Visitors to SMIC’s booth at the China International Semiconductor Fair in Shanghai, Oct. 14, 2020
From the U.S. export sanctions against ZTE and huawei to SMIC’s recent restrictions on overseas financing, the weaknesses of China’s chip technology are evident. China’s poor relations with the West have forced the technology industry to revert to “self-reliance,” but the technology industry, represented by semiconductors, may be heading down the same path of the previous steel industry’s crude expansion and eventual overcapacity. Moreover, the cutting-edge technology is not just words and money can be smashed out.
Semiconductor industry investment money surging
From the central government to local governments, and then to the private financing market, China’s semiconductor chip industry in recent years, investment is hot.
In September 2014, China’s National IC Industry Investment Fund (industry players will call it “big fund”) a registered capital of 98.72 billion yuan, the total investment scale of 138.7 billion yuan. The second phase of the “Big Fund” was incorporated on October 22, 2019, with a registered capital of 204.15 billion yuan.
The website of China’s First Financial News reported that China added more than 71,000 enterprises with the business scope of “integrated circuits, chips and semiconductors” in 2020 as of Nov. 30, an increase of 31.7 percent year-on-year, according to statistics from Sky Eye.
China Economic Weekly reported that from 2019 to date, nearly 20,000 companies have switched to “integrated circuits, chips and semiconductors,” and even Tibet and other regions that have not formed a cluster effect in the electronics industry have joined the “Core Making Great Leap Forward” movement.
Some industry insiders analyze that as long as the business scope is expanded to be related to integrated circuits, they can enjoy the local tax reduction policy or can facilitate financing.
With the establishment of the science and technology board of the Shanghai Stock Exchange, more investment is injected into the semiconductor industry. According to the “Review and Outlook of China’s Equity Investment Market in the First Three Quarters of 2020” released by Qingke Research Center, semiconductor and electronic devices received a total of about 108.351 billion yuan of investment in the first three quarters of last year, up 280% year-on-year, making it the fastest-growing sector among all investment industries.
Inefficient production capacity financing internal and external difficulties
However, China’s chip industry has shown the chaos of inefficient and duplicate investment.
China has ambitious chip localization targets and was planning to produce 40% of the chips it uses by 2020. The New York Times cited Morgan Stanley analysis data that Chinese companies bought $103 billion worth of semiconductor chips in 2020, only 17% of which came from Chinese suppliers. Morgan Stanley predicts that by 2025, the domestic share of Chinese chip consumption will rise to 40 percent, well below the 70 percent target set by the government.
According to Chinese media statistics last October, in more than a year’s time, six tens of billions, or even up to hundreds of billions, of semiconductor planning projects in five Chinese provinces have come to a halt, including Nanjing DeKe code, Chengdu Ge core, Shaanxi Kun with, Jiangsu Huaian De Huai semiconductor, Guizhou Huaxintong and Wuhan Hongxin semiconductor.
At the same time, the Chinese government focused on supporting the leading semiconductor company Tsinghua Ziguang Group last November was exploded in debt default. In January, SMIC was withdrawn from OTCQX, the U.S. over-the-counter securities exchange, due to Trump‘s executive order.
Scott Kennedy, senior advisor on China business and economics and chairman of the board at the Center for Strategic and International Studies (CSIS) in Washington, told VOA that government investment can only bring chip companies through the door and that it is extremely difficult to build a healthy and complete industry chain.
China’s supply of capital is almost endless, and they can raise money for different high-tech industries from the state or private markets,” Gansett said. However, semiconductors are capital-intensive, with a manufacturing plant costing between $5 billion and $10 billion, which is much more expensive than researching other technologies.”
Nathaniel Taplin, a columnist for The Wall Street Journal, wrote this week that Chinese technology companies will face less access to overseas financing and will face higher market barriers as U.S.-China relations deteriorate. In the article, he said, “If China’s key domestic markets remain unfairly tilted toward policy-oriented companies instead of looking at the best products, it may be difficult for the country to give birth to many new companies that truly drive technological progress and can take advantage of the technology frontier.”
Another problem for Chinese companies trying to “bend the curve” in the chip sector is that China’s current development of chip manufacturing technology is already lagging behind its most advanced competitors, and according to China’s usual five-year investment plan, China’s research investment is inevitably out of step with industry development.
The integration density of chips is doubling every 1.5 years,” Salvatore Babones, an associate professor of sociology and China expert at the University of Sydney, told Voice of America. Even if China buys or manages to acquire today’s technology, this technology will be obsolete in a few years.”
In the case of photolithography machines used to make chips, for example, the current level of China’s domestic photolithography process is 90 nanometers, and Shanghai Microelectronics Equipment Company plans to deliver the first domestic immersion lithography machine with a 28-nanometer process in 2021 or 2022. The world’s most advanced lithography technology is currently in the hands of the Dutch company ASML, they produce extreme ultraviolet (EUV) lithography at the 5 nanometer level.
Project a flurry of technology industry overcapacity concerns
The semiconductor industry is not the only sector in China’s technology sector that is experiencing overheated investment, said CSIS’s Seth Gan, adding that the Chinese government’s state-led capitalist approach to development has often led to a rush of investment in areas such as electric cars, robotics, memory chips, certain machinery and medical equipment that could follow in the footsteps of previous overcapacity in the steel and aluminum industries.
China’s development model emphasizes building ahead in the hope that demand will eventually catch up (with supply),” he told Voice of America. …… These strategies all stem from the idea that if you build ahead and it costs less, you can build more before costs go up and eventually demand will meet their supply. Sometimes demand does go up, sometimes it doesn’t. The speculation of Chinese companies and the government is sometimes wrong. …… The most famous examples of the Chinese overbuilding are in the steel and aluminum industries, areas that have always had huge problems.
He predicts, “In the next few years, we will see a pattern of overbuilding industries, a situation that will create problems of overcapacity or dumping, not in traditional industries like steel and aluminum, but in those more commoditized high-tech industries.” He added, “These are areas where the world needs to be highly concerned. China has deployed manufacturing capacity on a large scale and increased production significantly, but Chinese domestic demand is still far from keeping up, along with the hope that the global market will expand.”
Babs of the University of Sydney noted that the biggest problem for a command-and-control economy like China’s is how to identify market signals in the technology sector.
Replication is one thing, development is another,” he said. Without those market signals, the likelihood of a government-led project successfully identifying future demand is very small.”
The analysis concluded that the development of the semiconductor industry emphasizes sustained investment in research and development rather than blind government injection of funds. The Semiconductor Industry Association (Semiconductor Industry Association) 2020 Industry Status Report statistics show that the U.S. semiconductor technology industry invests 16.4 percent of sales revenue in R&D, compared to 15.3 percent for European companies and 10.3 percent for Taiwanese companies, but only 8.3 percent for Chinese companies.
“The United States and its allies have a large and diverse corporate ecosystem with many different approaches constantly competing for success. China has to develop a national champion – and if it develops the wrong national champion, all that money goes down the drain.” Barbers said.
He also believes that China’s “bets” on a wide range of cutting-edge technologies have a very high failure rate.
I’m sure China can’t be the world’s most advanced chip maker, develop a civilian airliner, keep building more high-speed railroads across the country, fund the ‘Belt and Road’ countries, develop rail guns, build four aircraft carrier battle groups, etc., all at the same time,” he said. They can’t afford all of these projects at the same time, but because of the lack of transparency in Chinese spending, we don’t know which investment projects will actually be capitalized and which will fail. I am certain that many of these programs will fail. Which one? I don’t know, but semiconductor development must be the most expensive of China’s many technology projects.”
Reconnecting with the West? Gansted: Not during Xi’s presidency
In his article, Wall Street Journal columnist Taplin commented that the Chinese government is simply embarking on a massive but unlikely plan to create advanced semiconductor manufacturing capabilities without relying on foreign suppliers, which would require a huge investment by the Chinese people, and that instead of repairing relations with the West and reforming China’s dysfunctional credit system, it should be able to import chips and let the Chinese market and Chinese companies decide what they are really good at.
CSIS’s Gansted argues that China wants to maintain good relations with the U.S., Europe and other developed economies, but won’t give up its so-called “core interests” and won’t budge on some long-standing issues in the East-West conflict.
China wants good relations (with the West), but it is not willing to make big sacrifices in areas of particular importance to the United States,” he said. China has made some concessions to the European Union, which is why they recently reached an agreement on investment issues. But these concessions still do not address the core issues of China’s industrial policy, subsidies, the development of China’s surveillance state system, China’s censorship of speech outside its borders and its practice of ‘war-wolf diplomacy’.”
“China will not do much to address these issues. The CCP will be willing to provide more market access in certain specific sectors, such as the financial sector. But as long as Xi Jinping is in power, there won’t be much change in other areas.”
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