China Semiconductors in Corruption Loop

· Two of the most scrutinized areas are the $9 billion bailout of Tsinghua Unigroup Co., and the National Integrated Circuit Industry Investment Fund

· What SMIC appears to have done is produce a somewhat standard chip, used for bitcoin mining, and with little evidence it can churn these out with good yields or at scale.

· it’s not impossible to make 7nm using older machinery, just a lot more complicated. And it’s an established fact that TSMC has in the past sued SMIC for stealing technology.

· Unigroup’s big win was backing Yangtze Memory Technologies Co., a company that’s slowly climbing up the ranks of global memory-chip players. But if the goal is to wean China off foreign technology, YMTC serves largely as a PR win. Memory chips are a commodity product — the silicon equivalent of a filing cabinet — which merely stores information rather than the number-crunching performed by processors.

· Money alone is not enough to be a semiconductor leader. If that were the case, then Intel and UAE-backed GlobalFoundries Inc. would be further along.

· Neither TSMC or Samsung became leaders with a go-it-alone attitude. They lean heavily on suppliers of equipment, software and materials — many of whom are in the US, Japan and Europe — instead of taking on a solo mission to pursue technological independence.

Architects of China’s ambitious efforts may be facing the music for having not produced world-beating technology. Multiple corruption probes announced by authorities stem from anger among the nation’s top leaders over an inability to develop semiconductors that could replace American components, it reported. Two of the most scrutinized areas are the $9 billion bailout of Tsinghua Unigroup Co., and the National Integrated Circuit Industry Investment Fund — known as the Big Fund.

Those looking at China’s achievements are mostly finding what they seek, and ignoring the rest. Semiconductor Manufacturing International Co., for example, got a lot of attention recently when industry analysts TechInsights wrote: “SMIC has been able to fabricate features that are small enough to be considered 7nm.

China chip cheerleaders see this as an incredible breakthrough, bringing the Shanghai-based firm closer to the capabilities of world leaders Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. But it’s not, really. What SMIC appears to have done is produce a somewhat standard chip, used for bitcoin mining, and with little evidence it can churn these out with good yields or at scale.

Any budding chef trying to make soufflé will eventually pull off a couple of good samples. But mastery can only be claimed when almost all attempts are successful (yield), and can be done consistently and in large quantities (scale). By contrast, TSMC and Samsung rolled out mass production at 7 nm four years ago — a demonstration that they’d nailed the process. The question of how SMIC managed this, while being cut off from Western manufacturing equipment, also remains. As TechInsights notes, it’s not impossible to make 7nm using older machinery, just a lot more complicated. And it’s an established fact that TSMC has in the past sued SMIC for stealing technology. The company has not been accused of wrongdoing with respect to 7 nm processes.

Whatever is behind this possible breakthrough, you could forgive Beijing for holding its applause. The government and numerous feeder funds haven’t spent the past 20 years and more than $100 billion to end up four years behind. It fully expected its semiconductor industry to not only catch up, but set the country on a path to technological independence. A single example of a chip that’s close to what others had a few years ago falls far short of that goal.

If the Big Fund’s aim was to provide a solid financial return — like any mutual, hedge or venture capital fund — then we might conclude that it did its job. It invested in at least 23 chip companies between 2014 and 2019, and then started selling down after massive rises in their share prices.

But there’s little evidence that the Big Fund itself, or the huge prestige of being associated with a state-backed organization, actually accelerated industry development. SMIC had been in business for 15 years before it announced in 2015 that China Integrated Circuit Industry Investment Fund would buy 4.7 billion new shares for a total of almost $400 million. At the time it trailed TSMC, but not by much. In December 2014, it had built its first Snapdragon processor for Qualcomm Inc. using 28-nm technology, a little more than three years after TSMC achieved a similar feat. It’s convenient to compare SMIC to Intel Corp., the US goliath that has struggled in recent years and also fallen behind TSMC and Samsung, but the harsh reality is that SMIC’s gap on the leaders has barely narrowed.

Then there’s Tsinghua Unigroup, whose name alone benefited from association with one of China’s most prestigious academic institutions. Although it attracted much fanfare for both itself and chairman Zhao Weiguo, it did little to make the nation less dependent on foreign technology. Among Zhao’s biggest moves was to buy up established local players — including Spreadtrum Communications Inc. and RDA Microelectronics Inc. — for a combined $2.6 billion. An attempt at a venture with Western Digital Corp. failed when the US government vetoed an almost $4 billion investment.

Unigroup’s big win was backing Yangtze Memory Technologies Co., a company that’s slowly climbing up the ranks of global memory-chip players. But if the goal is to wean China off foreign technology, YMTC serves largely as a PR win. Memory chips are a commodity product — the silicon equivalent of a filing cabinet — which merely stores information rather than the number-crunching performed by processors. If China wants semiconductors that can conduct artificial intelligence or guide missiles, then it’ll need to do a lot better than boast about memory chips.

Yet this was a problem of China’s own making. Money alone is not enough to be a semiconductor leader. If that were the case, then Intel and UAE-backed GlobalFoundries Inc. would be further along. Instead, both China and the US need to learn the importance not only of developing your own technology, but building trust among industry peers so that they’ll freely collaborate. Neither TSMC or Samsung became leaders with a go-it-alone attitude. They lean heavily on suppliers of equipment, software and materials — many of whom are in the US, Japan and Europe — instead of taking on a solo mission to pursue technological independence.