Fri, Oct 27, 2017 page10

• China rethinks chip domination dream

  HARD REALITY: A plan to reduce semiconductor imports by boosting domestic firms has run up against merger and acquisition woes and rivals’ massive research budgets

  • Bloomberg
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  China’s signaling a tempering of its ambitions to become a global semiconductor power because it cannot outspend the likes of Intel Corp in the short run, but it still intends to become a force in unclaimed fields such as the Internet of Things.

  The nation’s “corner-overtaking” strategy simply is not realistic, said Ding Wenwu (丁文武), president of a US$20 billion government-backed fund set up in 2014 to help lift the domestic chip sector out of obscurity.

  Ding, speaking at an industry forum in Shanghai, was using a racing term that refers to passing opponents at their most vulnerable.

  China is trying to reduce a reliance on about US$200 billion of annual semiconductor imports, which it fears undermines both national security and the development of a thriving technology sector.

  Overall, Beijing envisions spending about US$150 billion over 10 years to achieve a leading position in design and manufacturing, an ambitious plan that US executives and officials warn could harm US interests.

  Ding’s China Integrated Circuit Industry Investment Fund Co (國家集成電路投資基金) plays a key role by steering overall investment and strategy.

  “It’s very unrealistic to overtake on the corner given the current situation,” Ding told his audience. “It’s only possible when everyone is on the same starting line.”

  Money cannot solve the problem either, he said.

  Intel Corp, Samsung Electronics Co and Taiwan Semiconductor Manufacturing Co (台積電) alone wield annual research budgets in the billions or even tens of billions of dollars.

  “How can one overtake the front-runners when lagging so far behind? Not to mention the leaders are trying very hard to keep their position,” Ding said.

  Executives, academics and government officials converged on Shanghai this week to debate the future of their industry, convening one of the largest annual convocations of its kind. China’s import dependency and the Internet of Things dominated the agenda.

  The Chinese Ministry of Industry and Information Technology focused on smart devices and chip-laden sensors as well as automobiles, which is considered a fertile market as cars increasingly become connected and autonomous.

  “We support innovations in areas such as smart devices, sensors, inter-connected smart vehicles and medical segments,” Diao Shijing (刁石京), director of the ministry’s Electronics Bureau, told the forum. “The integrated circuits industry, as the fundamental and most important sector, has been searching for directions so it won’t miss new growth opportunities.”

  Leading China’s charge into the next generation of microchips is Unigroup Ltd (紫光), an affiliate of the business arm of Tsinghua University that has become the largest player in a local market dependent on foreign high-performance processors and 3D-NAND memory chips.

  In March, the chip giant clinched as much as US$22 billion of financing from two Chinese government-backed investors, amassing a pool of funds to pursue acquisitions.

  The vast sums of money deployed have spurred concerns in some quarters. The White House in January issued a report warning that China’s push into semiconductor technology threatens to harm US chipmakers and places US national security at risk.

  However, the reality is that both sides may need each other.

  “One of the biggest concerns for China is it doesn’t want to see the industry controlled by others,” said Wei Shaojun (魏少軍), director of the Institute of Microelectronics at Tsinghua University. “We are heavily dependent on semiconductor imports, what if they suddenly stopped shipping the chips to us?”

  “On the other hand, I’ve got CEOs from overseas giants asking me: ‘You guys purchase a huge amount of chips from us. What can we do if you stopped buying?’” he said.

  Unigroup and other Tsinghua affiliates have already pulled off a number of acquisitions over the years in pursuit of capacity and technology: Unigroup bought RDA Microelectronics Inc and Spreadtrum Communications Inc (展訊) to beef up its design capability, and signed partnership deals with global players including Western Digital Corp.

  Unigroup’s major business units and affiliates include integrated-circuit developer Unigroup Guoxin Co (紫光國芯), formed via a series of mergers of state-backed entities.

  Its US$2.8 billion Changjiang Storage (長江存儲) was the result of a merger last year between Unigroup’s own memorychip operations and a government-run factory.

  However, that mergers and acquisitions spree has hit a wall of late.

  Tsinghua was forced to withdraw a planned investment in Western Digital after the deal threatened to invite US government scrutiny, while a Taiwanese acquisition attempt fell through.

  Now, China itself is discouraging unfettered overseas acquisitions, worried about capital outflow.

  That further threatens to stifle one avenue through which the country can swiftly acquire technological credibility.

  “The overseas acquisition environment is now complicated,” Ding said, without elaborating.
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