When China's Communist Party delegates meet on Monday to throw out their economic plan for the next five years, the semiconductor industry will be high on the agenda.
Beijing's 30-year pressure to build a homemade chip sector has taken on a new sense of urgency as the Donald Trump administration tightens its grip on China's leading technology group.
Washington has banned companies around the world from producing chips for Huawei, the telecommunications company, in what is a potential death sentence for its affiliate company HiSilicon, China's largest chip designer. The United States has also restricted US companies from supplying Semiconductor Manufacturing International Corporation, China's most advanced chipmaker, the machines needed to make chips. 2025, this targeted US attempt to stifle the country, both in terms of supply of semiconductors and the means to make them, makes Beijing's pressure to develop the domestic chip sector much more difficult.
China's efforts to develop its semiconductor sector previously prioritized "basic building blocks" such as tile production, packaging and testing, said Randy Abrams, head of Asian technology research at Credit Suisse. "But now they must try to become less dependent on the United States where they can."
Beijing's priorities now include increasing the technological prowess of electronic design automation (EDA) – the software used in chip design – and by making the machines deployed in chip manufacturing plants. US EDA toolmakers Cadence and Synopsys are choking on the global market for advanced chips, while Applied Materials, Lam Research and KLA Tencor dominate critical segments of cutting-edge chip manufacturing equipment.
Analysts said that in semiconductor equipment and EDA, China is today where Huawei and ZTE were in the late 1990s, a cheap supplier that still lags behind foreign peers in technology. "The gap is not just about a certain amount of dollars, you also need time to develop the experience and the talent," Abrams said.
The tools offered by Huada Empyrean, China's most advanced EDA company, are significantly behind the capabilities required by SMIC, China's largest chipmaker, and chip industry leader Taiwan Semiconductor Manufacturing Corporation to make its most advanced products.
"Making a breakthrough in semiconductor equipment is the biggest obstacle," said Zeng Guan-wei, an analyst at research firm Trendforce, who added that less than 10 percent of these machines used in China are manufactured by domestic companies.  Equipment manufacturers were nothing more than an afterthought in Beijing's past spending on the sector – and they were enormous. According to the Semiconductor Industry Association, Chinese chip manufacturers have been awarded about $ 50 billion in subsidies from central government alone over the past 20 years. This is 100 times the amount received by companies in Taiwan, which together with South Korea is the world's largest chip production hub.
An OECD chip worldwide identified four Chinese companies among the largest recipients of government funding. The OECD found that SMIC and Tsinghua Unigroup, one of China's leading chip design houses that have now also invested in manufacturing, received state aid totaling more than 30 percent of their revenues between 2014 and 2018.
production has come far below meeting the country's needs. According to the China Semiconductor Industry Association, only 27 percent of the chips sold in the country were produced domestically, while the rest were covered by imports.
Beijing has pledged to invest heavily as part of its response to pressure from Washington, in addition to new tax incentives for chipmakers. The 14th five-year plan is expected to provide more support.
But some warn that China needs to calibrate the way it supports the industry.
"I think financing is not a problem now," said an engineer at SMIC. . “But how will these funds be distributed? Will some of the relatively backward but central parts of the chip industry in China get more attention, such as EDA or manufacturing equipment?
For example, he added that software experts could make much more money working for Internet companies than at EDA. ones.
The industry has also suffered due to inefficiency. Over the past three decades, hundreds of chip projects have failed due to investors lacking the necessary technical knowledge or having redirected subsidies to unrelated real estate projects.
The promise of more state aid to industry may actually exacerbate the situation. During the first nine months of 2020, more than 13,000 Chinese companies registered as chip companies, although many have no previous industry experience.
The National Development and Reform Commission, China's most important state planning agency, said this week that the latest press should focus on preventing such waste.
"There seems to be a tendency in China for enterprising people to take the opportunity to throw themselves as patriotic investors when it comes to nationalist rhetoric," said Douglas Fuller, a professor at Hong Kong City University and an expert on China's industrial policy in the chip sector. "I hear again and again how bad it is in most other sectors, so the prospect of large funding in the chip sector acts as a magnet."