China lags global leaders by five years in commercial manufacturing of advanced logic chips and continues to fall behind in semiconductor manufacturing equipment, although Chinese companies have made progress in other areas, according to a new report. In leading-edge logic chip manufacturing, top players, such as Taiwan Semiconductor Manufacturing Company (TSMC), are about five years more technologically advanced than Semiconductor Manufacturing International Corporation (SMIC), mainland China’s largest foundry, according to report by the Information Technology and Innovation Foundation (ITIF), a Washington-based science and technology policy think tank. TSMC, the world’s largest contract chip maker, introduced in 2022 its 3-nanometer process, used in making some of the world’s most sophisticated chips. SMIC, which was reportedly testing its next-generation 5-nm process, last year began producing chips at the 7-nm node for Huawei Technologies’ flagship Mate 60 smartphone, in defiance of U.S. sanctions aimed at capping Chinese firms at 14-nm.
The Shanghai Semiconductor Industry Investment Fund (SSIIF), run by the municipal government to support the local chip industry, has doubled its size to around USD2 billion after a new funding round, as the Chinese semiconductor hub pumps more money into the sector amid U.S. sanctions targeting the industry. “China is investing hundreds of billions of dollars to become a leader in semiconductors, so it is making impressive strides, but its progress so far has been limited to certain aspects of chip development and production,” said Stephen Ezell, ITIF’s Vice President of Global Innovation.
Chinese firms are even weaker in the production of semiconductor-manufacturing equipment, as well as semiconductor assembly, testing and packaging (ATP). Despite innovative efforts, Chinese companies stand “several years more behind global leaders”, the ITIF said. The future looks brighter in the design of logic chips, where Chinese companies have come closer to global leaders, falling only two years behind, according to the ITIF. Strong local demand for the design of logic chips used in mobile devices or artificial intelligence applications has fueled faster innovation, the report said.
The growth of China’s semiconductor industry, particularly in older-generation chips, has been driven largely by massive subsidies, according to the report, as President Xi Jinping calls on all levels of the government to support the nation’s chip self-reliance drive. Chinese chip companies have benefited not only from state subsidies, but also tax or tariff reduction and exemption for equipment and materials, as well as land sales at reduced prices, according to ITIF. Since 2014, semiconductor-industry investments made each year by all levels of the Chinese government are likely equivalent to the USD52 billion in subsidies earmarked by the United States to encourage domestic semiconductor manufacturing under the Chips and Science Act of 2022, Chris Miller, author of the book Chip War, was quoted as saying in the report. While analysts have said that government subsidies are vital to support loss-making Chinese firms playing the long game, the report warned that China’s “go-it-alone” strategy to create a “closed-loop” chip industry could prove highly difficult, given the complexity of the chip ecosystem. Substantial government subsidies have also led to an overcapacity in Chinese legacy chip production. The country’s share of global mature-node production is expected to grow from 31% in 2023 to 39% in 2027.
The development has triggered concerns in Washington that China may dominate global supply of such chips. The U.S. has announced it would double tariffs on semiconductor imports from China to 50% next year. China now pins high hopes on ATP, as the country’s share of global ATP facilities rose to 38% in August 2023 from 27% in 2021, according to ITIF. The world’s five largest outsourced assembly and test firms, such as JCET Group and Tongfu Microelectronics, are Chinese. While over half of global semiconductor patent applications filed in 2021 and 2022 came from Chinese companies, twice those from U.S. companies, Chinese firms dedicated less of their revenues to research and development (R&D). In 2022, the R&D intensity in China’s semiconductor industry was 7.6%, compared with 18.8% in the U.S., 15% in the EU and 11% in Taiwan, the report showed.
The SSIIF raised CNY6.9 billion from investors, most of them state-backed companies based in Shanghai, to expand its capital base to CNY14.5 billion, according to business registry database Qichacha. The capital boost is expected to bolster the fund’s capacity to finance projects vital to helping China reach self-sufficiency in the semiconductor sector, and signifies Shanghai’s commitment to developing chip technology. The SSIIF is among funds set up by local Chinese governments to strengthen their chip industries, in addition to the China Integrated Circuit Industry Investment Fund, a national initiative also known as the “Big Fund”. After the latest capital injection, Shanghai Science & Technology Venture Capital Group remains the SSIFF’s largest shareholder with a 35% stake, followed by Shanghai Guosheng Group and Shanghai International Group, each holding an 18% stake. All three entities are fully controlled by the local regulator of state-owned assets. The first phase of the SSIIF, which dates back to 2016, invested billions of yuan into major chip foundries and semiconductor-manufacturing equipment makers, such as Semiconductor Manufacturing International Corporation (SMIC) – China’s largest contract chip maker – as well as HLMC, a subsidiary of Hua Hong Group, and ACM Research Shanghai, a semiconductor cleaning tool manufacturer.
The second phase of the fund launched in May 2020 with CNY5.4 billion in equity investments from six backers, including Shanghai Science & Technology Venture Capital Group, Shanghai Guosheng Group and Shanghai International Group. The fund’s capital base reached CNY7.6 billion in 2022. The SSIIF’s latest funding round followed the establishment of the Integrated Circuit Industry Parent Fund by the Shanghai government in late July, which earmarked CNY45 billion for investments into chip design, manufacturing packaging, equipment and materials, the South China Morning Post reports.
The Global Times reports that China's semiconductor companies posted stellar first-half gains. Of the 68 semiconductor companies that have released their financial reports for the first half, 40 reported revenue gains of more than 50%. According to CITIC, there are 157 A-share listed companies in China's semiconductor industrial chain. Companies making storage chips, contact image sensor chips and system-on-a-chip products posted impressive gains. China's chip exports reached CNY640.91 billion, up 25.8% year-on-year to a new record.
