China Is Starting to Rethink Its Dreams of Chip Domination
China’s signaling a tempering of its ambitions to become a global semiconductor power.
(Bloomberg) -- China’s signaling a tempering of its ambitions to become a global semiconductor power because it can’t out-spend the likes of Intel Corp. in the short run, but it still intends to become a force in unclaimed fields such as the Internet of Things.
The country’s “corner-overtaking” strategy simply isn’t realistic, said Ding Wenwu, president of a $20 billion government-backed fund set up in 2014 to help lift the domestic chip sector out of obscurity. Ding, speaking at an industry forum, was using a racing term that refers to passing opponents at their most vulnerable.
China is trying to reduce a reliance on some $200 billion of annual semiconductor imports, which it fears undermines both national security and the development of a thriving technology sector. Overall, Beijing envisions spending about $150 billion over 10 years to achieve a leading position in design and manufacturing, an ambitious plan that U.S. executives and officials warn could harm American interests. Ding’s China Integrated Circuit Industry Investment Fund Co. plays a key role by steering overall investment and strategy.
“It’s very unrealistic to overtake on the corner given the current situation,” Ding told his audience in Shanghai. “It’s only possible when everyone is on the same starting line.”
Money can’t solve the problem either, he said. Intel, Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co. alone wield annual research budgets in the billions or even tens of billions of dollars.
“How can one overtake the front-runners when lagging so far behind? Not to mention the leaders are trying very hard to keep their position,” he said.
Executives, academics and government officials converged on Shanghai this week to debate the future of their industry, convening one of the largest annual convocations of its kind. China’s import dependency and the Internet of Things dominated the agenda.
The Ministry of Industry and Information Technology, the governing body for China’s tech and telecoms sector, focused on smart devices and chip-laden sensors as well as automobiles, considered a fertile market as cars increasingly become connected and autonomous.
“We support innovations in areas such as smart devices, sensors, inter-connected smart vehicles and medical segments,” Diao Shijing, director of the electronics bureau under the ministry, told the forum. “The integrated circuits industry, as the fundamental and most important sector, has been searching for directions so it won’t miss new growth opportunities.”
Leading China’s charge into the next generation of microchips is Unigroup, an affiliate of the business arm of elite Tsinghua University that’s become the largest player in a local market dependent on foreign high-performance processors and 3D-NAND memory chips. In March, the chip giant clinched as much as $22 billion of financing from two Chinese government-backed investors, amassing a pool of funds to pursue acquisitions.
The vast sums of money deployed have spurred concerns in some quarters. The White House in January issued a report warning that China’s push into semiconductor technology threatens to harm U.S. chipmakers and places American national security at risk. The reality however is that both sides may need each other.
“One of the biggest concerns for China is it doesn’t want to see the industry controlled by others,” said Wei Shaojun, director of the Institute of Microelectronics at Tsinghua University. “We are heavily dependent on semiconductor imports, what if they suddenly stopped shipping the chips to us?”
“On the other hand, I’ve got CEOs from overseas giants asking me: ‘You guys purchase a huge amount of chips from us. What can we do if you stopped buying?’”
Unigroup and other Tsinghua affiliates have already pulled off a number of acquisitions over the years in pursuit of capacity and technology: Unigroup bought RDA Microelectronics Inc. and Spreadtrum Communications Inc. to beef up its design capability, and signed partnership deals with global players including Western Digital Corp.
The company’s major business units and affiliates include integrated-circuit developer Unigroup Guoxin Co., formed via a series of mergers of state-backed entities. And its $2.8-billion Changjiang Storage was the result of a merger between Unigroup’s own memory chip operations and a government-run factory in 2016.
But that M&A spree has hit a wall of late. Tsinghua was forced to withdraw a planned investment in Western Digital after the deal threatened to invite U.S. government scrutiny, while a Taiwanese acquisition attempt fell through. Now, China itself is discouraging unfettered overseas acquisitions, worried about capital outflow. That further threatens to stifle one avenue through which the country can swiftly acquire technological cred.
“The overseas acquisition environment is now complicated,” Ding said without elaborating.
To contact Bloomberg News staff for this story: Gao Yuan in Beijing at ygao199@bloomberg.net.
To contact the editors responsible for this story: Robert Fenner at rfenner@bloomberg.net, Edwin Chan, Peter Elstrom
©2017 Bloomberg L.P.
With assistance from Gao Yuan