Chip manufacturing: China looks to out manoeuvre US with $47.5 bn war chest

chip manufacturing
Amid US sanctions, China is aggressively investing in education and partnerships to create homegrown chip manufacturing capacity.

Even though Western nations have imposed sanctions on China to halt its progress in the lucrative chip manufacturing business, this has not deterred the Asian giant from pursuing its ambitious goals of achieving self-reliance in advanced chip technology. Beijing is doubling down on its plan to dominate future technologies and has established the largest-ever semiconductor state investment fund worth $47.5 billion. This comes amid sweeping restrictions by the United States which has banned the export of American chips and chip technology.

Six of China’s largest state-run banks including ICBC and China Construction Bank have come forward to fund the project, underlining President Xi Jinping’s ambition to make China a tech superpower. China has an overarching plan called “Made in China 2025,” under which the country has set a roadmap to achieve new heights in a range of industries including artificial intelligence (AI), 5G wireless, and quantum computing.

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China and the global chip manufacturing war

Chips and semiconductors have become crucial for the technology industry, especially with advancements in AI. During the pandemic, disruptions in global supply chains and subsequent chip shortages turned into a geopolitical chess game. The tech rivalry between China and the US has become one of the most pressing issues in global politics today, with tensions only escalating.

Currently, Western nations lead in technology due to cutting-edge chip-making equipment and expertise. Santa Clara-headquartered Nvidia Corp is at the core of the world’s most important technology and controls 80% of the market for a particular kind of chip called a data-centre accelerator. With the US imposing sweeping restrictions, China faces a daunting challenge as refining its own technology becomes difficult in the face of export bans. Additionally, the intricate supply chains that support global chip production leave China vulnerable to disruptions.

China looks to catch up

China cannot be entirely written off by Western nations, as the country is endowed with vast resources. Besides pouring billions into domestic research and development to bridge the technological gap, China’s universities and private companies are also supporting the government’s vision by fuelling these investments. Moreover, China has never backed down from a challenge easily.

In addition to financial investments, China is heavily investing in human capital to support its semiconductor industry. The government is funding educational programmes and research initiatives at leading universities to cultivate a new generation of engineers and scientists specialising in chip technology. This focus on developing domestic talent is crucial for China’s long-term goal of becoming a leader in semiconductor innovation and reducing its reliance on foreign expertise.

China has been actively seeking international collaborations and acquisitions to enhance its semiconductor capabilities. By forming partnerships with foreign companies and acquiring stakes in overseas firms, China is gaining access to advanced technologies and expertise. These international endeavours are part of China’s strategy to accelerate its progress in the semiconductor industry and mitigate the impact of Western sanctions.

China has been strategically managing its vast resources to ensure a steady supply of raw materials essential for chip manufacturing. The country holds significant reserves of rare earth elements, which are critical for producing semiconductors. By leveraging these resources, China aims to secure a dominant position in the global supply chain, reducing its dependency on foreign suppliers. This strategic resource management is part of Beijing’s broader plan to achieve technological self-reliance and counteract Western sanctions.

Despite Western restrictions, China’s Huawei shocked industry experts by introducing a new smartphone powered by a 7-nanometer processor, raising questions about how the company managed to develop such technology despite the US ban. Furthermore, some Western countries depend on Chinese companies.

With its massive investments, China looks to bring its semiconductor industry up to international standards by 2030. A significant portion of the fund has been earmarked for chip manufacturing, design, equipment, and materials, according to the ministry of industry and information technology when launching the first phase in 2014.

Roadblocks ahead

China’s ‘Big Fund’ has been mired in several corruption scandals in recent years. The country’s anti-graft agency has probed top figures in state-owned chip companies, including Lu Jun, former CEO of Sino IC Capital and the manager of the Big Fund, who was indicted on bribery charges in March.

Aside these scandals, the US unveiled a sweeping set of export controls that ban Chinese companies from buying advanced chips and chip-making equipment without a licence. The Biden administration also compelled its allies, including the Netherlands and Japan, to enact their own restrictions. China needs to find a way to bolster its domestic semiconductor industry, as major manufacturers like SMIC remain largely dependent on foreign chip-making equipment, such as those from Dutch supplier ASML.

However, there is another side to the story. A previous article by Policy Circle highlighted that while China faces challenges, it is only about two years behind the United States in developing its own technology. Moreover, Chinese tech giants like Huawei and SMIC remain unfazed by the restrictions and are proactively ramping up efforts to develop their own AI chips. This will be a critical step towards achieving technological self-reliance. Analysts also believe that Washington’s attempt to stifle China’s chip industry might have unintended consequences, such as pushing Chinese companies to become more self-reliant by seeking domestic alternatives.

The trend is already evident. Faced with US restrictions on Nvidia’s advanced chips, Chinese tech giants like Alibaba are reportedly exploring Huawei as a potential supplier of AI chips. In retaliation to the chip ban by Western nations, Beijing also imposed export controls on two strategic raw materials critical to the global chip-making industry. Beijing is not an easy contender, something that the West will be reminded of repeatedly.