‘De-Americanize’:
How China Is Remaking Its Chip Business
Seven
months after Washington unveiled tough curbs, Chinese companies are doubling down
on homegrown supply chains and drawing billions in cash from Beijing and investors.
·
Three U.S. equipment suppliers almost immediately
halted their shipments and services, and Europe and Japan are expected to do
the same soon.
·
Yangtze Memory Technologies Corporation,
or YMTC, a memory chip company that Xi Jinping, China’s president, has extolled
·
Beijing mobilized vast sums to cultivate
homegrown alternatives to Western chip makers. But foreign components were
readily available and of higher quality, leaving many Chinese firms unwilling
to make the switch.
·
Guangzhou Automobile Group, a
state-owned electric vehicle manufacturer, said in February that it aimed to
eventually purchase all of its roughly 1,000 chips in its cars from Chinese
providers. It currently buys 90 percent of its chips from overseas.
·
Foreign investment into China’s
semiconductor sector this year has already tumbled to $600 million, its lowest
point since 2020, according to data from PitchBook, which tracks private
financing.
·
The government’s “Big Fund” injected
roughly $1.9 billion into YMTC in February to bolster its response to the U.S.
restrictions.
·
So far, less than 1 percent of all
semiconductors in China are at the industry’s top end that are subject to U.S.
·
according to estimates from Yole Group,
a market research firm. The rest are less advanced, or “mature,”
semiconductors, found in everyday consumer electronics and cars, and are “the vast majority of the business
·
China’s two largest chip manufacturers,
the state-backed Semiconductor Manufacturing International Corporation, or
SMIC, and Hua Hong Semiconductor have each announced billions of dollars this
year to expand production into mature chips.
·
China’s lack of access to world-class
tools needed to make chips
·
YMTC had targeted a three
fold increase in its share of global chip production to 13 percent by
2027, challenging chip incumbents like U.S.-based Micron Technology
·
Korea and Taiwan’s leading chip
manufacturers, Samsung and Taiwan Semiconductor Manufacturing Company, or TSMC,
are investing billions of dollars into new production in the United States.
Last October, construction plans
for a hulking semiconductor factory owned by a major state-backed company in central
China fell into disarray. The Biden administration had escalated the trade war over
technology, severing China’s access to the Western tools and skilled workers it
needed to build the most advanced semiconductors.
Some employees with U.S. citizenship
departed the company. Three U.S. equipment suppliers almost
immediately halted their shipments and services, and Europe and Japan are expected
to do the same soon.
The facility
belonged to Yangtze Memory Technologies Corporation, or YMTC, a memory chip company
that Xi Jinping, China’s president, has extolled as a
flag-bearer in China’s race toward self-reliance. Now, the chip maker and its peers
are hurriedly overhauling supply chains and rewriting business plans.
Nearly seven months later, the
U.S. trade barriers have accelerated China’s push for a more independent chip sector.
Western technology and money have pulled out, but state funding is flooding in to
cultivate homegrown alternatives to produce less advanced but still lucrative semiconductors.
And China has not given up on making high-end chips: Manufacturers are attempting
to work with older parts from abroad not blocked by the U.S. sanctions, as well
as less advanced equipment at home.
The tough U.S. restrictions stemmed
from alarm over what officials in Washington viewed as the threat posed by China’s
use of its technology companies to upgrade its military arsenal. Jake Sullivan,
the national security adviser, recently characterized the sentiment as part of a
“new consensus” in Washington that decades of economic integration with China was
not wholly successful, adding that the new controls were “carefully tailored” to
go after China’s most cutting-edge semiconductors.
Under the October rules, American
enterprises and citizens may no longer aid any Chinese companies building chip technology
that meets a certain threshold of sophistication. The controls went beyond Trump
administration trade curbs that went after specific companies like the Chinese telecom
giant Huawei.
During those earlier trade tensions,
Beijing mobilized vast sums to cultivate homegrown alternatives
to Western chip makers. But foreign components were readily available and of higher
quality, leaving many Chinese firms unwilling to make the switch.
Those
reservations about using materials from China appear to be easing. Chinese tech
companies up and down the supply chain are assessing how to replace Western chips
and related components, even those unaffected by U.S. controls. Guangzhou Automobile
Group, a state-owned electric vehicle manufacturer, said in February that it aimed
to eventually purchase all of its roughly 1,000 chips in its cars from Chinese providers.
It currently buys 90 percent of its chips from overseas.
“The
goal now in China in a lot of areas is to de-Americanize
supply chains,” said Paul Triolo, the senior vice president for China at Albright
Stonebridge Group, a strategy firm.
Dozens
of Chinese chip companies are finalizing plans to raise money through public offerings
this year. They include China’s second-largest chip manufacturer, Hua Hong Semiconductor,
as well as a chip tool maker backed by Huawei.
The technology
disputes between the world’s two largest economies show no signs of abating. The
Biden administration has drafted, but not yet released, new rules that would restrict
American venture capital investments in advanced chip companies in China. Foreign
investment into China’s semiconductor sector this year has already tumbled to $600
million, its lowest point since 2020, according to data from PitchBook, which tracks
private financing. And officials are mulling tighter controls on technologies like
quantum computing or chip manufacturing equipment.
U.S.
restrictions have caused Beijing to activate a state fund that had been dormant
because of waste and graft: The government’s “Big Fund” injected roughly $1.9 billion
into YMTC in February to bolster its response to the U.S. restrictions. The fund
has also recently put money into chip equipment and material suppliers, according
to state media reports.
The new subsidies aim to remove
Western components from China’s supply chains. The southern city of Guangzhou has
earmarked over $21 billion this year for semiconductor and other tech projects including
those that attempt to replace Western chip equipment suppliers. Purchase orders
for Chinese-made equipment have spiked in recent months, according to corporate
reports and press statements.
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Mr. Xi has been outspoken about
what he sees as an effort by Western countries to enforce an “all-around containment”
of China. During an important legislative meeting in March, the Chinese president
interrupted remarks by a delegate from a Chinese crane manufacturer. The exchange
was widely reported by state media: “The chips inside your cranes, are they locally
sourced?” Mr. Xi asked. Yes, the delegate said.
China’s
two largest chip manufacturers, the state-backed Semiconductor Manufacturing International
Corporation, or SMIC, and Hua Hong Semiconductor have each announced billions of
dollars this year to expand production into mature chips, according to public announcements.
Yet over
the long term, China’s lack of access to world-class tools needed to make chips
could stymie its progress in many advanced industries like artificial intelligence
and aerospace, according to Handel Jones, the chief executive of International Business
Strategies, a consulting firm.
Last
August, YMTC had targeted a three fold increase in its
share of global chip production to 13 percent by 2027, challenging chip incumbents
like U.S.-based Micron Technology, according to Yole Group’s estimates. Facing trouble
building out its second factory, the Chinese memory chip maker’s production is set
to decline, sliding to just 3 percent of the market in 2027.
International
companies that had previously invested in China’s semiconductor industry are diverting
their investments elsewhere. Korea and Taiwan’s leading chip manufacturers,
Samsung and Taiwan Semiconductor Manufacturing Company, or TSMC, are investing billions
of dollars into new production in the United States. The Taiwanese
chip-maker is applying for U.S. subsidies for its Arizona factory that force it
to cap its investment into China for a decade.
At the same time, experts said,
the weakening of foreign influence over China’s chip sector is creating opportunity
for domestic companies. Last month, a semiconductor equipment manufacturer went
public in Shanghai. Shares of the company, Crystal Growth & Energy Equipment,
have climbed 30 percent since its debut.
“It’s because of the sanctions
that there’s now space in the market,” said Xiang Ligang, a director of a Beijing-based
technology consortium who has advised the Chinese government on technology issues.
“Now we have a chance to develop.”
The recent burst of state cash
could supercharge China’s share of global production in lower-end chips. In the
next decade, China could account for roughly half of the world’s production capacity
for a class of mature semiconductors, according to a jointly written report by Rhodium
Group, a consulting firm, and Stiftung Neue Verantwortung, a think tank in Berlin.
That could create new supply
chain vulnerabilities for foreign companies, said Jan-Peter Kleinhans, a co-author
of the report.
“Putting all of your eggs in
one basket is a stupid idea,” he explained. “This is a choke point that can be exploited.”