Will government incentives make or break China’s semiconductor industry?

Business & Technology

Faced with U.S. sanctions against Chinese tech firms, the Chinese government is trying to incentivize companies and engineers to go warp speed to develop the domestic chipmaking industry. But it’s far from certain that the program will succeed.

Make chips, don’t waste money, comrades — NDRC spokeswoman Mèng Wěi 孟玮 at a press conference on October 20.

China’s central government is hoping major tax incentives and state funding will encourage the expansion of its domestic semiconductor industry, amid increasing U.S. sanctions that are cutting China off from overseas chipmaking technology. But local governments, many of which are eager to capitalize on subsidies yet ill prepared for the subsequent responsibilities, could waste the central government’s largesse.

Beijing recently introduced tax breaks that will give established integrated circuit projects up to 10 years of corporate income tax exemption, provided they develop 28-nanometer or more advanced chips. Enterprises that produce chips between 28nm and 65nm would receive tax exemption for five years, on top of a 50% discount on the corporate rate for the following five years.

Beijing pledges $1.4 trillion for critical technologies

By throwing state support and investment behind China’s homegrown semiconductor industry, Beijing hopes the country can accelerate the development of its own chipmaking technology and become self-sufficient from overseas semiconductor suppliers. A draft of China’s 14th Five-Year Plan, which outlines the country’s social and economic initiatives for the next half-decade, pledges an estimated $1.4 trillion to the development of critical technologies through 2025. Semiconductors are sure to play a vital role in these efforts, as they are the tiny electronic devices that process data and provide the base for all kinds of state-of-the-art “smart” technology, from smartphones to vehicles to household appliances. China’s ambitious goal is to produce 70% of its chip needs domestically by 2025; currently, only 16% of the country’s chips come from homegrown companies.

Brewing tech tensions between Beijing and Washington are driving much of this urgency, as the Trump administration is increasingly cutting China off from important technology it needs to further its technology ambitions. In October, the U.S. announced new export restrictions that prevent American companies from supplying materials to China’s most technologically advanced chipmaker, Semiconductor Manufacturing International Corporation (SMIC). A letter from the Department of Commerce sent in September stated that American suppliers now must apply for licenses in order to sell certain technologies to SMIC.

The letter stated that a department review had determined that technology sold to SMIC “may pose an unacceptable risk of diversion to a military end use in the People’s Republic of China.”

SMIC’s chip technology lags a few years behind semiconductor powerhouses such as Samsung and Taiwan Semiconductor Manufacturing Company (TSMC), which are producing leading-edge 7nm process node technology. SMIC had launched small-scale development of 14nm chips, but those were already two or three generations behind the industry leaders, and were only possible with the support of foreign chipmaking supplies. (Meanwhile, TSMC recently announced it is developing a research-and-development center to begin producing 2nm chips.) Blocked from U.S. technology, the competitiveness of China’s chipmaking industry may fall behind even further.

Blindly rushing into projects that go nowhere

But China’s efforts to grow a robust domestic semiconductor industry are off to a rocky start, and the country’s rush to achieve self-sufficiency could lead to hiccups along the way. A partially complete semiconductor plant in Wuhan that was one of the most high-profile in China’s semiconductor push has abruptly halted construction over shortage of funds — and appears to have no plans to begin production. The company, Wuhan Hongxin Semiconductor Manufacturing (HSMC), is the latest in a string of semiconductor investments to end in failure due to broken fund chains, haphazard qualification checks on investors, and lack of preparedness by the local government. HSMC was established in 2017, but has produced almost no output.

The central government is aware that local governments plunging into projects they do not understand or cannot undertake could cause the country’s semiconductor push to stall. At a press conference (in Chinese) held by the National Development and Reform Commission (NDRC) on October 20, spokeswoman Mèng Wěi 孟玮 acknowledged the current chaos (SupChina’s translation):

We have also noticed that heady enthusiasm for investment in the integrated circuit industry in China continues to rise. Some “three noes” companies — no experience, no technology, and no talent — have joined the industry. [The people involved] don’t understand the laws and regulations, they blindly begin projects, they make the same low-level mistakes. Some projects have even just come to a standstill and some factory buildings are vacant, resulting in waste of resources.

Meng did not call out any specific factories or municipalities by name. She said the NDRC had “strengthened top-level design” and “paid close attention to industrial planning,” and would continue to do this to bring “order” back to Chinese chipmaking.  

Don’t count Chinese chips out just yet

In the meantime, SMIC is reportedly making strides in its quest to develop more advanced chips. Chinese chip designer Innosilicon announced it has successfully taped out its first chip based on SMIC’s N+1 process technology. The breakthrough could mean China may soon be in the early stages of producing an equivalent to the advanced 7nm process node, although it remains to be seen when the chips could begin mass production.

SMIC is the latest high-profile Chinese company to become a target of the Trump administration amid escalating trade conflict between the two countries. President Trump previously placed sanctions, or threatened to do so, on multiple Chinese tech companies, including the video-sharing app TikTok, messaging app WeChat, and electronics company Huawei.

The Chinese chipmaking industry undoubtedly faces some serious hurdles. But while the road to semiconductor self-reliance may be a tough one, multiple China-based tech companies have become forces to be reckoned with in recent years. If the past is any indication, it’s not inconceivable that the country could soon innovate its own path to chipmaking independence.