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China Hits Pause on Giant Chip Spending Aimed at Rivaling US

Daniel Nenni

Admin
Staff member
  • -Beijing plans alternative measures to support local firms
  • -US is bolstering campaign to crimp China’s access to key tech
China is pausing massive investments aimed at building a chip industry to compete with the US, as a nationwide Covid resurgence strains the world’s No. 2 economy and Beijing’s finances.

Top officials are discussing ways to move away from costly subsidies that have so far borne little fruit and encouraged both graft and American sanctions, people familiar with the matter said. While some continue to push for incentives of as much as 1 trillion yuan ($145 billion), other policymakers have lost their taste for an investment-led approach that’s not yielded the results anticipated, the people said.

Instead, they’re seeking alternative ways to assist homegrown chipmakers, such as lowering the cost of semiconductor materials, the people said, asking not to be identified revealing sensitive negotiations.

That would mark a shift in Beijing’s approach toward an industry regarded as crucial to challenging American dominance and safeguarding Chinese economic and military competitiveness. It underscores how the country’s economic ructions are taxing Beijing’s resources and hobbling its chip ambitions — one of President Xi Jinping’s top priorities. That could have ramifications for spending in other critical areas, from the environment to defense.

Shares in Chinese chipmakers and gear suppliers underperformed a broad market rally. Tokyo Electron Ltd. slid 1.2% in Japan, while Chinese peers including Naura Technology Group Co. and Advanced Micro-Fabrication Equipment Inc. fell more than 1%.

It’s unclear what other chip policies Beijing is considering, or whether it will ultimately decide to ditch the capital investment-heavy approach that’s worked so well in propelling its manufacturing sector over the past decades. China’s government could still decide to divert resources from other arenas to fund its chipmakers. Representatives for the State Council Information Office and Ministry of Industry and Information Technology didn’t immediately respond to faxed requests for comment.

But the discussions now underway are in stark contrast to Beijing’s prior efforts of pouring colossal resources into the chip industry, including setting up the National Integrated Circuit Industry Investment Fund in 2014.

That vehicle lies at the heart of Xi’s unhappiness with Beijing’s prior philosophy. Known within the industry as the Big Fund, it drew about $45 billion in capital and backed scores of companies, including China’s chipmaking champions Semiconductor Manufacturing International Corp. and Yangtze Memory Technologies Co.
Xi’s administration grew frustrated that tens of billions of dollars funneled into the industry over the past decade haven’t produced breakthroughs that allow China to compete with the US on a more equal footing. In fact, SMIC and Yangtze, arguably the two most advanced Chinese semiconductor players, were crippled by US sanctions.

Senior Beijing officials ordered a flurry of anti-graft probes into top industry figures last summer, blaming corruption for wasted and inefficient investment. The Big Fund is likely to lose its stature as a result, the people said.

All that happened as semiconductors increasingly became a key battleground in the rivalry between China and the US. Xi has repeatedly talked about the need for a sense of urgency to resolve China’s so-called chokepoints: areas where the country still relies heavily on the US and other foreign powers, including critical technologies such as chips.

He has implored top officials to achieve self-sufficiency in key technologies as the US moves to isolate China. When he secured a precedent-breaking third term in October, Xi vowed to “move faster” in implementing strategic projects to increase innovation, saying “efforts will be made to improve the new system for mobilizing resources nationwide to make key technological breakthroughs, and boost China’s strength in strategic science and technology.”

In response, Chinese officials recently discussed whether to offer additional incentives for domestic semiconductor companies, the people said. But many reckoned it would be difficult to pool a substantial amount after Beijing had spent heavily to combat Covid over past years, according to the people.

Instead, officials are now asking local semiconductor material suppliers to cut prices to provide support to their domestic customers, the people said.

Weak tax revenue, declining land sales and the cost of stemming Covid has squeezed the government’s finances, pushing the fiscal deficit to a record last year.

Meanwhile, the US is proving increasingly aggressive in going after China’s technological ambitions.

Last year, it accelerated a campaign to contain Beijing’s chip endeavors, wielding various tools including export controls to deter China’s progress in emerging technologies. That was part of efforts to maintain what US National Security Advisor Jake Sullivan called “as large of a lead as possible.”

Its key allies including the Netherlands and Japan have also agreed in principle to tighten controls over the export of advanced chipmaking machinery to China, Bloomberg News has reported, in what may be another potentially debilitating blow to Beijing’s grand chip plans.

 
China's labour force and population has already peaked. And with no immigration derived from the desire to maintain an ethnically homogenous society means things will not improve. Furthermore, with such a large part of government revenue coming from land sales to the now flagging property developers, consistently growing tax revenue will have now fallen precipitously. China is finding out they really don't have infinite money anymore just at the time where people are getting used to and beginning to expect modern social services and safety nets. They can't keep piling money into massive sector wide subsidies because more of each dollar must be diverted to simply maintaining what they already achieved. This is the key conclusion we take from the Solow growth model. China must now transition to increasing per worker productivity but Xi and CCP seem dead set on taking a more ideologically strict line on communist principles. This will not be conducive to increasing per worker productivity and total factor productivity where the U.S is a world leader. I believe Xi and the politburo is miscalculating how much the Chinese people actually buy into maoist/communist principles. The Chinese people really just want a better life for themselves and children like the rest of us. Anything that endangers the progress they've made over the last 50 years is a grave error. Economic success is the only thing keeping the CCP legitimate in the eyes of the Chinese people. As long as they deliver they CCP won't be challenged. I believe to a large extent the Chinese infinite money glitch is behind them and governing/husbanding resources will become much more difficult going forward.
 
I‘ve been fascinated by China, hopeful and doubtful. In equal parts. And still am hopeful.

The truest thing I’ve heard recently about China is that they don’t play the long game, they don’t play 4D chess, in reality it’s thrown together 10 minutes in advance negative 1D chess.
 
I‘ve been fascinated by China, hopeful and doubtful. In equal parts. And still am hopeful.

The truest thing I’ve heard recently about China is that they don’t play the long game, they don’t play 4D chess, in reality it’s thrown together 10 minutes in advance negative 1D chess.
Authoritarian governments have the benefit of a singular vision. The problem is when that vision is wrong or undoable there is no mechanism to correct course. A democratic China would have given up zero covid a year ago, democratic Russia would not have invaded Ukraine and a democratic Iran would give up its dreams of exporting religious extremism to the rest of Middle East and would be a rich and prosperous nation. Instead Iran is killing its young people, pushing its human capital out in a decades long brain drain and keeping women out of the workforce. With all the downsides of democracy it’s ability to pivot, change course and remove leadership is its greatest strength.
 
I'm not worry about China's technological advancement at all. I am quite optimistic about China's continuous progress in moving up the value ladder,despite all the external obstacles. Yes,there are sanctions in the place. But after I did some research,I could not find a single industry/sector in China that is totally stagnated due to US sanction. There are many industry in China that are subject to US sanction for over decades already,such as aerospace technology,advanced materials,military technology etc. Yet these industry still blossom in China despite sanctions.

To be exact,I'm not worry about the development of anything related to hard power in China. The real worry for me,is alway the development of soft power related stuff,this is something CCP very bad at.
 
China's labour force and population has already peaked. And with no immigration derived from the desire to maintain an ethnically homogenous society means things will not improve. Furthermore, with such a large part of government revenue coming from land sales to the now flagging property developers, consistently growing tax revenue will have now fallen precipitously. China is finding out they really don't have infinite money anymore just at the time where people are getting used to and beginning to expect modern social services and safety nets. They can't keep piling money into massive sector wide subsidies because more of each dollar must be diverted to simply maintaining what they already achieved. This is the key conclusion we take from the Solow growth model. China must now transition to increasing per worker productivity but Xi and CCP seem dead set on taking a more ideologically strict line on communist principles. This will not be conducive to increasing per worker productivity and total factor productivity where the U.S is a world leader. I believe Xi and the politburo is miscalculating how much the Chinese people actually buy into maoist/communist principles. The Chinese people really just want a better life for themselves and children like the rest of us. Anything that endangers the progress they've made over the last 50 years is a grave error. Economic success is the only thing keeping the CCP legitimate in the eyes of the Chinese people. As long as they deliver they CCP won't be challenged. I believe to a large extent the Chinese infinite money glitch is behind them and governing/husbanding resources will become much more difficult going forward.

CCP is well aware of the importance of labor productivity,that's why China is accelerating the pace towards higher degree of automation.

China is increasing production line automation at an unprecedented speed,in 2021 China officially surpass the US in robot density.


https://ifr.org/downloads/press2018/RobotDensities_WorldRobotics2022_1600_900.jpg



BTW,US labor productivity in manufacturing sector is deteriorating rather than improving


"In the manufacturing sector, productivity decreased 2.9 percent rather than 1.3 percent as previously reported, reflecting a 1.3-percentage point downward revision to output and a 0.3-percentage point upward revision to hours worked"
 
As you can see,Chinese domestic equipment makers are expanding the market share in China at an exponential pace



U.S. Sanctions Are A Catalyst For China's New Semiconductor Fab Expansion

Summary
  • Current Chinese fab expansions through 2025 will add just 6% to the overall global semiconductor capacity with a $68 billion fab spend.

  • Current 28nm fab expansions will only increase global capacity 4% despite sanctions.

  • U.S. sanctions are minimally working, but only serve as a catalyst for China to promote its drive for self-sufficiency in chip making.

  • The mean growth for non-Chinese companies for the nine-month period between January 2022 and September 2022 was 11.2%, and Applied Materials' (AMAT) exhibited a revenue growth of just 8.7% for 3Qs 2022 vs. 3Qs 2021, indicating underperformance against other non-Chinese WFE competitors.

  • Importantly, the mean growth for Chinese equipment companies was 62.8%, indicating that Chinese equipment companies are gaining in the market, although their revenues are significantly lower than non-Chinese counterparts.


In November, the number of domestic semiconductor equipment won bidding grow 505% YoY
 
CCP is well aware of the importance of labor productivity,that's why China is accelerating the pace towards higher degree of automation.

China is increasing production line automation at an unprecedented speed,in 2021 China officially surpass the US in robot density.


https://ifr.org/downloads/press2018/RobotDensities_WorldRobotics2022_1600_900.jpg



BTW,US labor productivity in manufacturing sector is deteriorating rather than improving


"In the manufacturing sector, productivity decreased 2.9 percent rather than 1.3 percent as previously reported, reflecting a 1.3-percentage point downward revision to output and a 0.3-percentage point upward revision to hours worked"

CCP is well aware of the importance of labor productivity,that's why China is accelerating the pace towards higher degree of automation.

China is increasing production line automation at an unprecedented speed,in 2021 China officially surpass the US in robot density.


https://ifr.org/downloads/press2018/RobotDensities_WorldRobotics2022_1600_900.jpg



BTW,US labor productivity in manufacturing sector is deteriorating rather than improving


"In the manufacturing sector, productivity decreased 2.9 percent rather than 1.3 percent as previously reported, reflecting a 1.3-percentage point downward revision to output and a 0.3-percentage point upward revision to hours worked"
You seem to be using cherry picked data to mislead people come to the wrong conclusions supporting your point. Inferring from the last year that American productivity is declining as a trend is not at all the right conclusion to make from that data. Firstly 2022 was a year of below trend slow growth, secondly over hiring in 2021 and 2022 has artificially diluted per worker productivity as employers have hoarded workers in fear of not having enough labor. As workers are shed by hoarding employers per worker productivity will rise again. Again inferring year over year growth rates gives the wrong impression as the base effect slows growth down. If you zoom out even a tiny bit your assertion is hard to take seriously regarding recently revised downwards productivity growth rates. Using solely 2022 year over year data is very misleading. As for manufacturing in particular, still trend is positive over long term and again when per worker productivity is already very high it is hard to maintain those growth rates. Even so the U.S is primarily a service based economy as most all developed economies are and its service sector per worker productivity is still very much positive.










CCP is well aware of the importance of labor productivity,that's why China is accelerating the pace towards higher degree of automation.

China is increasing production line automation at an unprecedented speed,in 2021 China officially surpass the US in robot density.


https://ifr.org/downloads/press2018/RobotDensities_WorldRobotics2022_1600_900.jpg



BTW,US labor productivity in manufacturing sector is deteriorating rather than improving


"In the manufacturing sector, productivity decreased 2.9 percent rather than 1.3 percent as previously reported, reflecting a 1.3-percentage point downward revision to output and a 0.3-percentage point upward revision to hours worked"

labor-compensation-labor-productivity-gap.png
 
Authoritarian governments have the benefit of a singular vision. The problem is when that vision is wrong or undoable there is no mechanism to correct course. A democratic China would have given up zero covid a year ago, democratic Russia would not have invaded Ukraine and a democratic Iran would give up its dreams of exporting religious extremism to the rest of Middle East and would be a rich and prosperous nation. Instead Iran is killing its young people, pushing its human capital out in a decades long brain drain and keeping women out of the workforce. With all the downsides of democracy it’s ability to pivot, change course and remove leadership is its greatest strength.
I’ve always said I’d love to have a good king, but would rather have a bad democracy over the inevitable bad king.
 
As you can see,Chinese domestic equipment makers are expanding the market share in China at an exponential pace



U.S. Sanctions Are A Catalyst For China's New Semiconductor Fab Expansion

Summary
  • Current Chinese fab expansions through 2025 will add just 6% to the overall global semiconductor capacity with a $68 billion fab spend.

  • Current 28nm fab expansions will only increase global capacity 4% despite sanctions.

  • U.S. sanctions are minimally working, but only serve as a catalyst for China to promote its drive for self-sufficiency in chip making.

  • The mean growth for non-Chinese companies for the nine-month period between January 2022 and September 2022 was 11.2%, and Applied Materials' (AMAT) exhibited a revenue growth of just 8.7% for 3Qs 2022 vs. 3Qs 2021, indicating underperformance against other non-Chinese WFE competitors.

  • Importantly, the mean growth for Chinese equipment companies was 62.8%, indicating that Chinese equipment companies are gaining in the market, although their revenues are significantly lower than non-Chinese counterparts.


In November, the number of domestic semiconductor equipment won bidding grow 505% YoY

Frankly at this point, China's semi industry for advanced nodes is simply DEAD, largely the consequence of CCP's "wolf warrior" policy trying to pick fight with everybody. Those recent "expert" talks in China about "we will find different ways to develop semiconductor" is just handwaving BS because none of them have any idea what to do with the current situation and everyone is just pacifying Beijing by saying useless words. Everyone is waiting for the emperor in Beijing to issue orders regardless if he knows anything or nothing about semiconductor. Any honest semiconductor professional will tell you China going alone will NEVER succeed because this is and will continue to be a global industry global effort.

Yes China will invest and expand in the mature nodes space because they have no other choices, but even that success likely will be limited and spotty with terrible capital efficiency (billions spent without much to show for). Your selective data on the domestic equipment industry story is totally misleading and laughable, to the same tone of the recent story in China about "Huawei just filed a patent on EUV, so maybe Huawei will make EUV lithography tools soon?!".
 
You seem to be using cherry picked data to mislead people come to the wrong conclusions supporting your point. Inferring from the last year that American productivity is declining as a trend is not at all the right conclusion to make from that data. Firstly 2022 was a year of below trend slow growth, secondly over hiring in 2021 and 2022 has artificially diluted per worker productivity as employers have hoarded workers in fear of not having enough labor. As workers are shed by hoarding employers per worker productivity will rise again. Again inferring year over year growth rates gives the wrong impression as the base effect slows growth down. If you zoom out even a tiny bit your assertion is hard to take seriously regarding recently revised downwards productivity growth rates. Using solely 2022 year over year data is very misleading. As for manufacturing in particular, still trend is positive over long term and again when per worker productivity is already very high it is hard to maintain those growth rates. Even so the U.S is primarily a service based economy as most all developed economies are and its service sector per worker productivity is still very much positive.

Not trying to cherry pick anything,I simply choose the latest data,because I feel new data usually reflect the current situation more accurate than older one.

I choose manufacturing sector instead of service sector,is because manufacturing sector is the real economy,service sector is virtual economy. A house maid in the US could earn 5x more than her counterpart in the developing world,but she doesn't create 5x more wealth,they create the exact same amount of wealth. The reason she could earn 5x more,is because many people she serves,actually create 5x more wealth than those in the developing world. And those who work in manufacturing sector,making high end stuffs that the developing world can not make,are the real source of wealth generation. That's the reason why losing manufacturing will inevitable lead to economic decline,as service economy does not create real wealth
 
Frankly at this point, China's semi industry for advanced nodes is simply DEAD, largely the consequence of CCP's "wolf warrior" policy trying to pick fight with everybody. Those recent "expert" talks in China about "we will find different ways to develop semiconductor" is just handwaving BS because none of them have any idea what to do with the current situation and everyone is just pacifying Beijing by saying useless words. Everyone is waiting for the emperor in Beijing to issue orders regardless if he knows anything or nothing about semiconductor.

No problem,everyone has their own opinion. Just like watching sports match,It's always fun to guess which side will win the game.

Any honest semiconductor professional will tell you China going alone will NEVER succeed because this is and will continue to be a global industry global effort.

Globalization is the most efficient/cost effective model for all industries,it is the correct way to go under normal circumstances. But if the circumstances does not allow,you will just have to settle with less efficient/costly ways.

For instance,would you say that the US solar industry have succeed?I would not say so. They are not competitive anywhere outside of the US. The US is forced to bear higher renewable energy price,they choose to go alone instead of embrace the global solar industry because China is the top dog in the field,US solar can only survive under the protection of tariff. And the US is going to do the exact same thing in EVs with the new IRA by create an entire new battery supply chain in the US,and it is doomed to fail as well.

Yes China will invest and expand in the mature nodes space because they have no other choices, but even that success likely will be limited and spotty with terrible capital efficiency (billions spent without much to show for). Your selective data on the domestic equipment industry story is totally misleading and laughable, to the same tone of the recent story in China about "Huawei just filed a patent on EUV, so maybe Huawei will make EUV lithography tools soon?!".

Yes,the US could improve the capital efficiency by alot,if they just buy solar and battery from China,instead of spend tens of billions build them in the US. Why would the US give subsidise to TSMC so they can build fabs in the US?Don't they know that fab operations in the US is 30% more expensive than that of Taiwan?Don't they know that buy chips from Taiwan is actually the most capital efficient way?

Also,are you saying that the data I provided regarding Chinese domestic equipment industry is not true?Would you provide more accurate data please?
 
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Are you saying that the data I provided regarding Chinese domestic equipment industry is not true?Would you provide more accurate data please?
They are decades behind and are cut off from all of the experts who could help them catch up. Their dry DUV tools have half the reticle size and weaker power supplies. Also they don't have production of anything but a couple of these subpar units. You can also apply this to every other tool category. They don't have the tools, software, expertise, or resources to develop competitive tools at a faster pace then the rest of the world's combined efforts. Again to use litho as an example. Cymer in the US makes the light source, Zeiss makes the optics, TEL does the photoresit application, and ASML makes the tool itself and software. This co-development/specialization is what has allowed ASML to leave their Japanese competitors in the dust. It will take decades to catch AM, LAM, Hitachi, TEL, SPIN, ASM, and ASML. Even if tomorrow these Chinese firms can wave their wands and magically develop at 2x the rate of the competition and they could some how maintain this rate of improvement for years (not likely given the closed ecosystem and already starting far behind on even basic competencies). It will take over a decade to catch the other vendors because they aren't sitting still either. Catching up on fab is one thing, the whole equipment ecosystem is another thing all together. With the sanctions catching up on fab is impossible without the tools. And these same sanctions make catching up on tools an even harder task than it was before.
 
I’ve always said I’d love to have a good king, but would rather have a bad democracy over the inevitable bad king.

Both Singapore Taiwan and Korea's high tech industry were kicked off during dictatorship era. The Chaebol in Korea didn't even want to touch semiconductor at the beginning,it was the dictator Park Chung hee forced these Chaebol to get into semiconductor businesses. If they were a democracy at the time,today they would be no different with Latin America banana republic
 
They are decades behind and are cut off from all of the experts who could help them catch up. Their dry DUV tools have half the reticle size and weaker power supplies. Also they don't have production of anything but a couple of these subpar units. You can also apply this to every other tool category. They don't have the tools, software, expertise, or resources to develop competitive tools at a faster pace then the rest of the world's combined efforts. Again to use litho as an example. Cymer in the US makes the light source, Zeiss makes the optics, TEL does the photoresit application, and ASML makes the tool itself and software. This co-development/specialization is what has allowed ASML to leave their Japanese competitors in the dust. It will take decades to catch AM, LAM, Hitachi, TEL, SPIN, ASM, and ASML. Even if tomorrow these Chinese firms can wave their wands and magically develop at 2x the rate of the competition and they could some how maintain this rate of improvement for years (not likely given the closed ecosystem and already starting far behind on even basic competencies). It will take over a decade to catch the other vendors because they aren't sitting still either. Catching up on fab is one thing, the whole equipment ecosystem is another thing all together. With the sanctions catching up on fab is impossible without the tools. And these same sanctions make catching up on tools an even harder task than it was before.

Well,tough roads ahead. The path to success won't be quick or easy
 
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Not trying to cherry pick anything,I simply choose the latest data,because I feel new data usually reflect the current situation more accurate than older one.

I choose manufacturing sector instead of service sector,is because manufacturing sector is the real economy,service sector is virtual economy. A house maid in the US could earn 5x more than her counterpart in the developing world,but she doesn't create 5x more wealth,they create the exact same amount of wealth. The reason she could earn 5x more,is because many people she serves,actually create 5x more wealth than those in the developing world. And those who work in manufacturing sector,making high end stuffs that the developing world can not make,are the real source of wealth generation. That's the reason why losing manufacturing will inevitable lead to economic decline,as service economy does not create real wealth
Saying the service sector not part of the real economy is a wild statement. If we can’t even agree on what data is real and meaningful then I don’t think we’ll get anywhere.
 
Both Singapore Taiwan and Korea's high tech industry were kicked off during dictatorship era. The Chaebol in Korea didn't even want to touch semiconductor at the beginning,it was the dictator Park Chung hee forced these Chaebol to get into semiconductor businesses. If they were a democracy at the time,today they would be no different with Latin America banana republic
Please read the RCA story about how Taiwan started its semiconductor efforts. There was nothing to do with the dictatorship, really not a good case to make such inference.
 
It's amazing and unbelievable that this day and age there are still people worshiping dictatorship....
By the way, china's equipment industry is also miles and miles behind global leaders, just like the fabs. Even just copying others, will take years and most likely decades just to catch up. EUV? forget about it!
 
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