China revs up grand chip ambitions to counter US blacklistings

Beijing

IN JUST two decades, China sent people into space, built its own aircraft carrier and developed a stealth fighter jet. Now the world's youngest superpower is setting out to prove its capabilities once more - this time in semiconductors.

At stake is nothing less than the future of the world's No 2 economy. Beijing's blueprint for chip supremacy is enshrined in a five-year economic vision to be unveiled during a summit of top leaders in the capital this week. It's a multi-layered strategy both pragmatic and ambitious in scope, embracing aspirations to replace pivotal US suppliers and fend off Washington, while moulding homegrown champions in emergent technologies.

China wants to build a coterie of technology giants that can stand shoulder-to-shoulder with Intel Corp and Taiwan Semiconductor Manufacturing Co, conferring the same priority on that effort as it accorded to building atomic capability.

The approach entails making do over the next five years or so with aging semiconductors that are adequate for electric cars and even military applications, but can't run advanced smartphones and similar devices. That buys China time to focus on fields like so-called third-generation chip-making in which no country yet dominates and - Beijing hopes - create an array of indigenous giants in areas including machinery, software and new materials.

The ultimate goal is to groom local alternatives to global linchpins like Cadence Inc and Synopsys Inc in design software and Europe's ASML Holding NV in chip-making gear.

"Semiconductors are a crucial sector in the information era that will lead the future of economic development," Science & Technology Minister Wang Zhigang said at a press conference last week. "At the same time, China will strive to achieve self reliance and strengthen our own capabilities."

China's efforts gained urgency because the Biden administration is escalating a battle against what it called "techno-autocracies". That could extend or even expand blacklistings that banned key transactions with corporations from Huawei Technologies Co to ByteDance Ltd and Tencent Holdings Ltd. To a country that imports US$300 billion of chips annually, a worsening global shortage drives home the risk of relying on potentially hostile suppliers for the building blocks of everything from artificial intelligence to sixth-generation networking and autonomous vehicles.

It will take years for local companies to match foreign counterparts in manufacturing and design expertise, during which there's no ready answer to the dominance of Japanese and American names in chip-making equipment. Chinese companies will still only supply 35 per cent of its domestic demand by the end of this decade, IDC analyst Mario Morales estimates.

They will also have to contend with Washington. The United States signalled it intends to go ahead with a Trump administration-proposed rule to secure the technology supply chain next month, a move that gives the Department of Commerce broad authority to prohibit transactions involving "foreign adversaries" like China.

Huawei, the country's largest technology company by revenue, underscores the leverage Washington wields. Once the world's biggest smartphone maker, Huawei was forced to sell its Honor division and run at close to minimum production capacity after it lost access to chips from the likes of TSMC under American regulations.

"It just stimulates the Chinese community to accelerate their internal developments and eventually they may come out even stronger," said Luc Van den hove, president of the Imec research center in Leuven, Belgium, which focuses on innovation in semiconductor technology. "And I think that's certainly a risk of trying to keep the two worlds further apart."

Beijing had set aside at the start of its last five-year plan around one trillion yuan (S$206 billion) for potential investment in semiconductors over five to 10 years, according to McKinsey.

It will now continue to bankroll research and investment in coming years, Mr Wang said last week. That should galvanise the much larger influx of private capital needed to produce genuine breakthroughs.

In the meantime, up-and-comers such as Semiconductor Manufacturing International Corp and Tsinghua Unigroup can help tide the country over a deficit of mobile processors, memory and telecom modules should Washington close off supply routes. BLOOMBERG