China Races to Develop Chips to Beat Trade War
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The Huawei ban is testing China’s capacity to develop its own semiconductors fast enough to keep pace with the escalating trade war.
By Yuan Yang, Nian Liu and Sue-Lin Wong
China is stepping up efforts to design and manufacture semiconductors itself rather than buy from the U.S., amid fears that sanctions might cripple its high-tech industry.
U.S. restrictions last year on exports to telecoms equipment maker ZTE, and this month to its bigger rival Huawei, have sharpened Beijing’s focus on semiconductor self-sufficiency. This will only become more urgent if Washington, as feared, places other leading Chinese technology groups including Hikvision, Dahua, Megvii, iFlytek and Meiya Pico on its blacklist.
China’s ministry of finance last week announced tax breaks “to support the development of integrated circuit design and the software industry,” canceling corporate taxes for some companies for two years.
Yet while some U.S. chips could be substituted by Chinese equivalents in the next few years, Beijing recognizes that self-sufficiency is a long way off. Last year, the Ministry of Industry and Information Technology said in a report that China relies on imports for more than 95 percent of the high-end chips used in computer processors, for more than 70 percent of those in smart devices and for the majority of its memory chips.
“Now the U.S. has made a full-on strike on Huawei with no concrete evidence … the chip industry has fully realized the importance [of self-sufficiency],” says Gu Wenjun, chief analyst at Shanghai-based semiconductor research company ICWise. But, Gu adds: “I think it will take another 30 to 40 years for China to be self-sufficient in the majority of key areas,” including software for chip design and chip fabrication.
They basically have to start the chip design and architecture from the ground up.
Jane Manchun Wong, smartphone security researcher
The threat of U.S. sanctions is galvanizing some Chinese companies to turn to domestic suppliers, says Wan Gang, chairman of the China Association for Science and Technology. “It seems like external pressure is turning us into a self-driven growth engine,” Wan says.
Producers of chips say Beijing’s drive for self-sufficiency has meant supporting “national champions” in the sector. “Making a profit is not the most important thing for us; the key thing is to develop our own technology and be ‘autonomous and controllable,’” says Wang Chao of UniCloud, a subsidiary of state-backed chipmaker Tsinghua Unigroup, in a reference to the Chinese government’s slogan for self-sufficiency in technology.
But while Wang estimates that Tsinghua Unigroup could catch up to the U.S. in making the 7-nanometer chips necessary for 5G devices in the next year and a half, he adds: “Maybe by that time the U.S. will have 5-nanometer chips and we will still be far behind.”
Particularly damaging for Huawei is its loss of access to the designs of U.K.-based ARM, which form the core architecture of its smartphone processors. Android, the operating system used by Huawei, said it only officially supported ARM and Intel’s architectures — both of which Huawei would lose access to under the U.S. blacklist.
“They basically have to start the chip design and architecture from the ground up,” says Jane Manchun Wong, an independent smartphone security researcher based in Hong Kong. “It might take several years if they haven’t started yet.”
In the near term, China’s big tech companies would resort to stockpiling of chips or buying through intermediaries, traders at a fair for semiconductor suppliers in the country’s electronics capital of Shenzhen said in May.
“Our customers include Dahua and Hikvision. If they get blacklisted, they will just go through agents like us,” said David Li, an operations manager at a leading Chinese distributor of electronics products. Some of Li’s big clients “are stockpiling chips in case of sanctions,” he said, adding that around 50 percent of his company’s semiconductors come from the U.S. Huawei has stockpiled nearly six months of smartphone inventory and nine to 12 months of 5G base station inventory, according to Hong Kong-based capital markets and investment group CLSA.
In contrast, the surveillance camera market, which includes Hikvision and Dahua, “has had some inventory problems over the past two to three quarters, with growth slowing,” says Sebastian Hou, a semiconductor analyst at CLSA. “It is unlikely there has been much inventory prebuilt into the market.”
Many of Shenzhen’s semiconductor suppliers have offices at Huaqiangbei, the world’s largest electronics market in Shenzhen. Ever since U.S. President Donald Trump began slapping tariffs on Chinese products, the suppliers of Huaqiangbei say they have been meeting regularly to try to preempt Washington’s next move.
Several traders there said Chinese technology companies, if blacklisted from buying U.S. semiconductors, faced two options: use substandard Chinese semiconductors or surreptitiously source through other channels, including companies that had not been blacklisted or third-party countries. But they added this was a fraught strategy.
“The U.S. has so many spies, if you indirectly sell to Huawei through other channels, the U.S. will find out for sure,” says Alan Yang, a sales director at Shenzhen Wonderful Technology, an agent of ST, Texas Instruments and Analog Devices.
Whatever the outcome of the trade war, some believe the tensions will help motivate China’s tech sector to speed up its development of semiconductors.
“The trade war is good for both the U.S. and China,” says Mike Wong, vice president of China sales and marketing at Semtech. “The U.S. gets to protect its intellectual property and China is forced to further develop its semiconductor industry.”
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