China's chip self-sufficiency dream a 21st Century Great Leap Forward? How much longer can it subsidize?
Against the backdrop of a secular slowdown in economic growth and a real-estate bubble burst that added debt burdens, how much longer can China continue to subsidize its industries and realize the dream of building a self-sufficient semiconductor sup...
Against the backdrop of a secular slowdown in economic growth and a real-estate bubble burst that added debt burdens, how much longer can China continue to subsidize its industries and realize the dream of building a self-sufficient semiconductor supply chain?
The semiconductor supply chain is highly complex and depends on the global division of labor that many countries have spent decades to build up what it is today. Can China succeed in building a domestic semiconductor supply chain just like it did with solar cells, electrical vehicles, and lithium batteries?
"Semiconductors are highly complex and cannot have all the materials, equipment, components, and chips in the entire processes manufactured by a single country. I think it is absurd and dangerous for China to try to build up a supply chain from upstream to downstream, doing logic IC, memory, and all equipment, materials, and components all at the same time," said Guo-chen Wang, an assistant research fellow at Taiwan's Chung-hua Institution for Economic Research (CIER), who is an economist specializing in China's economy.
"How long will it take for China to do everything from upstream rare earths to the end product? How many resources are needed even if they can rely on their market? It would be very inefficient trying to make all the products that are now produced by other countries," said Wang, emphasizing that not even the US or Taiwan could do that. "I don't think it is achievable no matter how many trillion dollars more to be poured into their semiconductor pipedream."
China aims to self-supply 70% of the semiconductors used for its domestic market by 2025 in its "Made in China 2025" Initiative launched in 2014, but according to TechInsights, in 2023, the local self-sufficiency rate of semiconductors was about 23.3%. However, if the production value of foreign companies' fabs (such as Samsung, SK Hynix, and TSMC) in China were excluded, the self-sufficiency rate would be only 12%.
Credit: TechInsights
Wang compares China's nationwide effort to build a semiconductor supply chain to the Great Leap Forward movement in 1957-1960, which resulted in producing massive quantities of low-quality iron and steel, over-exploiting resources, wasting materials, and seriously damaging the ecological environment.
"Another issue this year is how much money can China still churn out to subsidize the industries. After years of subsidizing solar panels and EVs, China managed to get the current results, but how long can China afford to continue subsidizing them plus the semiconductor supply chain now when its economy and finances are deteriorating?"
Subsidies, corruption, and scams
China shocked the world when the Kirin 9000 chip was found to be made by SMIC's 7nm processing technology last summer despite the US sanctions. Huawei recently launched another new smartphone with
, not willing to be left out of the AI chip race.
Huawei has invested heavily in building its semiconductor ecosystem and has teamed up with SMIC to manufacture the advanced chip designed by its IC design arm, HiSilicon. JCET, a Chinese packaging and testing company,
. All of them, of course, have received subsidies from the Chinese government.
A
revealed that 32 fabs in China will expand production lines for 28 nm and older mature chips by the end of 2024. Data from TrendForce indicates that the number of China's fabs hits 77, mainly targeting the mature process. The 25 projects currently under construction in China and are expected to start production in the next 2-3 years will add 463,000 units of 8-inch wafer output and 1.663 million units of 12-inch wafer output by 2026.
from the Netherlands and
to fulfill the ambitious target while developing
.
The majority of the added output is for mature-node chips manufactured with 28nm processing technology and older, and 70% of the new fabs are expected to provide pure-play foundry services. "If the majority of the 12-inch fabs (in China) are going to be foundries, it may face difficulties to find enough orders to keep all the 12-inch production lines busy, and thus may result in redundancy and heavy losses for the fabs," said a semiconductor industry expert.
However, in the process of building up the production lines, the procurement of equipment, materials, and factory buildings, would have created rent-seeking opportunities for swindlers whose aim is to make personal gain in wealth and not truly competent in manufacturing semiconductors. Such examples can be found in Wuhan Hongxin, after investing CNY130 billion (US$1.8 billion) in 3 years, ended up in bankruptcy.
In December 2019, the company even purchased a lithography machine from ASML. However, Wuhan Hongxin mortgaged this "brand new and unused" lithography machine to Wuhan Rural Commercial Bank on January 20, 2020, for a loan of CNY581.8 million.
The China Integrated Circuit Industry Investment Fund, or so-called "the Big Fund", has invested at last CNY342.8 billion (US$47.4 billion) since 2014 and is said to raise another CNY300 billion this year. However, at least 7 fund managers and executives of invested companies have been under arrest for corruption investigations.
A perfect storm in the making
Although the central government of China transferred the proceeds of special treasury bonds exceeding CNY10 trillion to the local governments to help alleviate debt burdens, the continued contraction of the real estate market is still adding financial pressure on local governments.
"Now that the Chinese real estate market is in depression and the government is placing all its bets on high-tech industries. This will lead to overcapacity," said Wang.
Rhodium Group estimated China's actual growth in 2023 was more like 1.5%, rather than the official government figure, owing to an ailing property market, limited consumer spending, falling trade surplus, and battered local government finances. The International Monetary Fund (IMF) forecasts China's GDP growth for 2024 at 4.6%, lower than the 5% target set by Beijing.
Guo-chen Wang said that the real estate market is on the brink of collapse if Beijing fails to bail out the industry with some form of quantitative easing at the size of CNY10 trillion to alleviate debt servicing pressure. And since the dollar debt interest rates remain high, failure to raise sufficient financing at an affordable cost could in turn lead to a destabilizing debt crisis. In case of a financial crisis triggered by a real estate market collapse, China's economic growth could drop to 3% or even faces a recession, said Wang.
Besides net capital outflows seen since last year, China is also facing renewed pressure on currency depreciation. Peter Kurz, Chief Strategy Officer of Quantum International Corp. (QIC), a capital market consultancy firm, warned that the depreciation of the Japanese yen below JPY160 to US$1 will exert greater depreciation pressure on the Chinese yuan, as the People's Bank of China continues to cut interest rates, widening the interest rate gap with the US dollar.
When the market has built an expectation for currency depreciation, capital outflow will be hard to halt. A perfect storm is in the making, but the majority of local media and economists are too fearful to sound the alarms. How much longer can China continue to subsidize its semiconductor industry and others? Maybe not for too long.
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