When the Chips Are Down
A staff member of China’s Newland Group holds a self-developed decoding chip at the First Digital China Summit in Fuzhou, southeast China’s Fujian Province, on April 23 Amid the controversy surrounding the U.S. banning of Chinese tech giant ZTE’s purchase of crucial U.S. technologies, including microchips, for its alleged violation of the terms of a sanctions settlement in April, one stark reality has emerged. China is over reliant on chip imports, resulting in the stagnant development of indigenous chips, a key component of telecommunications equipment.
The country is the world’s largest market for integrated circuits (IC), accounting for more than half of total consumption worldwide. However, it mainly relies on chip imports for major IC products. According to data from the General Administration of Customs, China has been importing over $200 billion worth of microchips annually since 2013, with this figure reaching a record high of $260.1 billion in 2017, roughly double the value of China’s crude oil imports.
Data from the CCID Research Institute, a think tank under the Ministry of Industry and Information, show that 13 out of the top 20 semiconductor manufacturers are from the U.S., with sales of $66.7 billion in the Chinese market in 2017. Leading U.S. chipmakers Qualcomm, Broadcom and Micron realize half of their global sales in China.
Lagging behind
Gu Wenjun, a chief analyst with ICwise, a leading provider of market research and advisory services to China’s semiconductor and electronics industry, said that the reason why China relies so heavily on chip imports is because domestic producers lag behind their global peers in almost every way, and that everyone has a share in the blame for this shortcoming.
“Chip users prefer global suppliers over domestic chip makers, unless domestic ones have the same capacity as global chips and cost much less. They even use domestic companies as a bargaining chip when negotiating with their global suppliers,” Gu told ChinAfrica, explaining that this has significantly narrowed the profit margin of Chinese chip makers.
“Things are the same when it comes to the chip makers. They also prefer global suppliers over domestic raw material suppliers and continuously squeeze their suppliers’ profit margin,” Gu said.
In recent decades, indigenous Chinese chips have had some success, but mostly in the case of certain technologies or companies, and not across the entire industrial chain. According to Gu, the semiconductor industry is complicated and dynamic, covering dozens of subjects, hundreds of technologies, thousands of products and tens of thousands of businesses. No country in the world has a fully independent, complete and manageable industrial chain.
If a country were to attempt to build a complete industrial chain, it would be a long-term and strategic goal that could take 30 to 50 years or longer, said Gu.
Yuan Lanfeng, Associate Researcher with the University of Science and Technology of China, said that the ZTE fallout has raised social awareness of technology self-sufficiency and could present a precious development opportunity for Chinese chipmakers.
Yuan said that the chip industry is extremely capital-intensive, requiring substantial investment to make technological breakthroughs.
“Chip users and chip producers have to cooperate from the very beginning - customizing chips according to user demand, testing chips in the actual environment and finally starting production. The expenditure on developing and testing one kind of chip could easily run into the tens of millions of yuan before production,” Yuan said.
“China has invested too little in the chip making industry. It established an IC Fund in 2014, which accumulatively invested 81.8 billion yuan ($12.94 billion) in the sector from 2014 to 2017. But Intel invested $12.7 billion in 2016 alone,” Yuan said. “You cannot expect Chinese researchers to achieve more with less funding than their global peers.”
“The more we spend on research and development (R&D) now, the more we’ll save in the future,” Yuan said.
Seeking a new edge
As the foundation of the modern information industry, experts predict that the domestic chip sector will enter a new phase of development.
According to Yuan, the key to the development of the chip industry lies in heavier investment and alluring more talent.
“Once more and more chip users realize that they cannot rely on foreign products, they will start using Chinese chips. Building a production line requires considerable investment. But once production starts, the marginal cost of producing more chips will be lower as shipments increase,” Yuan said.
The rapid growth of domestic chip makers depends on a supportive environment from chip buyers, in which they are willing to spend time, energy and resources to grow together.
“Chinese companies should strengthen internal control, intensify investment in R&D, and attach greater significance to core competitiveness,” said Gu.
The government is increasing its support for the industry. From January 1 this year, domestic chip makers enjoy tax exemptions ranging from two to five years and covering low-, medium- and high-end chips used in electronic devices like computers and smartphones.
In June 2014, China released a guideline on the development of the IC industry, predicting the annual revenue of China’s IC industry would reach 870 billion yuan ($138 billion) in 2020, with technologies in key areas to reach leading global levels and materials and equipment entering the global supply chain. An industry fund has also been set up to support the development of the sector.
Gu suggested targeted government support be provided to industry leaders.
“The training of talent and the stricter protection of intellectual property rights are also necessary. Moreover, China’s homegrown chip industry should be integrated into the global industrial chain, and an atmosphere of cooperation should be created,” Gu suggested.
According to industry experts, artificial intelligence and the cloud-based Internet of Things are two major areas where China’s homegrown chips stand a good chance of being able to compete with global players.
China’s e-commerce giant Alibaba Group announced on April 20 that it had acquired IC design house Hangzhou C-SKY Microsystems in a bid to increase its own chip-making capacity.
Alibaba has previously invested in five chip manufacturers, including U.S. AI chip designer Kneron and Barefoot Networks.
The company’s research institute DAMO Academy is now developing a neural network chip to be used in artificial intelligence. The cost performance of the new chip is reportedly 40 times that of similar products currently on the market.
In addition to Alibaba, China’s search engine giant Baidu is also sparing no effort in the development of new generations of chips. In March 2017, Baidu released the DuerOS smart chip and began strategic cooperation with domestic and foreign chip producers. In August 2017, Baidu launched a new type of chip in collaboration with Xilinx, a Chinese chip maker headquartered in Shenzhen.
According to Gu, the growing presence of tech giants in the sector will certainly boost the chip industry’s development. “But [it] takes time and requires diligent work,” he noted.
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