Tag Archives: semiconductors

Corruption Probes Aim To Kickstart China’s Lagging Semiconductors Sector

THE SEMICONDUCTOR INDUSTRY has been hit with a series of anti-corruption investigations over the past month.

On August 9, the Central Commission for Discipline Inspection announced that three senior executives connected to the management of the investments of the National Integrated Circuit Industry Investment Fund, the main channel through which the government has provided more than $100 billion of state support for the sector, were under investigation for corruption.

In addition, the Commission is sending a team into the Ministry of Industry and Information Technology, whose minister, Xiao Yaqing, is already facing disciplinary proceedings.

The latest investigations follow hard on those of six other senior figures. These include Ding Wenwu, president of the National Integrated Circuit Industry Investment Fund, Lu Jun, president of Huaxin Investment, an asset manager for the Fund, and four top executives of Tsinghua Unigroup, the Tsinghua University-owned chipmaker and technology business beset by debt problems. Yangtze Memory Technologies was one of the Tsinghua Unigroup companies backed by the National Integrated Circuit Industry Investment Fund.

One of the four is former Unigroup Chairman Zhao Weiguo, who is associated with several businesses backed by the National Integrated Circuit Industry Investment Fund. He will be remembered outside China for leading a $23 million takeover bid for the US chip maker Micron Technology in 2015, which Washington blocked at the last minute.

China’s semiconductor industry has expanded rapidly since 2014 under government direction. Yet, despite the massive state support, China has not caught up to the cutting edge of chip manufacturing. Semiconductors remain its largest category of goods imports.

The anti-corruption crackdown reflects top leadership’s frustration with the semiconductor sector’s lack of progress even as its strategic importance grows in the face of US export controls on semiconductor manufacturing equipment and a new multi-billion-dollar programme to develop the US semiconductor sector. A further source of frustration is that the world’s largest supplier of advanced chips is Taiwan.

Public investment in state-backed sectors commonly has large inefficiencies. In this case, these appear to have been greater than usual — returns and outcomes look very poor compared to, say, the investment in the space industry — and worsened by who at this point knows what side deals were cooked up in the shadows of that mountain of money.

The shake-up of the sector that the anti-corruption investigations will cause will likely leave it better managed than before, though not necessarily better able to deliver ‘technological breakthroughs’ to order.

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US Stacks The Chips In High-Stakes High-Tech Game With China

Extreme ultraviolet source, droplet generator and collector mirror in a NXE3400b lithography system. Photo credit: courtesty ASML.Copyright © (ASML) All Rights Reserved

REPORTS FROM THE NETHERLANDS say that Washington is pressing the Dutch government to ban exports of semiconductor fabrication equipment to China.

ASML, one of the key manufacturers in the sector, is headquartered in Veldhoven near Eindhoven in the southern Netherlands. China is the company’s third-largest market after Taiwan and South Korea, worth $2.1 billion in 2021, one-sixth of total annual sales.

Since 2019, a Dutch-US agreement on export licences for dual-use technologies has prevented the company from selling Chinese firms its most advanced lithography systems — the machines that use ultraviolet light to trace the circuitry on computer chips (a detail of which can be seen in the photograph above).

According to the reports, Washington wants to expand the scope of the restrictions as it moves to slow Beijing’s drive for technological self-sufficiency. Last year, the US National Security Commission on Artificial Intelligence recommended that the United States ask its allies to prevent all lithography tool exports to China.

The Catch-22 for Washington is that restrictions on sales of advanced Western technology to China only spur Bejing’s development of its indigenous tech industries to end run US sanctions.

Last month, Bloomberg reported that China’s chip industry was growing faster than any other, with 19 of the world’s 20 fastest-growing chip industry firms being Chinese, compared to just eight a year earlier.

Beijing is pouring billions of dollars of investment into chipmaking by funding national champions, encouraging Chinese firms to ‘buy Chinese’ and through industrial policy programmes like ‘Little Giants’, which backs high-tech start-ups. It is also lobbying as discretely as it can manage against a bill in the US Congress that would provide $52 billion to supercharge US semiconductor manufacturing.

The long-term opportunity for China lies in developing a globally competitive chip industry that would dethrone its US rival and perhaps fatally damage US technological leadership. Former Google chief executive Eric Schmidt and Harvard scholar Graham Allison wrote in the Wall Street Journal last month that:

If Beijing develops durable advantages across the semiconductor supply chain, it would generate breakthroughs in foundational technologies that the US cannot match.

Schmidt and Allison proposed that Washington use carrots (tax incentives and subsidies) and sticks (leaning on their governments) to encourage chipmakers TSMC and Samsung to partner with US chip designers and fabricators to manufacture advanced chips in the United States. That would do nothing but escalate Beijing’s reaction to what it already calls ‘technological terrorism’.

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The Chips Are Down

BY VALUE, CHINA imports more semiconductors than oil. For the past two years, chips have been the country’s most valuable import.

That, in itself, tells this Bystander how much of a foundational challenge China still faces in becoming a technological rival to the United States until it is the leading provider of chips, the bricks of the digital economy, and especially the most advanced designs.

The national drive for self-sufficiency in the design and fabrication of semiconductors is long-standing. Domestic production is being ramped up rapidly, and the pace has accelerated since the US imposed sanctions to deny it access to US chipmaking technology.

Domestic output rose by one-third last year over 2020’s level, to reach 359.4 billion units, according to data newly released by the National Bureau of Statistics, having grown by 16% in 2020 over 2019.

However, last year’s production was still less than imports, which reached 432.5 billion units.

More significantly, China still does not yet produce the most advanced chips. The indigenous chip industry is still only nibbling at the edges of the leadership of foreign chipmakers like TSMC, Samsung, and Intel in cutting-edge chips. It is also an industry in which economies of scale favour the market leaders.

That adds to the risk of China’s strategy to leap-frog to compound semiconductors or ‘third-generation’ chips. Chipmaking is an industry ill-suited to decoupling.

Investment of some $26 billion in production facilities in 2021 — and the mobilisation of state planning resources on the scale of the development of the atom bomb in Mao’s time — is moving China’s chip makers up the technological ladder and reducing the country’s vulnerability to sanctions and external shocks.

The Covid-19 disruption to supply chains was a further wake-up call in that regard if any was needed. However, supply chains in the sector are complex and transnational, making self-sufficiency in chips beyond China (and indeed any country) for the foreseeable future.

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Not-So-Easy Trade Wars

TRADE WARS MIGHT, as US President Donald Trump says, be easy to win (although this Bystander, for one, doubts it), but some of the terrain that has to be to yomped across is complicated and treacherous. Take the example of semiconductor equipment manufacturers.

The direct costs that result from the tariffs the United States is imposing on China and the ones that China is imposing on US firms in retaliation would be unwelcome but manageable for the three leading listed US semiconductor equipment manufacturers, Applied Materials, Lam Research and KLA-Tenco.

The trio’s China business earned them $5.4 billion in the year to end-March, 2018, according to calculations by the rating agency Moody’s. That was equivalent to 18% of their total revenue. Although that was 41% up on a year earlier, their business overall seems to have been growing at a similar rate.

These are good times to be making the equipment that makes chips, as it should be given global chip sales have increased by one-third since 2016, and are forecast to be a $460 billion market this year.

This is where things start to get complicated for trade hawks. Only about one-third of the three US firms’ China revenue comes from indigenous Chinese chipmakers, Moody’s reckons; the balance comes from multinationals that manufacture semiconductors in China, such as Intel and Samsung. (That is in line with the overall rule of thumb that holds that about two-thirds of world trade is accounted for by value and supply chains.)

US-based multinational chipmakers manufacturing in China could apply for US exemptions from US tariffs for the components they export back to the United States, though that would do nothing for reducing the headline trade deficit figure by which the US president sets so much score.

China could even ban such export sales. There is no indication Beijing is considering doing so should it come to it, but who knows what symbolic gestures will be made?

Absent a trade war, US semiconductor equipment manufacturers could expect steadily growing sales in China both to indigenous and multinational companies. Prospects would be particularly bright for the next several years among Chinese companies as Beijing is pushing the development of an indigenous chipmaking industry under Made in China 2025 to wean the country off its dependence on the United States for this critical technology. China will make its own chips first, then later the equipment to make them.

In the event of a trade war, Moody’s estimates, the three would lose $660 million of business from Chinese companies this year and $775 million in 2019.

At the end of this month, the Trump administration is set to announce new rules to curb Chinese access to critical US technology. While investments in the United States by any company with at least 25% Chinese ownership will be at the forefront, restrictions on exports of technology by US firms are also likely.

Limits to the three US firms’ freedom to sell their chipmaking equipment to Chinese companies would be a significantly more serious threat to them than tariffs. That might be appealing to the Trump administration as a way of delaying China’s drive to self-sufficiency in chip-making. There are no ready alternatives to the three US companies to which Chinese firms can turn.

But that, in turn, could force China to speed up the development of its own manufacture of semiconductor-making equipment.

So who wins? There is no uncomplicated answer.

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An Early Sign Of Slowing Growth?

A straw in the wind from the electronics industry about how strong recovery will remain in the second half of this year:  we are hearing reports that PC orders are weakening, not just in China but from across the region, which will have a knock-on effect on chip makers. Our man with the robot soldering iron tells us that OEM makers are also seeing demand from Europe drop for all sorts of components and, for chip makers, slowing demand from Chinese car makers (which is a more concerning coalmine canary). This follows lackluster Labor Day retail sales in China for phones and TVs. So it seems that inventories are starting to back up.

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