China Spends Big on Semiconductor Development, But Frontrunners Stumble

With achieving “national self-reliance” an important goal of Beijing’s under its new five-year plan, the government has been pouring vast sums of money into fostering a homegrown industry. China’s reliance on foreign technology and imports makes the chipmaking sector a major vulnerability in the Chinese government’s eyes, especially after the country’s biggest manufacturer, SMIC, was hit with sanctions from the U.S. government in September.

Recent developments have highlighted the immense challenges facing the country as it races to establish a national champion in a technologically complex industry. This week, The Wall Street Journal’s Liza Lin reported that a record number of Chinese companies have registered their business as related to semiconductors this year:

Meantime, more than 50,000 Chinese companies have registered their businesses as related to semiconductors this year, a record that is four times the total from five years ago, according to data from corporate registration tracker Tianyancha.

These include companies with only the most tenuous of ties to the chip industry such as real-estate developers, cement makers and restaurant businesses—all of which have recast themselves as chip firms in a bid to benefit by association with a plan unveiled in August by China’s cabinet promising tax waivers and government funding. [Source]

The flood of money into the sector has drawn the concern of state regulators. A major problem is that entrepreneurs and businesses with little expertise or background in chipmaking have taken advantage of the widely available investment to launch their own initiatives. Last month, the National Development and Reform commission announced that it would “curb chaos” in the industry as inexperienced businesses with little expertise in semiconductor manufacturing had “blindly entered projects.”

On Wednesday, the government’s involvement in the sector took a big step forward after local authorities were forced to take over onetime darling semiconductor startup HSMC following months of delays and a cash shortage. South China Morning Post’s Sidney Leng reported that district authorities in Wuhan took over the “nightmare” factory:

According to the latest corporate registration records compiled by Chinese data site Tianyancha, Wuhan Hongxin Semiconductor Manufacturing Company (HSMC) has been taken over by the municipal government in the central Chinese province of Hubei.

This follows months of delays in the construction of its US$20 billion state-of-the-art semiconductor manufacturing plant caused by the coronavirus as well as funding shortages.

[…] “My experience with HSMC was a nightmare, unfortunately! It’s really hard to describe in a few words,” said former HSMC chief executive Chiang Shang-yi when contacted by the South China Morning Post via LinkedIn for comment. [Source]

Investors and analysts initially had high hopes for HSMC, whose CEO Chiang Shang-yi oversaw R&D at Taiwan’s TSMC, the world’s biggest semiconductor manufacturer. And HSMC is not the only major chipmaker to have fallen flat this week alone. On Monday, Tsinghua Unigroup, a government-backed chipmaker owned by the prestigious Tsinghua University, defaulted on its loans. The Wall Street Journal’s Xie Yu reported that the default was a major setback for a company that once made a bid to buy one of the world’s largest memory-chip makers:

The financial difficulties are striking for a company which in 2015 made headlines with a $23 billion bid for U.S. memory-chip maker Micron Technology Inc., and which has enjoyed huge state backing. Last year, an Organization for Economic Cooperation and Development study of 21 global semiconductor companies ranked Unigroup at the top for government support received from 2014 to 2018.

[…] Dan Wang, a Beijing-based technology analyst at Gavekal Dragonomics, said Unigroup was a major player in China’s semiconductor industry, with important roles in making memory chips and chip design. However, he said it was a classic state-owned enterprise that was eager to follow political orders and was ambitious in creating new ventures in the chip-manufacturing supply chain, but which wasn’t very successful in producing first-class products.

“Tsinghua Unigroup has many business lines, but none of its products are on the technological cutting edge. YMTC, for example, is still not producing in large volumes, while its memory technology is still regarded as being behind the industry leaders,” he said. [Source]

China is not unfamiliar with dramatic boom and bust cycles in industries which the government has deemed a national priority. After the NDRC set ambitious targets for solar energy in 2007, huge investments in expanding China’s solar panel manufacturing capacity led to a glut in supply, and the collapse of solar giants such as Suntech in 2013. Today, Chinese companies are the world’s leading manufacturers of photovoltaics. 

Semiconductor manufacturing is far more complex than making solar panels, so the path to national self-reliance in this industry may prove to be much harder. Nonetheless, as NPR’s Emily Feng points out: it only takes one winner:

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