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China may have become the world’s factory for new technology, but the country is still struggling to make a name for itself in one sector: electronic chips. “Only 16% of semiconductors used in China are produced domestically,” says Piero Scaruffi, a Silicon Valley historian. “The rest is imported.” In 2018, this dependence cost China $312 billion.
Beijing has wanted to balance that trade deficit for a long time. “Developing a domestic chip industry has been one of the Chinese government’s priorities for at least a decade,” says Len Jelinek, a semiconductor expert with the consulting firm Omdia. In 2014, Beijing set up a $150 billion fund to invest in the semiconductor industry. The Made in China 2025 Plan launched in 2015 established specific targets: under the plan, the country would produce 40% of its chips by 2020 and 70% by 2025.
But the real turning point came on 16 April 2018. On that day, the United States banned American companies from selling their chips to ZTE, one of China’s leading telecommunications groups, which is accused of exporting hardware to Iran. Heavily reliant on US-made computer chips, ZTE suddenly found itself in a chokehold.
“That’s when Chinese companies became aware that their access to US technology could be cut off with a snap of the fingers, particularly regarding semiconductors,” says Jeffrey Towson, an American expert on Chinese technology. “That realisation convinced the Chinese government to develop its own semiconductor manufacturing chain to reduce its reliance on the United States.”
In October 2019, China created another $29 billion fund devoted to semiconductors
National efforts became even more urgent in 2019 when Washington stiffened its sanctions, banning US companies from selling their products to dozens of Chinese firms, including the tech giant Huawei. Economic disaster began to loom, as chips are essential in order to produce Huawei smartphones, IT servers and electric cars, which China mass produces. The next step came in October 2019, when China created another $29 billion fund devoted to semiconductors.
Chinese strategy is focused on two main pillars. First, it aims to create national champions from the private sector by offering subsidies, tax rebates and low-interest loans. This move has brought several promising firms to the fore, such as SMIC, HiSilicon (a Huawei subsidiary) and the Yangtze Memory Technologies group. Alibaba, Tencent and the Gree group, the world’s largest air conditioning manufacturer, have also assembled in-house initiatives to produce semiconductors.
The second pillar in China’s strategy is acquiring expertise. At the end of 2019, the Shanghai-based firm Wingtech Technology bought the Dutch semiconductor manufacturer Nexperia. Before that, in 2018, the Beijing conglomerate Tsinghua Unigroup bought the French chip component producer Linxens. Beijing also managed to attract Korean groups Samsung and SK Hynix, US companies Intel and Global Foundries, and Taiwanese firms TSMC and UMC. All have set up joint ventures or opened plants in China.
Thanks to this massive investment, China is starting to catch up with its American competitors. “In terms of chip design, China is only 12 months behind,” says Malcolm Penn, who heads the consulting firm Future Horizons. HiSilicon’s Kirin chips, which now feature in some Huawei smartphones, are some of the best around. Alibaba also unveiled its Hanguang 800 chip in September 2019. The test platform MLPerf, known for its objective industry benchmarks, says the Hanguang 800 outperforms Intel and Nvidia products.
Although China has begun designing chips to rival US products, they cannot yet be manufactured in the country. For example, the Hanguang 800 chip is built by the Taiwanese foundry TSMC, which produces almost 50% of the chips ordered worldwide, including for Apple and Huawei.
In comparison, SMIC, China’s largest semiconductor maker, has only recently begun manufacturing 14-nanometre chips, while TSMC has launched production of 5-nanometre chips. “SMIC’s semiconductors are always several generations behind those produced by TSMC, with much lower production volumes on top of it,” Len Jelinek from the consultancy Omdia points out.
Jeffrey Towson agrees: “Developing a state-of-the-art plant is extraordinarily expensive and requires technical expertise that China doesn’t have.” TSMC’s latest production plant cost $17 billion.
But price isn’t the only problem. More importantly, China lacks the manufacturers. “The highly complex machines used to produce chips are built by a handful of firms in the United States, the Netherlands and Japan,” says Scaruffi, Silicon Valley historian. And those manufacturers tend to focus on their long-standing customers, like Samsung, TSMC and Global Foundries, which currently dominate their revenue base.
Exacerbating matters, the Trump administration is doing everything it can to make sure China can’t acquire the best machines for its plants. In 2019, it pushed the Dutch group ASML to cancel the sale of one of its photolithography machines to SMIC.
China’s workaround is to invest in the memory chip market, which is more accessible than the processor and graphics card markets. “Memory chips are relatively easy to produce on a large scale, and that’s an advantage for firms serving a vast market like China,” Penn says. Chinese companies Yangtze Memory Technologies and ChangXin Memory Technologies are on the verge of launching mass production of these units and are expected to generate between 3% and 5% of global production by the end of the year.
“China also has an ace up its sleeve in the form of more basic chips for low-end smartphones and smart appliances that use Internet of Things technology,” says Towson. Chinese manufacturer Gree released its first air conditioners fitted with self-produced chips in June last year. Meanwhile, Unisoc, a subsidiary of Tsinghua Unigroup, has become world leader in chips for smartphones in the under-$100 range.
But Beijing has higher ambitions. “China wants to lead chip design for artificial intelligence,” Towson says. “Because this is a new area, no manufacturing standards have been set.” This virgin territory is a perfect place for new players to emerge. “The debate isn’t about whether China will eventually dominate the chip industry,” Towson adds, “but whether the reversal of fortune will take place in three years or ten.”