October 31, 2020

China unveils policies to boost chipmakers as tensions with U.S. rise


Integrated circuits on a circuit board. The semiconductor industry has been in focus during the U.S.-China trade war.

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China has unveiled a slew of policies to help boost its domestic semiconductor industry as tensions with the U.S. continue to rise, but analysts have cast doubt over whether they will have a major impact. 

A large part of the incentives from China’s State Council focus on tax relief. For example, a manufacturer that has been in operation for more than 15 years and that makes so called 28 nanometer or more advanced chips, will be exempt from corporate income tax for up to 10 years. 

For chip manufacturers, the preferential treatment period starts from the first profit-making year. 

But it’s not just the actual manufacturing side of the industry getting tax relief. Other players working in areas from chip design and software, areas where the U.S. and Europe have been traditionally very strong, also received tax incentives.

Beijing’s new policies also focus on funding and encourages firms to list on China’s technology-focused stock exchanges such as the Shanghai Science and Technology Innovation Board, often dubbed the STAR Market. 

Under the so-called “Made in China 2025” industrial plan, the country aims to produce 40% of the semiconductors it uses by 2020 and 70% by 2025. It’s unclear what that figure is at currently. But it’s a key focus for the government and one that has been ramped up in the past 18 months as tensions between China and the U.S. have escalated

“I think this new cold technology war is exactly why China is scaling the technology curve and aggressively developing the mainland technology for threat of being cut off and cut adrift by aggressive U.S. policies,” Neil Campling, head of technology, media and telecoms research at Mirabaud Securities, told CNBC by email. 

Semiconductor boost? 

Analysts have cast doubt that the latest announcement could give a meaningful boost to the semiconductor industry in the world’s second-largest economy. 

“The State Council’s announcement focuses mainly on tax breaks, which are unlikely to supercharge China’s semiconductor development,” Dan Wang, technology analyst at Gavekal Dragonomics, a Beijing-based research firm, told CNBC. “However it signals that the central government has strong political backing for the sector.”

Stimulus for the chip industry in China is not new. In 2014, Beijing set up a multibillion dollar national fund to invest in chipmakers and last year created another one. But China still remains far behind the U.S. and other countries like Taiwan and South Korea.

“Beijing has been pouring money into portions of the semiconductor industry since the 2014 establishment of the National IC (integrated circuit) Investment Fund, with so far only incremental success. That is because the sector is highly globalized, competitive, and market driven, and companies need more than cash to compete,” Paul Triolo, head of the geo-technology practice at Eurasia Group, told CNBC.

“The preferential treatment outline in the new policies will help in some areas, but in the short-term will have only marginal impact of the ability of Chinese semiconductor firms to move up the value chain and become more competitive globally.”

Sanctions 

The United States’ latest sanctions on Huawei has exposed China’s reliance on external chipmakers. Washington’s latest rule requires foreign manufacturers using U.S. chipmaking equipment to get a license before being able to sell semiconductors to Huawei. 

Huawei relies on Taiwan’s TSMC to manufacture so-called 7-nanometer chips for its smartphones. TSMC will be affected by the latest U.S. sanctions. These are some of the most advanced semiconductors and there is no Chinese player that can produce them at the scale Huawei needs

Even China’s largest chipmaker SMIC, which carried out a 46.28 billion yuan ($6.64 billion) share sale in Shanghai last month, will not be able to meet Huawei’s demands.

The semiconductor supply chain is quite complex. While Huawei for example designs its own chips, it needs TSMC to actually make them. And the manufacturing process is made up of various very complex pieces of equipment made by very few players.

For example, Dutch firm ASML makes a machine that uses so-called extreme ultraviolet (EUV) and is required to make the most advanced chips such as those manufactured by TSMC and Samsung. But earlier this year, Reuters reported that the U.S. pressured the Netherlands government to stop the sale of an ASML machine to SMIC. That shipment has not made it to China.

An ASML spokesperson told CNBC that the company is waiting for an export license from the Dutch government in order to ship its machinery to China.

“The Dutch Ministry of Foreign Affairs and ASML are in talks about the export license. No further details will be provided,” the spokeserson said, adding that the company has “never confirmed the name of the customer and will not do so.”

Such actions could hold China back from catching up with the U.S. for now. 

“Here access to cutting edge tools that remain under the control of the US government because they contain US-origin IP (intellectual property) will be the limiting factor for China,” Triolo said. “No amount of government investment can overcome restrictions on tools like extreme ultraviolet lithography, for example, which is currently being denied for China’s leading foundry SMIC.”



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