Huawei consumer CEO Richard Yu speaks during the presentation of a Kirin 990 5G chip set at the international electronics and innovation fair IFA in Berlin on Sept. 6, 2019. Tobias Schwartz/AFP via Getty Images
New U.S. restrictions on technology exports are bad news for China’s semiconductor industry. The industry has been struggling for some time, with China’s chip productivity reportedly shrinking for eight straight months in 2022. Meanwhile, a record number of Chinese chip companies are closing, heralding an industry that has dramatically failed to meet expectations.
Data released on Sept. 16 by China’s Bureau of National Statistics showed that China’s output of integrated circuits fell 24.7 percent year-over-year in August, and cumulative chip production decreased by 10.0 percent to 218.1 billion units. That decline runs counter to the country’s trend of continued growth in annual chip production since 2009.
Further, this year saw more Chinese chip companies unable to maintain operations, with 3,470 chip companies closing in the first eight months of 2022. That number compared to 3,420 in 2021 and 1,397 in 2020, according to a Sept. 15 article in the South China Morning Post.
‘Stuck Neck’ Technologies
Chip technology has long been regarded as one of the key high-tech industries that China has had difficulty conquering. In September 2020, state-run newspaper Science and Technology Daily listed 35 “stuck neck” technologies that restrict China’s industrial development. Photolithography for chip-making ranked first on the list, followed by chip technology.
As early as 1999, China launched its “Starlight China Chip Project” to support the semiconductor industry. Over the ensuing decades, it invested tens of billions of dollars in the semiconductor industry.
In recent years, the ruling Communist Chinese Communist party (CCP) doubled down on the “Whole Nation System,” a strategy of mobilizing resources nationwide to accelerate development in priority areas. The “new-type whole nation system” is focused on advancing technological progress, as outlined in a document approved Sept. 6 by the CCP’s Central Comprehensive Deepening Reforms Commission.
The whole nation system has been widely questioned by domestic scholars and insiders, a prime example being Chinese economist Wu Jinglian’s critique at a Tsinghua University public lecture in 2018, in which he sternly warned against developing the chip industry “at all costs,” a strategy he called “dangerous.”
Case in Point: Huawei’s Gloomy Chip Outlook
Troubles at telecommunications giant Huawei, which owns semiconductor company HiSilicon, are symptomatic of the Chinese chip industry’s woes.
The company said on Jan. 1 that it would continue to set out on a “core” journey, but in the first half of this year, shipments of Huawei’s HiSilicon chips plummeted by 81.5 percent year-on-year, according to a report by CINNO Research, a research and consulting company.
Among global smartphone applications processors, HiSilicon has fallen to 0.4 percent market share by shipment. The company is down from 3 percent by revenue in the second quarter of last year, to 1 percent in the second quarter of this year, said Counterpoint Research, a Hong Kong-based industry analysis firm, in a Sept. 21 report.
The chairman of a Japanese tech company, who spoke to The Epoch Times under the pseudonym “Desen,” said HiSilicon, Huawei’s chip design company, does not itself have the ability to produce chips. “In the short term, TSMC [Taiwan Semiconductor Manufacturing Company] won’t produce chips for HiSilicon because of the U.S. sanctions, hence chips that HiSilicon designed cannot be turned into products in a timely manner, and the industry revenue is bound to be affected,” the industry executive said.
On May 16, 2019, the U.S. Commerce Department’s Bureau of Industry and Security (BIS) placed Huawei and 68 of its non-U.S. affiliated companies on its Entity List “in order to further address the continuing threat to U.S. national security and foreign policy interests.” U.S. companies may not supply products to Huawei and these affiliates without obtaining permission from the Department of Commerce.
Further, on May 15, 2020, the U.S. Department of Commerce required that any chips produced using U.S. technology and equipment would need approval by the U.S. before they could be sold to Huawei, a response to what it called “Huawei’s efforts to undermine U.S. export controls.”
As a result, semiconductor manufacturers that relied on equipment from U.S. companies, even those in China–such as Semiconductor Manufacturing International Corporation (SMIC)–stopped producing parts and equipment for Huawei. SMIC was added to the Entity List in December 2020.
In the long run, if HiSilicon cannot maintain and upgrade its chip design software, “its future industry revenue is likely to continue to go down,” Desen said.
An employee makes chips at a Jiejie Semiconductor Company factory in Nantong, in eastern China's Jiangsu province, on March 17, 2021. STR/AFP via Getty Images
Six Reasons for the Tide of Closures
As part of the CCP’s “whole state system,” a huge number of chip companies were established in China. However, many of those start-ups were short-lived and even established companies are struggling.
Desen cites six major reasons for the waning of China’s high-tech industry:
Reason 1: Some chip companies are formed simply to pursue government subsidies. China established its “Big Fund” of $22 billion for chip investments in 2014, followed by a second fund of about $30 billion in 2019. Soon tens of thousands of Chinese companies were registering as semiconductor businesses, even some in completely unrelated sectors such as cement making. It stands to reason that such companies are “bound not to produce any results,” the tech company executive said.
Reason 2: A large number of chip companies were set up in a short time with an inadequate number of employees, resulting in increased hiring costs and frequent personnel changes. This is detrimental to product development and causes operational woes, even if the company’s founding team has a background in relevant chip technology resources.
Reason 3: In order to attract huge investments, newly established chip companies often deliberately exaggerate industry prospects, ignoring technical problems or shortening time estimates for projects.
The chip industry requires continuous research and development over a long period of time, and enormous capital. “The investors may have been accustomed to the short and quick profit model represented by real estate, so when a company does not perform as well as expected, disagreements ... may arise between investors and the company, triggering the withdrawal of investors,” Desen said.
Reason 4: In order to meet investors’ desire for quick profits, chip companies tend to build surface prosperity. If the focus is only on surface appearance, lack of solid talent and trust will “inevitably lead to blindly money-burning and expansion ... Focusing only on the surface performance, no one can quietly focus on product development.”
“In some cases, the company just gives investors [promotional materials] to read and employees show their superiors only PPT [PowerPoint Presentations] without doing any concrete work.“ Obviously this is not conducive to actual chip production. Desen added, “This results in a huge waste of capital, eventually [leading] to a break in the capital chain.”
Reason 5: Chinese companies look for outside talent, but display a lack of trust that is a barrier to success.
The experience of Chiang Shang-Yi, former chief of operations at TSMC, illustrates this. Chiang joined SMIC as vice-chairman in late 2020.
In a March interview (pdf) with Silicon Valley’s Computer History Museum, Chiang said for the first time that joining SMIC was “a mistake” and “one of the foolish things I’ve done.”
Chiang had worked in the semiconductor industry for many years and had a high reputation. However, he said he was not trusted by the Chinese because he is Taiwanese and holds U.S. citizenship as well. When he was hired by SMIC, the company’s co-CEO resigned in protest. Chiang left the company less than a year later.
Reason 6: Even if many companies produce chips, they cannot make profits in the short term because of their initial overestimation of products and inability to control yields and costs. At the same time, they cannot absorb capital in the stock market. The inability to make profits also undermines investor confidence, ultimately dooming them.
The best-known examples are Wuhan Hongxin Semiconductor Manufacturing Corporation and Quanxin Integrated Circuit Manufacturing (Jinan) Company. Chinese officials invested hundreds of millions in the two semiconductor start-ups, but the companies never commercially made a single chip.
New Restrictions Add to Deep-Seated Issues
All in all, while U.S. restrictions continue to hobble the Chinese semiconductor industry, deep-seated problems have plagued the industry for years. The problems can be found in almost every aspect of the industry, due to government-led blind expansion and lack of scrutiny, Desen concluded. The result: a wave of tech closures and hundreds of billions of dollars down the drain.
Kathleen Li has contributed to The Epoch Times since 2009 and focuses on China-related topics. She is an engineer, chartered in civil and structural engineering in Australia.
