From the bottom up, and then from the top down - China leaves it to the development industry to solve the problems encountered in the development of the chip industry. China is studying the development of a new generation of chip technology over the next five years and is expected to invest trillions of dollars to reduce its dependence on U.S. technology.

Last month, the 18th meeting of the National Leading Group for S&T System Reform and Innovation System Construction was held in Beijing to study the preparation of the national S&T innovation plan for the 14th Five-Year Plan. The conference also focused on potential disruptive technologies of integrated circuits for the post-Moore era.

The state’s support for emerging chip technology strategies will also drive a new round of investment opportunities.

China's Ministry of Education has listed semiconductor science and engineering as a key discipline and encourages more universities to establish professional schools dedicated to integrated circuit-related fields. Last week (June 22), the School of New Materials and New Energy of Shenzhen University of Technology and SMIC jointly established the School of Integrated Circuits to cultivate advanced application-oriented technical talents in integrated circuit design and manufacturing.

IT consulting firm Gartner predicts that by 2025, in terms of revenue, Chinese semiconductor manufacturers' share of China's semiconductor market is expected to double from 2020 levels, increasing from 15% to 30%; by 2023, the scale of capital investment in Chinese chip companies will increase by 80% compared with 2020 scale.

However, analysts believe that because the manufacturing of new materials that support the new generation of chip technology requires the support of the entire chip supply chain, as well as the support of advanced equipment and production tools, including photolithography machines, China still faces challenges in moving towards high-end chip manufacturing, and needs to give time to industry and talent development.

Build a self-sufficient ecosystem

China has elevated chip manufacturing technology to a national strategic status to support the realization of the national advanced manufacturing goals in 2030. According to the plan, China’s local chip supply will increase to 40% this year, and will further increase to 70% by 2025.

The American Rhodium Group predicted five years ago that it was very necessary for China to develop its semiconductor chip industry. Rongding said that China is highly dependent on imported chips, especially high-end chips. These chips are used in all aspects of national construction and are risky from a security perspective.

This also means that it is imperative for China to increase investment in technology fields including chips and software. In a complex global business environment, China is building its own technology ecosystem to weaken its dependence on overseas products.

Against the backdrop of restrictions on companies such as Huawei, China is seeking ways to stimulate the development of disruptive new chip technologies, including providing broad incentives to the entire chip industry and leapfrogging from current silicon wafer chips to "third-generation" chips made using new materials.

With China's vigorous promotion of the chip industry, a number of companies with a market value of RMB 100 billion have emerged in the Chinese semiconductor market, such as Semiconductor Manufacturing International Corporation, Weill Corporation, Zhuosheng Microelectronics, Sanan Optoelectronics, Northern Huachuang, Wingtech Technology, China Resources Micro, GigaDevice, and Zhonghuan Technology.

Mao Junfa, vice president of Shanghai Jiao Tong University and academician of the Chinese Academy of Sciences, said at the 2021 World Semiconductor Conference in Nanjing this month that China can maintain its leading position in the chip industry through "heterogeneous integration" or the integration of individually manufactured components. "Heterogeneous integration is the new direction of the industry in the post-Moore's Law era, which provides opportunities for China to overtake in the integrated circuit industry." Mao Junfa said.

According to Mao Junfa, there are currently two main development routes for chips. One is to continue Moore's Law, and the other is to bypass Moore's Law. Today Moore's Law is facing various challenges, and there are many ways to circumvent Moore's Law, and heterogeneous integrated circuits are one of them.

As Moore's Law approaches physical limits, the use of new chip materials and heterogeneous integration methods are seen as the two areas most likely to produce disruptive innovations.

New materials for next-generation chips, namely third-generation chips, include silicon carbide (SiC) and gallium nitride (GaN). But at present, most industry analysts believe that it may take several years for China to achieve self-sufficiency in semiconductors.

Currently, silicon-based wafers still dominate the entire global value chain. In terms of silicon wafer materials, the top three suppliers - Japan's Shin-Etsu Chemical, Japan's SUMCO and Taiwan's Global Wafer - account for about two-thirds of the global silicon material market share.

According to Gartner's report, in terms of chip manufacturing supply chain, Chinese companies' market share in wafer equipment and materials is less than 3% and 5% respectively, which is very technically difficult; in terms of chip design tool EDA software, the market share is less than 1%.

Gartner data also shows that in 2020, Chinese semiconductor manufacturers' global market share was 6.7%, and China's top semiconductor manufacturer Shenzhen HiSilicon Semiconductor Co., Ltd. had a global market share of 1.75%.

However, Gartner emphasized that China plays an important role in the global electronic equipment supply chain. More than 70% of the world's electronic equipment is manufactured in China, and mainland China's semiconductor production capacity accounts for 18% of the world's.

A massive influx of capital

Gartner believes that multiple factors will drive the supply of local semiconductors in China.

The first is promotion at the government level. In October 2019, the National Integrated Circuit Industry Investment Fund Phase II Co., Ltd. was registered and established with a registered capital of 204.15 billion yuan, focusing on investing in semiconductor materials and equipment companies.

SMIC has announced that it will achieve mass production of the 14nm process in the fourth quarter of 2019. But SMIC still has a long way to go to become a globally competitive leader in chip manufacturing.

Industry experts believe that if "domestic" refers to local design, manufacturing and packaging, it has indeed been achieved. However, if it is to be extended to the industrial chain, such as using domestic frameworks and intellectual property modules in design, and using domestic equipment and materials in manufacturing, it will be difficult to achieve it in the short term.

Li Shixuan, an analyst at S&P Global Ratings, told China Business News: "China's chip self-sufficiency rate is still low. Judging from the raw materials, design and process manufacturing of the chip industry chain, raw materials are still controlled by the United States, Germany and Japan; design tool software is mainly dominated by American manufacturers; there is still a gap of about 5 years between mainland China's chip process manufacturing and TSMC, so the development of independent chips has a long way to go."

S&P believes that the Chinese government needs to increase financial and operational support for technology companies in key areas such as chips, including in various forms, such as capital injections, subsidies, tax cuts, accelerated regulatory approvals or simplified procedures.

Gartner believes that the second factor driving the development of China's semiconductor industry is the input of equipment manufacturer buyers. Gartner predicts that by 2025, China's top ten chip buyers will all have in-house chip design capabilities. These buyers include Chinese smartphone manufacturers such as Xiaomi, vivo, OPPO, and Internet giants such as Baidu. These manufacturers develop in-house chips to reduce dependence on global chip suppliers.

The third driving factor comes from the expansion of ecosystems such as 5G, artificial intelligence and the Internet of Things, as well as capital investment in non-chip manufacturing fields. Yin Zhiyao, chairman of semiconductor equipment manufacturer China Microelectronics, told China Business News: "Industrial development requires an agglomeration effect and needs to target the cutting-edge technology of the chip industry and combine high-end design, manufacturing, equipment, and material supply with the application of new technologies such as 5G and AI."

According to data from investment research institution PitchBook, China's total semiconductor investment in 2020 reached US$16.75 billion (approximately 108.3 billion yuan), of which capital investment in non-semiconductor manufacturing exceeded US$10 billion.

Gartner analyst Sheng Linghai told China Business News: "We have seen that a lot of capital from non-chip manufacturing fields is entering the semiconductor field. Although it has pushed up the valuation of chip companies to some extent, we still believe that this is good for improving the technology and production capacity of the entire chip industry."

However, Sheng Linghai said that although a large amount of capital has poured into the semiconductor field in China, the investment is relatively scattered, and the investment received by each company is very limited, making it difficult for investment to have a concentration effect.

Wu Gengyuan, co-founder and CEO of Shencong Intelligent, a joint venture between Spirit and SMIC's SMIC Juyuan, told China Business News: "Domestic chip production capacity is still facing a serious shortage, especially in advanced processes. There are not many projects with mature processes that can be implemented. The main reasons for this situation are that manufacturing investment costs are too high, risk management and control capabilities are weak, localization lacks motivation, and domestic equipment and materials are not verified enough to form an industrial chain and ecosystem."

Wu Gengyuan believes that for the chip industry, manufacturing capabilities must be expanded and improved, and the design threshold should be raised accordingly.

"Materials, equipment and processes are currently the biggest shortcomings. Manufacturing is the locomotive of the development of the entire industry. It can drive deficiencies in the back end of the industrial chain and vigorously promote chip manufacturing in the right direction." Wu Gengyuan said, "But there are too many chip design companies, the threshold is low, and it is impossible to form synergy. On the one hand, this wastes national resources and policy subsidies, and on the other hand, it is difficult to achieve economies of scale."

A professional who once served as an executive at Unisoc Group told China Business News that he is launching a wafer-level high-end packaging and testing project in China, hoping to fill the gaps in the domestic integrated circuit industry chain, strengthen the weak links in wafer-level packaging and testing, and form supporting packaging and testing manufacturing capabilities with domestic high-end chip companies, such as HiSilicon, to support the development of the national integrated circuit industry.

Technology companies, including Huawei, have increased investment in independent chip production in the past two years and believe that the "stuck" situation will gradually ease.

The above-mentioned professionals told China Business News: "There are no shortcuts in chip manufacturing and can only rely on time accumulation. In the past, the pain points in the development of China's integrated circuits were talent and capital, but now with the introduction of more favorable policies from the country, the situation in both aspects is improving."

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