Memory, National Security on Chinese Manufacturing Agenda

Article By : Alan Patterson

$31.5 billion fund to be set up by government to bring semiconductor manufacturing up to speed

TAIPEI — The Chinese government is planning a new 200 billion yuan ($31.5 billion) fund aimed at renewing efforts to kickstart its domestic chip industry and offset a huge trade deficit in imported semiconductors.

The state-backed China Integrated Circuit Industry Investment Fund Co. is in talks with government agencies and corporations, targeting the new financing, according to press reports, citing unidentified people familiar with the matter. Under the reported plan, the fund would begin disbursing money in the second half of 2018.

More money may not be enough to jumpstart China’s semiconductor industry, according to Bill McClean, president of market research firm IC Insights.

“While the Chinese have plenty of money to spend, they are lagging severely on the technology to be competitive,” McClean told EE Times. The goals of the new funding effort have almost no chance of success without strong results in both funding and technology, he said.  Each of those factors will have equal weight on the final outcome, he added.

The new funding effort would follow earlier footsteps of the China IC Industry Investment Fund, created three years ago to bootstrap domestic chipmakers that remain generations behind the global semiconductor industry in production capacity and process technology. The investment fund has disbursed a total of 106 billion yuan, or about 77 percent of the amount allocated for its first stage. The fund has attracted an additional 350 billion yuan from regional governments and the private sector.

That earlier injection of money has led to the creation of memory chipmakers such as Yangtze Memory Technologies Co. (YMTC) and acquisitions of assembly and test companies such as Singapore-based STATS ChipPAC. Even so, attempts to acquire other overseas semiconductor companies such as Lattice Semiconductor have been blocked by the United States on national security concerns.

In the meantime, China has been on the sidelines while the global semiconductor industry has undergone mergers and acquisitions worth hundreds of billions of dollars during the past few years, a consolidation that left a smaller number of big companies dominating the industry.

The biggest winners from China’s new money outlay may be chip equipment makers like Tokyo Electron Ltd. (TEL) as the nation builds as many as ten new fabs making chips on 12-inch wafers, according to analysts surveyed by EE Times.

“China’s spends will be a positive catalyst,” according to Mark Li, an analyst with Bernstein in Hong Kong. He said TEL has been gaining market share in China.

The new funding plan is underway as China aims to gain a foothold in memory chip production, the entry point for startup semiconductor makers decades ago in Japan, South Korea and Taiwan.

This time around, the barriers to entry will be much more difficult to overcome.

When they launch production, Chinese memory makers such as YMTC may be at least two generations behind industry leaders such as Samsung and Micron, according to McClean. The Chinese companies will moreover face legal hurdles regarding potential patent violations, he said.

Market Strength

Given China’s huge domestic consumption and substantial market share in consumer electronics held by Chinese OEMs, the nation may offer incentives to domestic manufacturers to use China’s memory output. In the foreseeable future, China should be able to sell an amount equivalent to 5 percent of the global supply of DRAM and 4 percent of NAND in its domestic markets while ignoring IP infringement and leading edge tech, according to one analyst report.

With mixed success, China has been recruiting memory chip veterans such as Yukio Sakamoto from Japan and others from Taiwan, where most of the manufacturers such as Elpida have collapsed. Former Micron Taiwan executive Charles Kao says in a Chinese-language interview that he joined YMTC as its chief operating officer in part to counter South Korea’s Samsung and LG Hynix, which dominate the memory business today. Without giving a timeframe, Kao said YMTC will start its first production with 64-layer 3D NAND. Kao said YMTC was expected to provide samples of 32-layer 3D NAND by the end of last year.

Although political opposition remains strong in Washington D.C., there is an opportunity for YMTC to cooperate with Micron of the U.S., the world’s third-largest memory maker, according to Kao. China’s bid to take over Micron several years ago was eventually blocked by the U.S. government.

“We want to be a balancer against the international giants, which means delivering self-made technologies and growing the market share of made-in-China products,” Qi Lian, Unigroup joint president and chief executive of its storage arm, told reporters Thursday. “To achieve this goal, we are building up our own R&D and also keeping an eye on global technology collaboration.”

National Security

It’s not only the United States that treats semiconductors as crucial to national security.

China aims to reduce some $200 billion in annual semiconductor imports, which it sees as critical to national security and the development of its technology sector. For decades, China has targeted semiconductors as a pillar industry for its economy.

China’s state-backed investment fund will again roll up its sleeves, investing in segments ranging from design and manufacturing to chip testing and packaging, potentially boosting telecom equipment makers Huawei Technologies Co. and ZTE Corp. as well as conglomerates such as the Tsinghua Group. The first round of funding has been earmarked for more than 20 domestic companies, including ZTE and foundry Semiconductor Manufacturing International Corp. (SMIC).

The Tsinghua Group, affiliated with Beijing’s elite Tsinghua University that includes President Xi Jinping as a graduate, plays a crucial role in the new plan. It includes the largest of the country’s chip producers including Tsinghua Unigroup Co., which has outlined a $22 billion plan — partly from the China IC Industry Investment Fund — to pursue acquisitions and build capacity.

— Alan Patterson covers the semiconductor industry for EE Times. He is based in Taiwan.

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