For years, China was the world’s biggest spender on chip incentives, a scale unmatched from Washington to Tokyo. Now, the effort to combat Covid and deal with the threat of a global recession is depleting state coffers and forcing Beijing to rethink that controversial approach.
Surging Covid cases are hobbling the world’s No. 2 economy and forcing its government to pause mammoth spending on its domestic chip industry. In a market dominated by the US and its allies, costly subsidies have so far borne little fruit and led to several high-profile corruption investigations. Policymakers are now searching for other ways to help homegrown chip firms.
The suspension of spending — some $100 billion and counting over the past few years — raises questions about Beijing’s intentions for an industry that’s essential not just in powering artificial intelligence and future devices, but also military systems. Beijing’s ultimate goal hasn’t changed: Xi Jinping’s administration remains intent on achieving primacy or at least matching geopolitical rivals in designing and producing components critical to most any device on the planet.
But rather than try to replicate a Western-centric chip supply chain, China may now choose to divert its limited state capital toward selective areas. Those include semiconductors for electric vehicles, novel materials for next-generation processors, and open-source chip architecture — arenas that are relatively nascent, and where no one nation can claim dominance. In a meeting Xi chaired last September, the Communist Party ordered the country to focus on core technologies where China has, or can gain, an edge.
“It’s impractical for China to try to recreate within its borders the entire global chip supply chain that took the world’s most powerful countries four decades to build,” said Brady Wang, an analyst at industry consultancy Counterpoint. “China just needs to be powerful enough in a few key sectors.”
The seeming about-face in Beijing highlights the monumental challenge China faces in trying to claw its way up a $550 billion industry. Washington in 2022 launched its biggest effort yet to stall that advance, with early signs of success.
The US-China rivalry over semiconductors deepened during the pandemic, which laid bare countries’ dependence on one another for key electronic components and spurred tech protectionism worldwide. Chinese semiconductor companies are now struggling to source the most advanced chipmaking machines and design software, and are sometimes unable to secure overseas contract chipmakers as a result of blacklists dating back to the Trump administration.
Yet it has little choice in the matter: Beijing has long identified the sector as key to its national security. Capital deployed or set aside previously has already set in motion a nationwide buildup that will boost capacity in coming years. The country is expected to add 20 new chip plants, the most among all global regions, between 2021 and 2023, according to industry group SEMI.
“It’s true that local governments are cash-strapped but if Beijing wants to offer financial support for the chip industry, it will find a way to do so,” said Trivium China’s senior chip analyst, Bao Linghao. “It’s still unclear what the right mix of policy support should be going forward. Policymakers are likely reassessing the strategy.”
History shows that climbing the technology ladder is not just imperative, but possible with dogged persistence.
Leadership in the chip sector has changed hands over the decades, hinging on which companies made the canniest tech bets. Japanese firms grabbed the lead in the 1980s thanks to a nationwide focus on DRAM, only to be overtaken by South Korean rivals who outspent them on memory chips and by Dutch equipment maker ASML Holding NV, which honed in on lithography. Over the last decade, Taiwan Semiconductor Manufacturing Co. has grown into the world’s most valuable chipmaker, thanks to years of investing in advanced logic chips as rivals cut back.
“The success of TSMC is built on many failed cases,” Counterpoint’s Wang said.
But to replicate Japan and Korea’s ascent, Beijing may have to tweak its old playbook.
China’s government has allocated more than $100 billion to build up the domestic semiconductor sector and lower its dependence on the West. In 2014, it set up the 330-billion-yuan ($48 billion) National Integrated Circuit Industry Investment Fund, which has lavished investments year after year in top chip companies such as Semiconductor Manufacturing International Corp. and Yangtze Memory Technologies Co.
But that sense of unlimited capital encouraged waste. In 2022, regulators launched an unprecedented series of investigations into alleged corruption, detaining some of the nation’s biggest industry figures. China’s new economic constraints mean investments will need to meet a higher standard in terms of returns, forcing more thought on which areas to focus on.
One possible area may be an open-sourced semiconductor architecture called RISC-V regarded as a possible alternative to Britain’s Arm Ltd. Chinese officials have publicly championed the standard as a way to leapfrog America since it’s relatively new (and, importantly, open-source), and big names including Alibaba Group Holding Ltd. and Huawei Technologies Co. have unveiled plans to design chips around the standard.
China has also poured money into blue ocean technologies like silicon carbide and gallium nitride chips, though those will take years — or more — to come to fruition. Beijing has latched onto that as another way to bypass traditional silicon materials, but that technology remains in its infancy.
Cut off from US suppliers, local chipmakers can also explore advances in areas traditionally regarded as lower-end, but that that are no less essential to future technologies such as electric cars. For instance, Chinese power chip firms will outgrow their peers, thanks to the country’s vast market and domestic supply chain, analysts from Citibank wrote in a note.
Another policy imperative is fostering local talent. Among the most-recent US sanctions was a moratorium on some Americans working for Chinese chipmakers — those will need to be replaced.
“If you look at the 20th Party Congress report, talent training is the top priority in the tech innovation push,” Bao said. “China has relied heavily on US-trained Chinese to lead China’s semiconductor development. That’s no longer a viable path under the new US export control regime.”