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May, 2018

Beijing unveils $47 billion fund to strengthen domestic semiconductor industry

Original article: United Daily News

China will launch a new $47 billion fund in a bid to strengthen its homegrown semiconductor sector. Led by the state-backed China Integrated Circuit Industry Investment Fund (CICIIF), the initiative follows a 2014 fund that raised US$21.8 billion from firms with strong ties to the Chinese government. The new fund will focus on boosting both China's IC design and manufacturing acumen. 

Analysis:

For Beijing, self-sufficiency in semiconductors has a twofold objective. First, it is integral to Made in China 2025, Beijing's plan to transform China into a global technology powerhouse. Semiconductors are among the most important electronic components in existence: They are the computing brains of electronic devices ranging from smartphones to radar equipment. Only a handful of companies have the technological, design and manufacturing acumen to be world-class semiconductor makers. Profit margins for top IC makers can exceed 40%, more than double that of other hardware products, according to research by Morgan Stanley cited in a 2016 Economist report. 


If Chinese companies eventually design, manufacture and control standards for chips, they will take a larger share of profits in the global technology sector, The Economist notes. CICIIF funding will be "very helpful" to acquire technologies, recruit talent and buy components, says Roger Sheng, a Shanghai-based semiconductor analyst at research firm Gartner. But most importantly, it will signal Beijing's support for the IC industry, which will attract investors eager for higher returns, he adds. 


And there is plenty for the taking: The global semiconductor market reached a value of $354 billion in 2016, according to PriceWaterHouseCoopers (PWC). China accounts for almost 61% of IC consumption, but only produces 13% of the world's semiconductors, PWC says. 


Secondly, Beijing worries that reliance on foreign - especially American - IC products compromises its national security. Former CIA contractor Edward Snowden heightened those concerns after he revealed the extent of U.S. spying on its citizens, friends and foes in 2013. Washington's recent moves to restrict access of ZTE and Huawei to the American market have accelerated Beijing's drive to cut its dependence on foreign technology. The ban could cripple ZTE and slow China's drive to dominate 5G, the next generation of wireless technology. 


Thus far, Washington has only sought to restrict access of Chinese tech firms and investors to U.S. markets. It has not sought to curb the activities of U.S. chip-making giants Qualcomm and Intel in China, which is their largest market. But if Sino-U.S. trade tensions worsen, the situation may change. It also may not be in the economic interest of U.S. chipmakers to share their key technologies with local partners in China. "Countries with leading technologies will want to keep technology within their own territory, and will not necessarily allow domestic manufacturers to invest in China," says Jian-Hong Lin, a semiconductor analyst at Taipei-based research firm TrendForce. 


A source quoted by The Wall Street Journal in a May report said the fund initially sought participation by U.S. chipmakers, but that the opportunity was not attractive because it aims to eventually reduce the role of foreign IC makers in the Chinese market. 


A few days after the ZTE ban was announced, Chinese President Xi Jinping emphasized that China would forge ahead with its state-backed drive to become a leader in next-generation technologies and cyberspace. Xi did not mention the U.S. by name but his remarks highlighted China's unwillingness to alter the techno-nationalistic policies that irk Washington. 


During a recent visit to Wuhan-based chipmaker FiberHome Technologies Group, ahead of a summit with Indian President Narendra Modi, Xi called on domestic chipmakers to become industry juggernauts. "Businesses must unceasingly make breakthroughs in core technology, mastering more key technologies with self-owned intellectual property rights and building up the ability to dominate industrial development. The country needs you to pick up the pace," Xi was quoted as saying by India's New Delhi Television Limited. 


It is no surprise that China's most powerful leader since Mao Zedong won't yield to U.S. pressure. But by doubling down on techno-nationalism, Xi is undercutting China's professed commitment to further opening its markets. It's a move that's similar to US President Donald Trump's tariffs. The U.S. and China accuse each other of protectionism, and ultimately, they're both right. 


Meanwhile, the creation of the new semiconductor fund is likely to increase U.S. concerns about unfair Chinese industrial policies. Former trade official William Reinsch told The Wall Street Journal earlier this month that the initiative is expected to cause oversupply of chips globally. That will drive chip prices down, squeezing U.S. and other foreign IC makers, he said.

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