News of Chinese plans to create a massive $47.4 billion investment fund to speed-up growth in the local semiconductor industry emerged from the Wall Street Journal recently. A formal announcement hasn’t yet been made, but it’s expected soon.
The formal name of the fund is “The China Integrated Circuit Industry Investment Fund.” While the exact size of the fund is still being debated, it does seem clear that it will be underwritten predominantly by government capital sources. At current anticipated levels, the fund would match a $47 billion fund that was established by Tsinghua University, China’s leading engineering university, to promote the development of a local semiconductor industry back in 2015. China also created a $21.8 billion fund for expansion of the domestic semiconductor industry in 2014.
Growth of the domestic semiconductor industry sits at the center of China’s current five-year plan. The technology and economic development goals established by China rely on the support of strong and reliable semiconductor suppliers.
U.S.-China Trade Wars
Recent actions by the U.S. in the developing trade battle with China have created an added sense of urgency in China, as major companies and industries are threatened by U.S. trade actions. In one of the most recent conflicts, the U.S. has imposed a seven-year ban on purchase of technology by ZTE, a leading Chinese telecommunications equipment supplier, from American companies (though recent news now throws question into that). The ban was imposed after it was found that ZTE violated the terms of an agreement that ZTE had agreed to with the U.S. concerning business with Iran and North Korea.
The potential ban may not only threaten ZTE, it would also damage China’s 5G network plans—a key element in its technology ambitions. As a leading global supplier of smartphones, ZTE shipped 48 million smartphones in 2017. The ban would prevent ZTE from purchasing critical components from key suppliers such as Qualcomm, Maynard, Acacia, Oclaro, and Lumentum for its handsets. It would also block software updates for software and applications from critical players such as Google.
In terms of its importance to China’s 5G innovation plans, ZTE could be considered “too big to fail” from the perspective of the Chinese government. Hence, the objectives of the new investment fund will be to develop domestic suppliers of advanced microprocessors (MPUs) and graphics processing units (GPUs)—key components for smartphones, tablets, and PCs.
One notable China success story in this area is Spreadtrum Communications, a Shanghai-based company that designs and sells chips for mobile communications and other applications. Other companies that could benefit from this investment are important chip-design companies such as Huawei’s HiSilicon and Tsinghua Group. Some observers have mentioned chip manufacturers like Semiconductor Manufacturing International Corp. (SMIC) as possible investment targets. However, semiconductor design and R&D are the critical needs in the development of a China semiconductor industry—not manufacturing.
The development path taken by companies in countries such as Japan, South Korea and Taiwan has been blocked by US security concerns. Companies in these countries have been able to engage in partnerships, acquisitions and licensing agreements that have enabled their semiconductor industries. However, China’s efforts to purchase US chip companies are consistently rejected by US regulators for security reasons. According to one analysis, China has made bids worth $34 billion fur US semiconductor companies since 2015 and only $4.4 billion have been completed.