With the growth of semiconductors, which can be said to be the heart of various electronic devices that we use, the world is interested in developing semiconductors and is competing for its rapid growth. In the world, China also has started ‘The rise of Semiconductor’ policy based on native investment for the development of its semiconductor industry. However, ‘The rise of China’s Semiconductor’ policy seems to be a lot of difficulties. Moreover, experts now predict that their policy may have reached its limit. Let's find out about the Chinese semiconductor industry (The rise of semiconductor) policy and further look at the its influence on other countries.
What is ‘The rise of China’s Semiconductor’ policy?
Semiconductor is a material that functions as both conductor and insulator, so that electricity flows only at the special conditions. Using the characteristics of semiconductors, we can adjust the current as needed. The major application areas of semiconductors are displays of various electronic devices, memory devices such as DRAM, image sensors, and digital signals among others. Moreover, most of the parts in smartphones that we possess are composed of semiconductors, and consequently semiconductors are necessary for the IT industry. In particular, semiconductors play a key role in IOT (Internet of Things), AI (Artificial Intelligence), VR (Virtual Reality), and machine learning in the fourth industry revolution. It is also linked to 5G, the field of interest in the fourth industry, because 5G requires a high level semiconductor technology. Therefore, the world is interested in the semiconductor industry and is striving to develop semiconductors through strong investment. Among them, China is also very interested in the semiconductor industry and announced its 'Made in China 2025 Strategy' in 2015 and informed the world of 'The rise of Semiconductor' as a semiconductor growth policy. The dictionary definition of 'The rise' is 'stand up' and figuratively means ‘have one’s name up for one’s humble status’. China announced that it would invest up to 1 trillion yuan (about 170 trillion won) by 2025 for the ‘localization of semiconductors.’ In a domestic case, Samsung Electronics has invested about 100 trillion won in the semiconductor industry in 10 years. So, when China's semiconductor industry is compared to Samsung Electronics, it is a big investment. Moreover, China has accelerated semiconductor growth by announcing that they would raise China's semiconductor self-sufficiency rate from 14 percent in 2015 to 70 percent in 2025. As of 2020, however, the world has had a more critical views of China's semiconductor policy, saying that China's semiconductor development industry is at a standstill.
Representative semiconductor companies in China include Tsinghua Unigroup, SMIC, HSMC, and HiSilicon belonging to Huawei. Tsinghua Unigroup Company is China's largest semiconductor design company at the center on ‘the rise of China's semiconductor’ policy. SMIC and HSMC are semiconductor foundry companies. A semiconductor foundry company is a consignment manufacturer that actually produces semiconductors which are designed by semiconductor design companies. According to Samsung Securities portfolio strategy team's global semiconductor sales measurement in June 2020, China ranked sixth after the US (47%), Korea (19%), Japan and Europe (10% each), and Taiwan (6%), at China (5%), but China’s share (5%) of the world's semiconductor market is insignificant. In addition, the Chinese semiconductor market grew from 13.4 billion dollars in 2015 to 19.5 billion dollar in 2019, but the growth rate is a little slow. If the above figure is calculated as the self-sufficiency rate of semiconductors in China, it shows a slight increase from 14.6% in 2015 to 15.6% in 2019. Tsinghua Unigroup, a promising Chinese semiconductor company, even failed to repay its 1.3 billion yuan (about 219 billion won) scale of a company bond on October 17, 2020 and acknowledged default (The state of being unable to pay interest or repay principal and interest in the bank finance). In other words, China's semiconductor industry is not running smoothly.
Although China is entirely supportive and increasing its investment scale of the semiconductor sector to grow the semiconductor industry, the growth of Chinese semiconductor companies seems to be at a standstill. Let's find out why China's semiconductor companies are having a hard time with absolute growth.
Limits of The Rise of China’s Semiconductor policy
With tight a trade war between the US and China, the US began to sanction China's semiconductor industry. US introduced sanctions about Huawei, a Chinese semiconductor company, and recently started imposing SMIC sanctions. Huawei grew with investment from the Chinese government and it was suspected that there was a close relationship between China political and business circles, revealing that they used the main media of China at the early stage of their business expansion. In May 2019, the US blacklisted Huawei, deciding not to use Huawei's equipment, using the reason of risk of security guarantees, based on suspicions that the Chinese government was the actual owner of Huawei. At the same time, the US government urged not only its Five Eyes allies (U.K., Canada, Australia, New Zealand) but also to the European Union (EU), Japan, and South Kore to not use Huawei's equipment. Amid the increasingly worsening US and China relations after the first sanctions about Huawei, the US government imposed second additional sanctions on Huawei concerning semiconductor component on May 15, 2020. In the first Huawei sanctions, semiconductor companies of third countries were free to import and exports with Huawei if they used American technology at least 25 percent in product development. According to the second Huawei sanctions announced by the US Department of Commerce, however, semiconductor companies of third countries must obtain permission from the US government to sell their products to Huawei even if they partially use US technology. Because of this, ‘The Rise of China's Semiconductor’ policy is starting to falter as the US imposed sanctions on Huawei, a semiconductor company in China. In addition, the U.S. has begun imposing SMIC sanctions on China's No. 1 foundry company after Huawei sanctions. According to Bloomberg News on October 4, 2020, SMIC said, "Under the US export control ordinance, some suppliers will need prior permission from the US Department of Commerce to export equipment to SMIC. Such a move is likely to have a significant negative impact on production and operation.” More than half of SMIC's equipment used in semiconductor production processes is imported from US companies. So it is expected that the development of semiconductors in China will be delayed once again due to the U.S. government's export regulations.
In November 2020, HSMC, which was at the center of China's semiconductor industry, deceived the Chinese government and received subsidies, but stopped the factory construction project because of the financial difficulties due to a lack of technology. HSMC secured investment of 128 billion yuan (about 22.26 trillion won) scale when they were established in November 2017, and had a goal of success in the 7nm primal semiconductor process in China. In semiconductor manufacturing, 7nm means the degree of detail of manufacturing technology, and lower numbers lead to lower power consumption and lower heat generation, which is connected to better performance. As HSMC, which had been highly anticipated, suddenly faced financial difficulties, the views that “it is likely to be a scheme for swindle aimed at government subsidies about semiconductors" is gaining weight in China. Regarding the HSMC crisis, some people in China also say, "We should reflect on our blindness in investment about “The Raise of China’s Semiconductors." WangYi media of China reported, "China's investment in semiconductor companies from January to July 2020 was 60 billion yuan (about 10.2 trillion won), which is double its investment in 2019. More and more unqualified companies are closing their businesses after only securing investment, and more and more companies are abusing this system.” In this way, fraudulent companies misusing China's unsystematic semiconductor support policy are being founded. And with many companies going out of business, China's semiconductor industry is looking at its limits.
There are countries that are positively affected by the sanctions and limitations on China's semiconductor sector. On the other hand, we can see countries that are helping China's semiconductor business. Let's look at China's semiconductor industry and the various relations with other countries.
How the World is affected by the Rise of China’s Semiconductor
First, let's look at how India is being affected to ‘The Raise of China’s Semiconductor’ policy. Due to the limitations of China's semiconductor industry, it is predicted that Apple, a U.S. electronics company, will move their semiconductor company in China to India. This will have a positive impact on the Indian semiconductor industry, and there will be significant growth and semiconductor development. According to Reuters Report on July 11, 2020, Apple strongly demands that Foxconn, their production business, to move part of their iPhone making factory from China to India. Foxconn says that we will spend 1 billion dollars (about 1.2 trillion won) to expand the plant that is making Apple’s iPhone in southern India. Former Governor Chennai of Tamil Nadu, India, posts on SNS, "We expect to create about 10,000 jobs if the plant is expanded and operates at 100 percent." Apple plans to extensively expand their Indian iPhone plant over the next five years with other consignment producing companies to significantly increase the production of devices and component of the Indian iPhone. In addition, they will move one-fifth of the Chinese iPhone production plant to the India plant during the same period.
Second, there is Taiwan. Taiwan's companies related semiconductor have stopped exporting semiconductor components to certain Chinese companies since September 2020. TSMC (Taiwan Semiconductor Manufacturing Company), the world's largest semiconductor foundry company, has not received orders for semiconductor components in China since September 15, 2020, saying that Taiwan want to join with the US sanctions against Huawei. With Taiwan's participation, Tesla of US and TSMC of Taiwan will jointly develop next generation automatic driving platforms. Tesla is planning to develop autonomous electric vehicles that include hardware components, and TSMC is expecting to develop system semiconductor fields such as AI chips and memory chips which are the software components of electric vehicles. This is a big event that shows that Taiwan's collaboration direction on the semiconductor/IT is positive, dramatically increasing the competitiveness and the potential development chances of both Tesla and TSMC.
Lastly, unlike India and Taiwan, Japan cooperates with China and is assisting in China's semiconductor growth. In November 2019, Yukio Sakamoto, former CEO of Elpida Memory in Japan, was appointed as chief vice president of Tsinghua Unigroup (a semiconductor design company) in China. Elpida Memory was the only DRAM semiconductor manufacturer in Japan in the 2000s and remained in its golden age among the top three of the world market share, but was acquired to Micron, a US semiconductor company, after going bankrupt in 2012. Tsinghua Unigroup highly values Elpida Memory's DRAM technology and expects to join the rich global network, recruiting veteran of Japanese semiconductors for DRAM production. In an interview with Tokyo Economy report and Sakamoto Chief Vice President, a reporter asked, "Is it okay to cooperate with China during the trade conflict of US and China?" Sakamoto replied, "The trade volume between China and Japan is much larger than the volume of the US and Japan, so I would like to do something if there is anything that can cooperate between Japan and China." The ‘China-Japan DRAM Alliance,’ which was created in this way, divided the development of design in Kawasaki, Japan, by moving the effective production to Chongqing, China. Also, the chief vice president Sakamoto hired about 100 engineers, who are DRAM designers undergoing intensive experience at the Renesas Electronics, a Japanese automotive semiconductor specialty company. Sakamoto predicted that independent DRAM production would be possible within three years at the earliest, five years at the latest, but the current bankruptcy crisis of Tsinghua Unigroup is expected to make fast DRAM production difficult.
Then let's take a look at how ‘The Raise of China’s Semiconductor’ is affecting our country. And let's look at the corresponding countermeasures in this situation.
As the U.S. recently imposed additional export sanctions on China's semiconductor development, the entirety of the Chinese semiconductor industry is in a crisis situation of falling into a slump. Then, China is trying to steal talented semiconductor people from Europe, Taiwan, Australia, and South Korea in order to secure technological prowess. In Korea, domestic companies are recognized worldwide in the semiconductor industry and has become a target of China's talent exploitation because Samsung Electronics, SK Hynix, and others have many talented people. Recently, a job search site in Korea posted a job search notice saying, "We are recruiting D-RAM designers to work in China." China attracts semiconductor related talent from certain Korean major companies, guaranteeing international schools if they come to the China with children, offering preferential conditions such as secured housing and maximum salary. Through qualification requirements include the phrase "preferential treatment is employees who are experienced in the S, H semiconductor departments" and explicitly points out certain companies in Korea (Samsung). Samsung Electronics developed the world's first '3rd generation 10nm 8GB DDR4 DRAM' in March 2019 and started mass production in the second half of this year, and announced that they will enter the mass production of ‘4th generation 10nm products’ in 2021. However, China still needs high quality semiconductor processing technology, so it is interested in the cutting edge semiconductor technology of Samsung and SK Hynix, the world's memory industry leaders, and the talent of domestic companies. In order to prevent the outflow of human and technology resources under The Raise of China's Semiconductor policy, Korea enacted and implemented the ‘Industrial Technology Leakage Prevention Act’, which was revised to impose a prison sentence of more than three years and a fine of up to 1.5 billion won on crimes of overseas leakage. Eom Mi jung, a researcher in the Science and Technology Policy Institute (STEPI), also stressed this problem by saying, "The government should actively manage this situation, by understanding the exact reality of human resources and technology leaks through continuous monitoring and preparing detailed technology security standards."
In addition, the reflective interest of Korean foundry companies is expected to be impacted by the US sanctions on China's SMIC semiconductor industry. Especially since SMIC, a Chinese foundry company, was a ‘potential competitor’ aiming to enter the 7nm process that only Samsung Electronics and Taiwan's TSMC are able to do; the benefit to Samsung electronics and TSMC SMIC's sanctions are forecast to be as great as SMIC's sanctions. There is also a possibility that Qualcomm, which designs semiconductors using SMIC’s components, may request an emergency order to Samsung Electronics. Some analyze that Samsung Electronics can manage to supply American and European companies that used production of SMIC other than Qualcomm. TSMC, the market leader, also has producing ability, but TSMC is currently unable to receive orders due to a large amount of reservation supply, so Samsung Electronics, the second-largest company, will have a reflective benefit. Moreover, some predict that medium-sized foundry companies in Korea will more easily secure customers who are actively targeting the Chinese market. Lee Seung-woo, a researcher at Eugene Investment & Securities, said, "As a result, SMIC sanctions will be a measure that brings a smile to Korean semiconductor companies."
The Raise of China's Semiconductor policy is collapsing amid various problems and limitations. However, it may not collapse easily because China, an advanced country in the world, manages and targets it. Under these circumstances, it is important for us to quickly grasp the flow of the semiconductor industry and establish ways to respond to the reality of the consequences of China's semiconductor policy.
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