Last month it became known that Ding Wen-Wu, the former president of the most important Chinese chip investment fund, is under investigation for corruption. The National Fund for Investment in the Integrated Circuits Industry, known as the “Great Fund”, raised about 50 billion dollars from Chinese government banking entities to invest in chips, as part of China’s push to advance its position in the critical field.
Ding is just one of a number of senior officials in the Chinese chip world who are currently being investigated for corruption. Together with him you can find the Minister of Industry and Information Technology Xiao Yaqing, the most senior official in China who has been under corruption investigation for years, and also the former chairman of the chip company Tsinghua Unigroup, to name just a few of the names.
Corruption investigations are popping up all the time in China, but the fact that a number of senior executives in the industry are becoming suspects suggests that something bigger is going on. It is believed that the investigations express dissatisfaction in the administration with the national progress in the field of chips and that company executives, who do not meet the goal of turning China into a chip power, are paying the price.
The Chinese pursuit of independence at home
China’s start when it comes to chips wasn’t bad at all. China created the first integrated circuit (chip) in 1965, eight years after its invention in the US and long before Taiwan and South Korea, which are currently leading the field. As of 1966, China was six years behind the US in terms of chip technology.
But then came the Cultural Revolution, a decade of cataclysm in which Mao Zedong sent youth companies to expose and punish bourgeois and intellectual elites that had allegedly arisen inside and outside the party. As part of the revolution, the leading chip experts in China were fired from their jobs in research institutes and the country sank into long years of scientific paralysis. When Mao Zedong died in 1976 and the Cultural Revolution officially ended, the gap with the US had grown to ten years.
Since then, China has been trying to narrow the gap with the West using all the tools at its disposal. China has tried to buy foreign production lines, demand “knowledge transfer” from foreign companies in exchange for access to the domestic market and distribute tax breaks, subsidies and investments to local enterprises. All this did not really help because the production lines bought were always outdated and the benefits did not always go to the right places. While China has become a powerhouse in assembling electronic products that use chips (like iPhones) and companies like Huawei are advancing in chip design, when it comes to chip manufacturing China is lagging behind and dependent on factories in Taiwan, South Korea and the West. “Our dependence on core technology is our biggest problem,” Chinese President Xi Jinping said in 2016.
In 2015, China launched the “Made in China 2025” program, one of whose goals was to promote independence in the field of chips. The goal set by the government is to increase from self-production of 10% of the chips consumed by local industry in 2015 to 70% by 2025. In order to achieve this goal, China has invested about 900 billion yuan in the field from 2015 to the first half of 2022 (130 billion dollars) . But even with these investments, China is not close to achieving the goal of independence at home. According to the forecast of the research company IC Insights, by 2025 the Chinese industry will consume chips worth 223 billion dollars, of which only about 20% will be produced in the country.
The promising Chinese venture turned out to be a scam
The Chinese incentives have certainly created a numerical boom, with thousands of new chip companies springing up in the country every year. The pressure to achieve quick results led to the investment of large public money in ventures that promised a lot and delivered very little. The most painful example of this is the chip company Hongxin from the city of Wuhan, which arose in 2017 with the promise of moving forward fast and big. Hongxin promised to turn 30,000 silicon wafers into chips per month, first with 14 nm production technology and then with 7 nm – the second most advanced production method in the world, which even Intel does not yet produce.
Hongxin appointed Chiang Shangyi, a former executive of Taiwan’s TSMC, the world’s leading chip maker, to the position of CEO. At the same time, Hongxin offered huge salaries that were 2.5 times higher than their current salaries to engineers from TSMC to move to China. Hongxin received billions of dollars from the government local in Wuhan, but in 2020 it began to accumulate debts to suppliers and employees and following the outbreak of the corona virus in Wuhan it finally collapsed without producing a single chip.
Another company Tsinghua Unigroup, controlled by China’s famous Tsinghua University, has become one of the country’s largest chip companies through mergers and acquisitions with foreign chip makers. In 2015, Unigroup offered to purchase the American Micron for $23 billion, a deal that the US blocked due to national security considerations. However, growing debt led it to bankruptcy and nationalization.
Not everything is black. According to a report from last month, SMIC, the largest chip manufacturer in China, has begun supplying chips made with 7nm-like technology, which represents a two-generation leap forward. The details on this are lacking and many in the West doubt that SMIC will be able to produce 7 nm chips efficiently and economically without advanced Western equipment, and there is still the potential for an unexpected Chinese breakthrough.
Blockade China receives advanced equipment
The leadership in Beijing is probably still not satisfied with this progress, judging by the order of those questioned from the chip industry. But it is clear that the investigations and arrests in themselves will certainly not provide China with the desired success.
Over the past decades, China has achieved success through cooperation with foreign knowledge and capital, but when it comes to chips, the country suffers from blocked access to technology. Other factories in the world, such as Samsung in Korea, have used knowledge and technology from the US and Japan in the past to build dominance and overtake competitors, which China cannot.
The US is currently preventing the Dutch ASML from selling its machines for marking the pattern on the chips to China, an essential technology for the production of advanced chips below 7 nanometers. The US is also working with the Japanese companies to prevent them from supplying even the previous generation of such marking machines to China. At the same time, the chip law passed by Congress this month offers billions in subsidies to chip companies that will build factories in the US and not invest in China. China’s aggressive foreign policy and its war exercises against Taiwan are exacerbating its isolation in the field of chips, and for that the government in Beijing can only blame itself.