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China set to challenge global chipmakers with huge state-led project

TOKYO -- China is striving to beef up its semiconductor industry in a bid to strengthen domestic chip manufacturing, a sector that is crucial for the country's national security.

An engineer works at a Chinese chipmaker's plant in Shanghai.

     China's push is posing a challenge to the existing dominance by global chipmakers in the U.S., Japan, South Korea and Taiwan, triggering yet another wave of industry realignment.

     Increasingly, China is seeking to recruit engineers from Japan. A retired Japanese engineer in his 60s was recently asked by headhunters and others if he was interested in working in China. The man, who lives in Kanagawa Prefecture south of Tokyo, was once responsible for production technology at Japan's now-defunct Elpida Memory.

     Similarly, a science and engineering professor at the Tokyo Institute of Technology said he has noticed that Chinese students at the university have increasingly been courted by Chinese chipmakers. "Some Chinese students went back to China midway through their Ph.D. programs," he said.

Massive investment rumors

Japanese semiconductor equipment makers in China are rushing to confirm rumors that China is planning a large investment in the industry, while a Japanese chip technology consulting firm recently said that China had asked for technological assistance.

     According to sources familiar with the matter, the Chinese government is planning to build a huge memory chip plant in Wuhan, Hubei Province, a national project estimated at as much as $24.6 billion in total. If realized, the planned factory would likely be one of the world's largest chip plants on a par in scale with Samsung Electronics' Hwaseong semiconductor plant in Gyeonggi-do Province, South Korea, and Toshiba's Yokkaichi factory in Mie Prefecture, Japan. Beijing is planning to launch DRAM production first, with a view to mass-producing NAND flash memory chips, the sources said.

     In May, the Chinese leadership, led by President Xi Jinping, unveiled "Made in China 2025," a 10-year plan to promote manufacturing. Semiconductors are one focus of the plan. To achieve this ambitious goal, China has been scrambling to mobilize all the chipmaking technologies available at home and abroad and is planning to create a huge, special zone for chip development.

     Observers say the government is expected to mainly shoulder massive costs for this capital investment project. China has formed the National Semiconductor Industry Investment Fund worth 120 billion yuan ($18.9 billion), whose capital base has reportedly multiplied with contributions from local governments.

Realizing a dream

For Beijing, accumulating the know-how to make cutting-edge computer chips has been a long-cherished dream. China imports chips worth about $246 billion annually, more than its oil imports in value terms, according to government trade statistics. Nevertheless, Chinese manufacturers currently produce less than 20% of all the chips the country needs. This is problematic as these chips are key components of various digital devices -- home electronics, PCs and smartphones, among others -- that China manufactures as a global production hub.

     Moreover, semiconductors play a crucial role in national security as well. Beijing worries that heightened military tensions between the U.S. and China could lead to the supply of chips from the U.S. being choked off.

     Furthermore, the conclusion of the U.S.-led Trans-Pacific Partnership free trade agreement appears to be propelling Beijing to ramp up its push. China is not a member country of the TPP.

     Back in 2000, Beijing sought to boost the ratio of domestic chip production to 50%, only to see the project peter out. "It is an entirely different level of difficulty compared with liquid crystal display panels, which you can make if you buy the necessary equipment," said an official of one Japanese chip production equipment maker.

     "When I look at developments in the last couple of months, China appears determined to dominate the global semiconductor industry," said Satoru Oyama, senior principal analyst at IHS Technology.

     China has also made a surprise move to prod realignment of the global semiconductor industry. Earlier this year, Tsinghua Unigroup, China's state-owned chip-design company based in Beijing, made a bid to acquire major U.S. chipmaker Micron Technology for a total of $23 billion.

     Indeed, this year has seen a series of large merger and acquisition deals in the industry. In June, Intel announced that it had acquired U.S. chipmaker Altera, followed by Netherlands-based NXP Semiconductors' acquisition of U.S. manufacturer Freescale Semiconductor in July. U.S. maker Western Digital said it would purchase U.S. rival SanDisk. All these deals are worth over $16.5 billion.

Academic roots

Tsinghua Unigroup started as an investment company, established by China's prestigious Tsinghua University in 1988, but turned into a chipmaker after its acquisition of a domestic chipmaker in 2013. Tsinghua Unigroup's acquisition bid was surprising, given that Micron Technology's sales are about 10 times those of the Chinese maker.

     When prospects for the Micron acquisition were becoming bleak, Tsinghua Unigroup announced on Sept. 30 plans to take a 15% stake in U.S. hard-disk-drive equipment maker Western Digital. Then, the U.S. chipmaker announced on Oct. 21 that it would buy SanDisk, which is in partnership with Toshiba.

     In the midst of all these moves, chipmakers globally are raising the alarm about China's memory chip plant project. "The basis for competition is so different," said an executive of a Taiwanese chipmaker.

     High technical hurdles have long prevented China from successfully promoting the growth of its domestic chip industry. In the meantime, chipmakers from Japan, the U.S., South Korea and Taiwan have been racing to shrink the line width of integrated circuits, as observed by the so-called Moore's law -- the observation by Intel co-founder Gordon Moore that the density of integrated circuits doubles every two years.

     Yet, chipmakers are nearing the limits of how far they can shrink circuits, which is in turn slowing the pace of technological advances. China is now making state-led efforts to narrow the technological gap with rival foreign makers.

     It remains to be seen whether Chinese chipmakers will be able to catch up with their Japanese, U.S. and South Korean counterparts. But one thing is abundantly clear: global chipmakers are increasingly facing a serious challenge from China's well-funded semiconductor industry.  

(Nikkei)

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