China Revs Up Grand Chip Ambitions to Counter US Blacklists

(Bloomberg) –

In just two decades, China sent humans into space, built its own aircraft carrier and developed a stealth fighter aircraft. Now the world’s youngest superpower is planning to prove its capacity once again – this time in semiconductors.

It says nothing less than the future of the world’s economy No. 2. Beijing’s blueprint for chip supremacy is inscribed in a five-year economic vision to be presented during a summit with top leaders in the capital this week. It is a multi-layered strategy, both pragmatic and ambitious, and includes ambitions to replace key US suppliers and ward off Washington, while shaping home-grown masters of emerging technologies.

China wants to build a coterie of technology giants that can stand shoulder to shoulder with Intel Corp. and Taiwan Semiconductor Manufacturing Co., and gives the same effort to the effort it put into building nuclear capability. While the details of that endeavor will not appear in several months, comments from government officials, party mouthpieces such as the People’s Daily and state think tanks provide important clues about the planned roadmap.

Read more: Xi mobilizes China for technological revolution to reduce dependence on the West

The approach means settling for the next five years with aging semiconductors that are sufficient for electric cars and even military applications, but which can not drive advanced smartphones and similar devices. It buys China time to focus on fields such as so-called third-generation chip manufacturing where no country still dominates and – Beijing hopes – create a number of domestic giants in areas including machinery, software and new materials. The ultimate goal is to manage local alternatives to global linpins such as Cadence Inc. and Synopsys Inc. in design software and Europe’s ASML Holding NV in chip manufacturing equipment.

“Semiconductors are a crucial sector in the information age that will lead the future of economic development,” Science and Technology Minister Wang Zhigang told a news conference last week. “At the same time, China will strive to achieve self-confidence and strengthen our own capabilities.”

The world lacks computer chips. Here’s why: QuickTake

China’s efforts became urgent as the Biden administration escalated a struggle against what it called “techno-autocracies”. It may extend or even expand blacklists that prohibit key transactions with companies from Huawei Technologies Co. to ByteDance Ltd. and Tencent Holdings Ltd. To a country that imports $ 300 billion worth of chips each year, a worsening global shortage brings home the risk of relying on potentially hostile suppliers for the building blocks to everything from artificial intelligence to sixth-generation networks and autonomous vehicles.

It will take years for local companies to match foreign counterparts in manufacturing and design expertise, during which there is no clear answer to the dominance of Japanese and American names in chip manufacturing equipment. Chinese companies will still only supply 35% of their domestic demand by the end of this decade, estimates IDC analyst Mario Morales.

They also have to fight with Washington. The United States has signaled its intention to move forward with a Trump government-proposed rule to secure the technology supply chain next month, a move that gives the Department of Commerce broad powers to ban transactions involving “foreign opponents” such as China.

“The United States and its allies should use targeted export controls of advanced semiconductor manufacturing equipment … to protect existing technological advantages and slow down the development of China’s semiconductor industry,” the National Security Commission on Artificial Intelligence, led by former Google chairman Eric Schmidt, recommended to Biden and Congress. week.

Huawei, the country’s largest revenue technology company, underscores the leverage effect in Washington. Once the world’s largest smartphone maker, Huawei was forced to sell its Honor division and drive close to the minimum production capacity after losing access to chips from similar TSMCs according to US rules.

Read more: China said it plans to support broad-chip sector to fight Trump

“It only stimulates the Chinese community to accelerate their internal development and eventually they can come out even stronger,” said Luc Van den Hove, president of the Imec Research Center in Leuven, Belgium, which focuses on semiconductor technology innovation. “And I think it’s really a risk to try to keep the two worlds further apart.”

Read more: Biden Putting Tech, Not Troops, at the Center of US-China Strategy

Beijing had set aside around 1 trillion yuan ($ 155 billion) at the beginning of its latest five-year plan for potential investments in semiconductors over five to ten years, according to McKinsey. It will now continue to fund research and investment in the coming years, Wang said last week. China will increase fiscal support for scientific research and encourage leading companies to join national programs, he added. It should galvanize the much larger influx of private capital needed to make real breakthroughs.

It is an approach that previously worked for the internet, where a mix of state and private capital helped build Alibaba Group Holding Ltd. and the fierce giant Didi Chuxing Inc. In February, state-of-the-art Global Times reported smartphone maker Xiaomi. Corp. and Oppo acquired shares in Jiangsu Changjing Electronics Technology Co., which exemplifies the type of private sector that Beijing is counting on.

As for the chips, “we will see more support relative to private companies, as they play a greater role in these sectors,” said Wendy Leutert, GLP-Ming Z. Mei, chair of Chinese Economics and Trade at Indiana University.

Read more: The conflict between the US and China over land is getting uglier

Meanwhile, upcoming ones like Semiconductor Manufacturing International Corp. and Tsinghua Unigroup help the tide land over a deficit of mobile processors, memory and telecom modules if Washington closes supply routes. They will mainly use mature processes of 14 nanometers and older, enough for all but the most demanding applications such as smartphones, high-performance computers and graphics processors. At the same time, the global leader TSMC for mass production of 3 nm chips will increase in 2022, approximately five or six generations ahead.

At the same time, they will serve as contact points for the country’s most capable brains to work with stop-gap measures such as advanced packaging that can improve chip computing power in the absence of more sophisticated American technology. The hope is that such a fine-tuning will buy time for home-developed development of advanced technology, for example in 7-nanometer chips and silicon design software.

Some of the major local players in that room include Shanghai Micro Electronics Equipment Co. and Naura Technology Group Co., which works with equipment that could one day replace ASML’s extreme ultraviolet lithography or EUV machines – a prerequisite for all advanced chip manufacturing.

Local start-ups like Empyrean are trying to replicate the equally indispensable software tools licensed by Synopsys and Cadence, employed by most of the world’s chip designers from Intel. Also in the commercial memory area, a subsidiary of the state-subsidized Tsinghua Unigroup spends billions on mass production to challenge Samsung Electronics Co. and Micron Technology Inc.

What does Bloomberg Intelligence say?

TSMC may lose market share in China over the next three years to local contract manufacturers such as Semiconductor Manufacturing International. These Chinese peers are accelerating advanced node technology development and are likely to receive orders from local chip designers such as Will Semiconductor and Unisoc, who are trying to avoid dependence on US technology due to bilateral trade tensions and the risk of sanctions.

– Charles Shum and Masahiro Wakasugi, analysts

Click here for the research.

Read more: China still buys 300 billion chips from the US, elsewhere

President Xi Jinping has pledged an estimated $ 1.4 trillion by 2025 for technologies ranging from wireless networks to AI. A large part of it is focused on semiconductors.

Chinese companies like Tsinghua will be responsible for building half of the world’s 30 or so new manufacturing facilities or factories over the next two years. It already spends 2.4 times more than the United States on semiconductor equipment, much of it from US companies, Morales wrote in a report.

The world lacks computer chips. Here’s why: QuickTake

The investment is that its companies can compete if they accelerate research on growing, adjacent areas such as AI and quantum computing now. This is where third generation chips come in. They are mainly made of materials such as silicon carbide and gallium nitride, can operate at high frequency and in higher power and temperature environments, with wide applications in fifth generation radio frequency ships, military-class radar and electric vehicles.

The country can secure first-hand benefits, although traditional silicon-based semiconductors will continue to account for the vast majority of global use for the foreseeable future, Citigroup analysts say. US-based Cree Inc. and Japan’s Sumitomo Electric Industries Ltd. has just begun to grow this business, while Chinese rivals such as Sanan Optoelectronics Co. and the state-owned China Electronics Technology Group Corp. have broken into.

The country’s second chipmaker, which includes SMIC, Will Semiconductor Ltd. and National Silicon Industry Group Co., benefit more from state aid.

“The investment commitment made by China ensures that the Chinese semiconductor ecosystem will continue to play an important role in the development of our industry and the overall IT market,” said IDCs Morales.

(Updates on China’s comment on research in the 12th paragraph)

For more articles like this, visit us at bloomberg.com

Subscribe now to stay ahead of the most reliable news source.

© 2021 Bloomberg LP