Thursday, June 13, 2024

China’s Plans For Self-Sufficiency In Chip Production By 2025 Come Unstuck

Washington, DC – China may not meet one of its critical industrial goals of indigenous chip making by 2025. The country’s top leadership is believed to no longer see ‘Made in China 2025’ as a realistic performance benchmark to localize semiconductor production.  

Heavy corruption, lack of skill sets, and, importantly, western sanctions impacting technology transfer are said to be the bottlenecks. The Chinese government is said to be recalibrating its targets, given the latest assessments that exposed the chinks in the semiconductor business, especially after heavy corruption scandals rocked the country earlier this year.  

The Made in China 2025 plan initially set a goal of locally producing 40 percent of the chips used by the Chinese industry in 2020 and 70 percent by 2025. But they never achieved the initial targets. In fact, the share of local chip production fell from 15.1 percent in 2014 to 16.7 percent in 2021, according to IC Insights, a US research firm. 

In the first half of this year, the Communist Party’s corruption watchdog, the Central Commission for Discipline Inspection, announced a series of investigations into senior figures in China’s semiconductor industry. The targets of these investigations include the former chairman of Tsinghua Unigroup, a state-owned chip-focused conglomerate, the former president of the China Integrated Circuit Industry Investment Fund (aka “Big Fund”), and the former head of the Ministry of Industry and Information Technology. These investigations follow a government audit of the Big Fund, affiliate funds, and companies that received investments from these institutions. 

An investigation was also launched against Du Yang, the former director of Sino IC Capital, the holding company managing the fund’s investments, for a “serious violation of discipline and law.” Two other firm managers are involved in the investigation by the all-powerful CCDI, conducted in collaboration with the ministry of industry and information technology. Xiao Yaqing, the former minister of industry who was supposed to oversee the sector, has also been accused of corruption, although it’s unclear whether the two cases are related. 

According to analysts, “Some speculate that the investigations are linked to the financial troubles of Tsinghua Unigroup and underline the perceptions among China’s senior leaders that the approach of throwing money at China’s semiconductor industry has fallen short of expectations.” Apparently, the large sums raised by the Big Fund, and the state’s encouragement of broader investment and business activity in the semiconductor industry, “have inevitably created wastage and opportunities for corruption.” But malfeasance by individual executives does not necessarily mean that their investment decisions were unproductive. Much of the Big Fund’s largesse has gone to relatively successful firms like Yangtze Memory Technologies Corp, which was poised to become a significant player in memory chips and a serious competitor to market leaders Samsung and SK Hynix. 

Unfortunately for China, the corruption scandal came about around the time Speaker of the US House of Representatives Nancy Pelosi visited Taiwan Semiconductor Manufacturing Company (TSMC) – Taiwan’s flagship semiconductor company, the world’s number one chip producer – in early August. 

Le Monde reported the irony: “Beijing fined a number of officials in the highly strategic sector, including a minister. On both sides of the Taiwan Strait, the contrast is striking: While the independent island claimed by Beijing relies on its semiconductor industry – the best in the world – to strengthen its geopolitical influence, China is tidying up a sector seized by speculation.” 

The Diplomat reported that “over the last decade, huge amounts of capital have flowed into Chinese chipmaking, with relatively loose oversight creating ample room for official corruption.” Big Fund managers have long been rumored to embezzle funds from their portfolio companies. The analysts ask: “But Beijing first raised concerns about the semiconductor sector back in 2020. So why have these probes only come about now? The answers may lie in concurrent international events.” 

Pelosi’s Taiwan visit exposed a “major sore point for Beijing: China’s continued reliance on foreign silicon leaves it in a vulnerable geostrategic position.” The Diplomat explained, “After the Trump administration introduced restrictions on chip exports in 2020, Huawei’s global smartphone business was devastated. And the Biden administration has only tightened the screws on China’s access to foreign semiconductor technology. Biden recently signed the CHIPS Act to advance US industrial policy in the sector and is reportedly building a “Chip 4 Alliance” with Taipei, Seoul, and Tokyo. In short, Beijing has a growing geostrategic urgency to advance its indigenous semiconductor capabilities. Yet despite some successes, like the Semiconductor Manufacturing International Corporation (SMIC), Big Fund investments have failed to meaningfully reduce China’s reliance on imported technology. This failure is likely a major driver of the crackdown, and the former Big Fund executives might be the fall guys.” 

Industry specialists say that from here on, “China will continue to pour money into its semiconductor sector, but likely in a way that is more cautious and tightly regulated than before. Precedent in other developing segments, like new energy vehicles, suggests that chipmaking will start to consolidate around larger champions, such as SMIC.”

Bruegel, a European think tank on the economy, analyzed China’s unsuccessful semiconductor venture: “First, chip fabrication requires massive fixed asset investment and, therefore, large subsidies, but with no guarantee of success. Second, one reason for the underwhelming results of China’s semiconductor policy is US containment, through export controls and other measures. In this respect, the EU should find it easier than China to upgrade its chips industry, but, given the costs, focusing on the highest-end part of the supply chain would be the best approach. Assembly and production of lower-end semiconductors already face overcapacity, given the financial resources already invested by China.” 

Deconstructing China’s planning on chip sufficiency, Bruegel says the objective is “clearly ambitious,” reaching self-sufficiency through the rise of national champions in the different steps of semiconductor production – design, fabrication, and assembly. 

The think tank feels China may have achieved some targets in the last part of the cycle: assembly. But there is a rider. “This has, however, the least value-added and is the least strategically important of the three phases. In terms of fabrication, producing standard chips, especially for memory cards, has become feasible in China, but these are clearly not the highest-end chips. The availability of funds for Chinese companies to assemble – and in some cases produce – low-end chips and, in particular, memory cards has resulted in overcapacity and the collapse of prices. Furthermore, export restrictions on software design or manufacturing equipment, imposed by the US and some like-minded countries (such as the Netherlands), are making it even harder than it already was for China to move up the ladder.”

 

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