Tech War With U.S. Turbocharges China’s Chip-Development Resolve

(WSJ) China is investing heavily in computer chips and stepping up efforts to cultivate homegrown talent as it accelerates its quest for technological self-sufficiency amid a tech trade war with the U.S.

Chinese semiconductor companies have raised the equivalent of nearly $38 billion so far this year through public offerings, private placements and asset sales, according to S&P Global Market Intelligence—more than double last year’s total.

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.

The semiconductor surge mirrors other recent manias in China, including investment binges in electric vehicles, real estate, peer-to-peer lending and solar panels—some of which led to bubbles or irrational spending—prompting China’s top economic planner to warn about unwise business activity.

“Companies without experience, technologies and talents have rushed into the integrated circuit sector,” a representative of the National Development and Reform Commission said last month. “Some local governments also blindly started projects with inadequate understanding of the industry.”

The frenzy of activity underscores concerns about China’s technological reliance on the West.

China is the world’s largest importer of semiconductors. Customs data showed it bought more than $300 billion worth of foreign-made chips last year.

Chinese firms supply only 5% of the world-wide market, according to the Washington-based Semiconductor Industry Association. Chinese chips are also far less advanced, lagging their Taiwanese and U.S. peers by five years or more, experts say.

President Trump’s moves this year to block exports of critical technologies to China’s Huawei Technologies Co. and ZTE Corp. set off a scramble by Chinese companies to build up domestic sources of semiconductors, the tiny processors that are increasingly essential to makers of smartphones, cars and other Chinese exports.

“It’s about protecting the safety of your supply chain,” said Adam Zhao, managing director at Shanghai investment firm Winsoul Capital, which invests in semiconductor startups. “You never know if you’ll be next on the U.S. blacklist.”

Last month, in an economic blueprint setting out priorities for the next five and 15 years, Chinese authorities formally elevated “self-reliance” in technology to the level of a key national goal.

President Xi Jinping, in a speech last week, called for accelerating the development of critical industries including semiconductors.

Since the 1950s, Beijing has spent billions of dollars to cultivate a domestic chip industry—first through central planning, and then with the help of foreign joint ventures. Talent bottlenecks, misguided investment and burdensome bureaucracy held back its success.

What’s different this time is the U.S.-China tech war, which has turbocharged Beijing’s desire to break through. The latest effort also relies more on private-sector expertise than the largely state-driven approach of the past.

“There’s now a whole-of-society effort to cultivate domestic sources so that no firm can be crippled by unpredictable supply,” said Dan Wang, an analyst at research firm Gavekal Dragonomics.

Universities are prioritizing programs dedicated to training a new generation of semiconductor experts, seeking to address an industry shortfall that will top 250,000 skilled workers by 2022, according to state media reports citing a 2019 white paper by a government-backed think tank.

In July, China’s cabinet raised the status of university degrees tied to semiconductors, promising more funding and prestige. Meantime, China’s elite Peking, Tsinghua and Fudan universities have started to channel additional resources into their semiconductor programs.

“There is no short cut in chip development—accumulating engineer experience and know-how is critical to success,” said Szeho Ng, head of semiconductor research at China Renaissance Securities.

At Huawei, which said in September that it is running out of processor chips for its smartphones because of U.S. sanctions, founder Ren Zhengfei has emphasized the need for a strong domestic chip industry.

The reason why Huawei is facing difficulties is because “China’s industry could not build the advanced semiconductor chips we designed,” Mr. Ren said while touring Beijing universities in September.

Huawei, in a statement, said cutting off its access to U.S. technology has “damaged the global semiconductor industry” and “led to a growing ‘de-Americanization’ of supply chains around the world.”

This year, six Chinese provinces and regions pledged to invest the equivalent of about $13 billion in semiconductors, according to state media and government statements.

Chinese companies ramping up chip-based investment include e-commerce giant Alibaba Group Holding Ltd. and electric car maker BYD Co. 

But the list also includes businesses like Gansu Shangfeng Cement Co., which poured $38 million into an investment fund to finance a semiconductor joint venture with the government of Anhui province—despite no prior experience in chips. Shangfeng said in a stock filing it was seeking to diversify its investments.

Several high-profile Chinese projects have gone belly up, including two between Chinese authorities and U.S. chip makers.

Last year, a joint venture between San Diego-based Qualcomm Inc. and China’s Guizhou province to make server chips folded after three years, according to former staff members, while a $10 billion plan by Globalfoundries Inc. of Santa Clara, Calif., to build an advanced chip-making factory in Chengdu fell apart.

Qualcomm didn’t respond to a request for comment. Globalfoundries said it and its local government partner amended their joint venture in 2018 and halted the construction plans after assessing market conditions.

In Nanjing, a planned $3 billion project to build two chip production facilities was halted after its backer went bankrupt in June, court filings show.

Li Ruiwei, the venture’s chairman, said his firm, Tacoma (Nanjing) Semiconductor Technology Co., made less-advanced chips than what the central government was looking for and was thus shut out from hoped-for subsidies.

Mr. Li, in an interview, called government policy a “double-edged sword” that often led investors to blindly invest in favored sectors.

Source: Wall Street Journal by Liza Lin

Tech War With U.S. Turbocharges China’s Chip-Development Resolve Tech War With U.S. Turbocharges China’s Chip-Development Resolve Reviewed by TechCO on 11/18/2020 Rating: 5

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