China’s $40 Billion Chip Ambition: A Challenge to the US and the World

China is determined to become a global leader in the semiconductor industry, the core technology behind the modern digital economy. To achieve this goal, China is launching a new state-backed investment fund that aims to raise about $40 billion for its chip sector, according to Reuters1. This fund, the third and largest of its kind, will focus on acquiring equipment and supporting research and development for chip making. China hopes to reduce its dependence on foreign technology and counter the US-led efforts to restrict its access to advanced chips.

The semiconductor industry is vital for the development of various fields, such as artificial intelligence, 5G, cloud computing, and military applications. However, China lags behind the US and other countries in terms of chip design and manufacturing. China imports more than 80% of its chips from abroad, mainly from Taiwan, South Korea, Japan, and the US2. This makes China vulnerable to supply disruptions and sanctions imposed by the US government.

The US has been tightening its export controls on chips and related equipment to China since 2019, citing national security concerns. The US has also pressured its allies to follow suit and limit their cooperation with Chinese chip firms. For example, the US has banned Huawei, one of China’s leading technology companies, from using American-made chips and software in its products. The US has also blocked SMIC, China’s largest chip maker, from obtaining advanced equipment and materials from American suppliers3.

These measures have severely hampered China’s ability to produce high-end chips that can compete with those made by Intel, TSMC, Samsung, and other global giants. According to Gerald Yin, the CEO of AMEC, a Chinese chip equipment maker, China’s microchips could fall “at least five generations behind” their US rivals due to the US export controls4.

To overcome this challenge, China has been investing heavily in its domestic chip industry for years. The Chinese government has established several state-backed funds to support chip companies and projects. The first fund, launched in 2014, raised $18.9 billion and invested in more than 70 chip-related enterprises5. The second fund, launched in 2019, raised $27.4 billion and focused on memory chips and integrated circuits.

The new fund, which is expected to be launched in the next few months, will be the largest and most ambitious one yet. According to Reuters1, the new fund was approved by Chinese authorities in recent months, and the finance ministry is planning to contribute 60 billion yuan ($8.2 billion). The fund will also include other state-owned entities and private investors as shareholders. The fund will target key areas such as chip design, manufacturing, testing, packaging, and equipment.

The new fund will also seek to boost China’s innovation capabilities in the chip industry. China has been relying on foreign technology and intellectual property for its chip development. However, this dependence has become a bottleneck for China’s progress as the US and other countries have restricted their technology transfers to China. Therefore, China needs to develop its own core technologies and patents in the chip field.

One of the main objectives of the new fund is to support the development of a domestic semiconductor manufacturing process that can rival or surpass the current industry standard of 7 nanometers (nm). The smaller the nm size, the more powerful and efficient the chips are. Currently, only TSMC and Samsung can mass-produce 7nm chips, while Intel is still struggling with its 10nm process. SMIC, China’s leading chip maker, can only produce 14nm chips at best.

The new fund will also support other emerging technologies in the chip industry, such as extreme ultraviolet (EUV) lithography, which is essential for making sub-10nm chips; three-dimensional (3D) NAND flash memory, which can store more data than conventional memory chips; and gallium nitride (GaN) power devices, which can offer higher efficiency and performance than silicon-based devices.

The new fund will face many challenges and uncertainties in its quest to transform China’s chip industry. First of all, it will have to compete with other countries that are also investing heavily in their own chip sectors. For example, the US passed the CHIPS Act in August 2022 to provide more than $52 billion to support domestic chip manufacturing and research. The European Union also approved a $47.5 billion plan in July 2023 to boost its chip production capacity and innovation.

Secondly, it will have to deal with the potential backlash from the US and other countries that may view China’s chip ambitions as a threat to their national security and economic interests. The US may impose more sanctions or restrictions on China’s chip activities, or even launch a trade war or a cyberattack against China’s chip facilities. The US may also try to persuade its allies and partners to limit their cooperation with China’s chip firms or join its efforts to contain China’s rise in the chip industry.

Thirdly, it will have to overcome the technical and managerial difficulties that have plagued China’s chip industry for years. China has been struggling with issues such as low quality, high costs, poor efficiency, lack of talent, and corruption in its chip sector. Many of China’s chip projects have failed to deliver on their promises or have been mired in scandals and lawsuits. China will need to improve its governance, regulation, and supervision of its chip industry to ensure its transparency, accountability, and sustainability.

In conclusion, China’s new $40 billion chip fund is a bold and ambitious move to boost its chip industry and challenge the US and the world. China hopes to achieve self-reliance and leadership in the core technology of the digital economy. However, China will face many obstacles and risks in its pursuit of this goal. China will need to balance its interests and relations with other countries, as well as improve its own capabilities and performance in the chip field. The outcome of China’s chip endeavor will have significant implications for the global balance of power and the future of innovation.

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