of 23.6%, which is nearly 6 times the average annual compound growth rate of the global semiconductor industry during the same period.

Not only that, statistics from the China Semiconductor Industry Association show that in the first three quarters of 2020, China's integrated circuit industry sales revenue increased by 16.9% year-on-year, of which IC design sales revenue increased by 24.1% year-on-year, and wafer manufacturing sales revenue increased by 18.2% year-on-year.

Many industry insiders said in an interview with China Business News that in recent years, the semiconductor field has become the main battlefield for competition among countries. Driven by market demand and supported by national policies, large funds and other capital have gradually entered the domestic semiconductor industry, and semiconductor projects have blossomed everywhere, showing that China has changed from passive to active in the development of semiconductor industrialization. However, we must also see the impetuous situation of some local governments and enterprises in the industry blindly launching projects.

Policy dividends continue to be released

From December 16 to 18, 2020, the Central Economic Work Conference pointed out that one of the key tasks in 2021 is to enhance the independent and controllable capabilities of the industrial chain and supply chain. The security and stability of the industrial chain and supply chain are the basis for building a new development pattern. We must coordinate the advancement of filling in the gaps and forging the strengths, implement key core technology research projects for the weak links in the industry, solve a number of "stuck neck" problems as soon as possible, and work hard in the areas of industrial advantages to come up with more unique skills.

Since the Trump administration came to power in the United States, it has directly anchored China as a strategic competitor or even an adversary. In some areas, it has taken turns to exert extreme pressure, especially in the field of chips, where it has carried out unscrupulous "choke" operations. Core materials such as silicon wafers, which are necessary for chip production, high-end equipment such as lithography machines for chip manufacturing, and EDA software tools for chip design have all been affected. ZTE, Huawei, and SMIC have all been affected.

In order to solve these "vital points" and "bottleneck" problems, the country has introduced a number of policies to support the development of the semiconductor industry.

On August 4, 2020, the State Council issued the "Several Policies to Promote the High-Quality Development of the Integrated Circuit Industry and the Software Industry in the New Era", proposing to formulate and introduce policy measures in eight areas, including finance and taxation, investment and financing, research and development, import and export, talents, intellectual property rights, market applications, and international cooperation, in order to further optimize the development environment of the integrated circuit industry and the software industry, deepen international industrial cooperation, and enhance industrial innovation capabilities and development quality.

Subsequently, on October 29, the Fifth Plenary Session of the 19th Central Committee of the Communist Party of China reviewed and passed the "Proposal of the Central Committee of the Communist Party of China on Formulating the 14th Five-Year Plan for National Economic and Social Development and the Long-Term Goals for 2035", which clearly pointed out that it will target cutting-edge fields such as artificial intelligence, quantum information, and integrated circuits, and implement a number of forward-looking and strategic national major scientific and technological projects to strengthen the country's strategic scientific and technological strength.

Benefiting from the policy dividend, domestic semiconductor companies have sprung up like mushrooms after rain. Tianyancha data shows that by the end of December, there were more than 100,000 integrated circuit-related companies in the country, and more than 67,000 of them were established in the past year.

Zeng Guanwei, an analyst at TrendForce, told reporters that under the guidance of various policies, China has shown a change from passive to active in the development of semiconductor industrialization, and is actively striving for opportunities to compete at the same level. Although it is still lagging behind in technology, the Chinese government has a high influence on domestic market applications, and it is not difficult to integrate industrial development goals with market context. Therefore, for supply chain companies outside China, the changes in long-term business strategies and sales markets cannot be underestimated, and a new wave of adjustment period may occur in the supply and demand of the global semiconductor industry chain.

Funds are pouring in

The continued release of policy dividends has also attracted a large amount of capital to flow into the semiconductor industry.

The latest data released by S&P Global Market Intelligence shows that so far in 2020, Chinese semiconductor companies have raised nearly US$38 billion (approximately RMB 250 billion) through public offerings, private placements and asset sales, more than double the total amount raised in 2019.

In addition, according to incomplete statistics, there were 43 IPOs in semiconductors and semiconductor production equipment in 2020, raising a total of more than 130 billion yuan. In particular, the number of IPOs on the Science and Technology Innovation Board has increased significantly, among which SMIC won the title of the largest A-share IPO in 2020 with a fundraising amount of 53.23 billion yuan.

Xu Ke, director of Strategy Analytics, told reporters that the semiconductor industry is an innovation-driven, highly market-oriented, and capital-intensive industry, and sustained high-intensity capital investment is the guarantee of the industry's success. Insufficient capital investment is the main obstacle to the development of China's semiconductor industry. The Science and Technology Innovation Board uses the power of policies and market-oriented means, and makes good use of the capital market to open up a green channel from investment to exit. It will attract more capital and talents to enter the industry, and will maximize the solution to the problem of insufficient investment that has long plagued the development of my country's industry, stimulating the accelerated development of China's semiconductor industry.

Wang Shuyi, chief analyst at Techsugar, said that the semiconductor industry requires large investments and has a long payback period. Before 2014, it was already a very unpopular industry and few investors were interested in it. The national policy tilt, especially the launch of the Science and Technology Innovation Board, has provided a channel for capital to exit quickly, which can encourage social capital to increase investment in the semiconductor industry.

Frequent unfinished projects

With the support of policies and the influx of a large amount of hot money, semiconductor projects such as high-end chips, advanced semiconductor industry clusters, third-generation semiconductors, and brain-like chips have been launched in many places. According to statistics from Jiwei.com, in 2020, more than 14 billion-yuan projects were signed and implemented, involving 6 provinces and 11 regions, with a total investment of more than 178.8 billion yuan.

However, while billion-dollar semiconductor projects are flourishing everywhere, it is difficult to prevent some projects from ending up in an embarrassing situation due to blindly launching them. Wuhan Hongxin's 100 billion-dollar project, Nanjing Tacoma, and Shaanxi Kuntong Semiconductor were all glorious when they were signed, but now some of them have ended up in failure, gone bankrupt, or are embroiled in disputes.

A staff member of a local economic development zone once told reporters: "At that time, the country strongly supported the development of the semiconductor industry. The project had technical guarantees and policy support at the time. It was an industry that everyone was optimistic about. Even now, its technology is not outdated. However, the feasibility was ignored. The local leaders took on too much for political achievements and accelerated the implementation of the project. They even covered up the problems after the project had problems, making the local government bear the losses."

Xu Ke believes that local governments have a strong desire for political achievements and hope to drive local technology industries with large semiconductor manufacturing projects. However, the integrated circuit industry is highly professional, with high barriers, and the investment intensity and technical difficulty are far beyond the scope that most governments can bear. The government has a path dependence on past investment projects and underestimated the difficulty of investing in semiconductors. The main leaders blindly launched projects after making decisions, causing a deadlock in many projects. It is recommended that local governments have clear feasibility studies, clear financial budgets, and sufficient due diligence for integrated circuit manufacturing projects in advance. At the same time, the central government's overall planning for industrial development also needs to continue to strengthen.