China gears up to develop its chip industry amid headwinds
By Zhang Shasha  ·  2020-08-21  ·   Source: | NO.35 AUGUST 27, 2020
An artificial intelligence chip developed by a Shenzhen-based tech company in Guangdong Province, south China, on display on August 12 (XINHUA)

U.S. restrictions on Huawei seem to have no end in sight. On August 17, the U.S. Commerce Department expanded its curb on the Chinese tech giant to cut off all its access to U.S. technology-backed components.

It also added another 38 Huawei affiliates to its economic blacklist, which indicates they are required to obtain a license from the U.S. Government when they "act as a purchaser, intermediate consignee, ultimate consignee, or end user."

"It basically blocks the way for Huawei to directly purchase chips from other chip manufacturers that use U.S. technology," Jia Mo, an analyst at market research company Canalys, said.

Richard Yu, President of Huawei's consumer unit, said at a press conference on August 7 that this year may mark the last year of production for Huawei subsidiary HiSilicon's Kirin high-end chips with U.S. limits on chip manufacturers.

Huawei was put on the U.S. Entity List in May 2019, and the successive sanctions since then have become a wake-up call for the company as well as the country to rethink the path of chip development.

On August 4, the State Council rolled out an array of measures to buoy integrated circuits (IC) and software sectors, including tax breaks, financing support and international cooperation, so as to boost industrial innovation and improve the quality of development.

"It showcases the government's desire to build a globally competitive semiconductor sector, and will encourage companies to devote more resources to overcome technological bottlenecks," Wang Peng, deputy head of the China Center for Information Industry Development, said.

Gaps in development

A 2006 book on China's IC development notes that China's top officials felt "astonished" after visiting Samsung's IC production line in the Republic of Korea (ROK) in the 1990s and became more determined to push forward China's IC industry.

The period of modernization of the ROK nearly equals the time the country took to surpass the U.S. and Japan in the semiconductor sector. IC, regarded as the "staple" of modern industries, has become a vital terrain for major competitors.

"Currently, the interplay of industrial reform, pandemic and superpower games has exposed the security risks in the supply chain of China's information and communication technology industry, and it is crucial to increase policy support and take measures in the sectors of high-end chips and fundamental software," Xu Yaqian, a researcher with the China Center for Information Industry Development, told People's Daily.

China has been rolling out policies on a 10-year basis since 2000 to improve the environment for IC and software industries, and has made progress in the past years. In the IC industry, some sectors have kept pace with their international counterparts, and chips for mobile terminals have nearly reached the advanced global standard. Some frontier software like cloud computing, big data and artificial intelligence have made quick breakthroughs. Both sectors have seen rapid growth since 2013.

However, there are gaps compared with developed countries as China's chip industry started late. Li Baoming, an associate professor at the School of Public Policy and Management of Tsinghua University, told, a news portal of the National Reform and Development Commission, that China lags behind developed countries and regions in two aspects.

First, its products are not as mature as those of developed countries. For example, Semiconductor Manufacturing International Corp. (SMIC), a state-backed Chinese mainland company, is able to produce 14-nm chips, while Taiwan Semiconductor Manufacturing Co. can make 5 nm ones with its 3 nm production on the way. Besides, key equipment and technologies are still dominated by developed countries like the U.S., European countries and Japan, and there is a long way to go before China can reach that level.

While largely depending on imports, IC has become a weak link in China's hi-tech development. According to the General Administration of Customs of China, in 2018, the country imported $312 billion worth of IC products from overseas with the trade deficit reaching $227.4 billion. Although the deficit narrowed in 2019 to $202.5 billion, the imports still reached $304 billion. Thus, there is huge room for homegrown products to replace imported ones in the future.

Catching up

Huawei's case has highlighted the problem that China cannot meet the manufacturing requirement for chips mainly because of the lack of advanced machines and related equipment.

Wang Yanzhi, a staff member with ZTE based in Nanjing, Jiangsu Province in east China, told Beijing Review that machines for chip manufacturing have become a bottleneck for China's chip industry since research and development (R&D) requires time and capital.

The new measures issued in August will be conducive to solving the problem. "The 10-year tax break for qualified chip companies proposed for the first time this year will nurture sophisticated manufacturing skills," Zhou Lan, Deputy Director of the Institute of Integration of Informatization and Industrialization at the China Academy of Information and Communications Technology, told People's Daily. Zhou said it's arduous to update chip manufacturing skills since it means large investment for many enterprises. With the support of fiscal and tax policies, the operation and production pressure on manufacturers would be eased.

New measures also cover aspects such as financing and investment, R&D, import and export, talent, intellectual property and international cooperation.

The core technologies of the chip industry are dominated by other countries, and the measures aim to tackle the problem, Chen Baoming, a researcher with the Science and Technology Talents Center of the Ministry of Science and Technology, told Beijing Review. He said although results cannot be realized within a short time, the joint efforts of enterprises, universities and research institutions can lead to an improvement in the industrial chain.

The new rules also state that the business environment will be improved for international chip companies to invest and manufacture in China. More efforts will also be made to cultivate talent for the semiconductor sector.

According to a white paper on IC issued in August 2018, the total number of domestic IC graduates is only about 30,000 each year. In 2017, the total number of IC talents reached 400,000. By 2020, about 720,000 IC talents will be needed for the industry, which means there will be a shortage of about 300,000. With the introduction of the policies, the gap in demand and availability of high-level IC talents is expected to narrow.

A golden age

"At the end of last year, orders for our domestic chips registered a rapid growth, but an unexpected surge in demand this year has led to a shortage of the products," Dou Qiang, General Manager of Phytium Technology Co. Ltd., an IC design company, told The Economic Observer, adding that the sales of bestselling domestic chips were originally expected to reach 1 million by 2021, but the annual target was reached much earlier in August.

"Although the global economy has encountered many difficulties, the demand in the chip market is still robust, driven by many new applications. At present, the company's production capacity is close to full, and products with mature technology are particularly in short supply. Especially when 5G-related applications are released, the unit price of related categories will rise," Zhao Haijun, Co-CEO of SMIC, said.

According to SMIC's latest financial report, in the second quarter, the company's revenue and net profit both hit a record high in a single quarter, achieving a net profit of $138 million, a 644.2-percent increase year on year. "We have entered the stage of growth and will reap the rewards of the rapid growth of advanced technology and mature technology," Zhao said.

As for the capital market, IC has become one of the most notable sectors this year, attracting large-scale investments.

Semiconductor chips have become a key part of the information technology infrastructure to power the digital economy. With the advent of 5G, IC will see huge opportunities as it is the cornerstone of information industries including the Internet of Things, big data, and cloud computing.

(Print Edition Title: When the Chips Are Down )

Copyedited by Madhusudan Chaubey

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