Well before the current chip supply chain crunch, Beijing has been trying to build out a local supply chain for semiconductors—its biggest import item.
Tens of billions of dollars of government support (pdf, p. 9) later, China’s chip processing ability is still at least a decade behind the most advanced players. And some of its semiconductor champions in the making are already faltering. On Friday, Tsinghua Unigroup, which began defaulting on its bonds a year ago, said it had accepted a bid from a consortium of state-backed investors to become its strategic investor, which will likely mean ceding control of key assets.
China’s finding out that spending lots of cash can’t quickly build semiconductor self-reliance, especially as the US doubles down on measures such as export blacklists that create bottlenecks up and down the chip manufacturing chain. Last year the US placed China’s largest chipmaker SMIC on the commerce department’s “entity” list, which limits its access to US components, including designs and software, after earlier doing the same to smartphone and telecom equipment maker Huawei, which crippled its chipset design unit.
“Two rounds of export control measures under the Trump administration in 2019 and 2020 have prevented Chinese chipmakers, as well as global foundries that cooperate with Chinese firms, from accessing US-made semiconductor production equipment and software,” wrote Australia’s Lowy Institute think tank in July. “These blockades have seriously constrained China’s ability to pursue technological advancement in the industry.”
The troubles of China’s chipmakers
China’s Made in China 2025 industrial strategy set a goal of having the country supply 70% of its own chip needs by that year. To accelerate the development of the chip industry, China in 2014 set up a state-backed $22 billion integrated circuit investment fund. In addition, many provincial governments established chip-focused funds. In 2020 alone, Chinese chip firms received around $35 billion investment, reported TechNode.
Tsinghua Unigroup, controlled by the prestigious Tshinghua University, was supposed to illustrate how generous subsidies and state determination would help China achieve self-reliance in semiconductors. But its efforts to use its deep pockets to acquire and invest in existing chip firms—which is how it broke into the industry in the first place—have been stymied by US national security concerns deepened in part by the Made in China 2025 plan.
For example in 2015, a plan to buy a 15% stake in Western Digital was abandoned over news that the US intended to examine the transaction for national security risks. Similarly, a $23 billion overture to US chip giant Micron the same year also faced such concerns. Though it continued with other acquisitions, such as its $2.6 billion purchase of French smart chip components maker Linxens in 2018, the US moves slowed its efforts to piggy-back on leading companies with …….