Daily Management Review

Chip Industry Of China Requires More Than Monetary Support From The Government To Address Impact Of US Sanctions Chip Industry Of China Requires More Than Monetary Support From The Government To Address Impact Of US Sanctions


Chip Industry Of China Requires More Than Monetary Support From The Government To Address Impact Of US Sanctions Chip Industry Of China Requires More Than Monetary Support From The Government To Address Impact Of US Sanctions
China intends to spend heavily to help its chip sector overcome US export restrictions, but money can only go so far unless Chinese firms can break free from a cycle that stifles innovation and traps them at the bottom of the value chain, according to industry participants.
According to Reuters, the government has set aside $140 billion to subsidize the purchase of domestically produced chip manufacturing equipment, which will likely benefit manufacturers such as Shanghai Micro Electronics Equipment Group, China's sole semiconductor lithography specialist (SMEE).
The expenditure was made in response to the United States tightening export restrictions on chip manufacturing technology for fear that it could be used to produce chips for applications such as artificial intelligence that China's military could use.
However, money alone will not be enough to catch up to Western rivals who are generations ahead. According to industry workers and market watchers, SMEE and local peers primarily sell to domestic chip foundries, and their lack of exposure to advanced chipmaking facilities such as Taiwan Semiconductor Manufacturing Co Ltd (TSMC) and South Korea's Samsung Electronics Co Ltd (005930.KS) has made it difficult for them to independently solve engineering problems and move up the value chain.
"This prevents whatever advances they make in R&D from getting into mass production, and also limits them from learning more tricks of the trade," said Mark Li, who tracks China's chip sector at Bernstein Research.
There were no comments on the issue from SMEE. 
Chipmaking equipment manufacturers, like the aviation industry, work closely with clients, providing long-term services such as installation, calibration, maintenance, and repair of machines that can cost more than $100 million each.
This collaboration may result in a significant sharing of know-how, allowing both parties to advance technologically.
People who worked at SMEE and other Chinese firms in areas such as etching told Reuters that entry barriers did not appear to be too high until supply chains became more global, engineering became more complicated, and the market was cornered by firms such as Dutch lithography giant ASML Holding NV.
According to one former SMEE engineer, top management at SMEE, led by a state power firm executive who founded the company in 2002, had no lithography experience, and staff built their first machines by buying and studying used equipment and reading public patents and papers.
The company advanced far enough to create a machine capable of printing circuit patterns as small as 90 nanometers (nm) on silicon wafers - two decades behind ASML. Nonetheless, it was hailed as a domestic breakthrough and received a local government award in 2018.
According to the engineer, SMEE has made no significant advances since, in part due to difficulties in obtaining equipment from abroad.
"Even if we could have built the machines, we wouldn't have known how to service and maintain them," the engineer said.
Another former top executive at a Chinese chipmaking equipment manufacturer described how, while attempting to perfect the etching procedure for 3D NAND Flash, the company was unable to perfect a critical element, namely the channel hole, or hole size.
"We knew what it takes to do that, but we were limited by the equipment's design capability. Our U.S. rival had already solved that," the staffer said.
Industry insiders have called for a complete rethink of how China can catch up by concentrating on what the future of chipmaking might look like rather than competing with competitors from abroad by attempting to make chips' circuits denser and denser.
Two senior academics from the Chinese Academy of Science published a piece late last month advocating a shift in emphasis away from copying foreign technology toward research and development of new materials and technologies.
We can "set our own chokepoints and barriers in the global chip supply chain, create countermeasures, and hopefully resolve the current technological pain points" by accumulating patents and controlling their use abroad, according to the authors.
Since the United States imposed restrictions in October that forbade American firms like Lam Research Corp and Applied Materials Inc from supplying machinery that can produce relatively advanced chips without a license, Chinese chip firms have further isolated themselves.
Should Japan and the Netherlands join the United States in limiting exports of chipmaking equipment to China, the situation for Chinese businesses could get worse.
"When the sanctions came out, all the American companies followed," an engineer at a Chinese memory chipmaker told Reuters.
"When we bought our equipment, we used to get customer service. Now we can't even get that because of the sanctions."