recently it has come out that sal wake wall former chairman of the indebted qinghua yuna group was detained by china's corruption watchdog the central commission for discipline inspection a few other members of china's chip industry have also been detained or are under probe this includes ding won woo he was the general manager of the national integrated circuit industry investment fund colloquially known in china as the big fund another person lujan was the former head of investment at sino ic capital this fund was responsible for managing the big funds assets another former vp had also been reviewed by the ccdi in november and then there's xiaoya ching the minister for industry and information technology this is the cabinet level ministry responsible for semiconductors telecoms and other materials xiao only just took up the post in 2020. xiao also served on the ccdi itself back in 2012 during when president xi jinping first kicked off his extended anti-corruption campaign you would expect a former anti-corruption guy to keep his hands out of the corruption honeypot the big fun garnered a lot of attention when it was established back in 2014 so these corruption allegations are also getting a lot of attention something seems to have gone wrong as early as the late 1950s the chinese government made indigenous semiconductor production a high industrial priority in 1960 the government set up ushi factory number 742 as a state-sponsored training ground for chinese engineers it soon became one of the country's best and based on certain metrics chinese semiconductor industrial development made substantial progress in 1965 one can argue that chinese semiconductor r d capabilities were on par with japan and ahead of both taiwan and south korea however china's semiconductor production efforts suffered the same flaws and drawbacks as the soviet union's great at r d and fundamental research but disseminating these findings to the broader industry was difficult factory 742 matched up as well as any producing millions of relatively sophisticated integrated circuits for televisions and other electronics in the 1970s but other chinese factories struggled to produce anything better than a diode the cultural revolution in 1965 would definitively derail chinese progress on semiconductor development effectively setting the country back years since then the gap has more or less persisted despite multiple government efforts the big fund's overarching goal when it was set up in 2014 was to help raise china's self-sufficiency in integrated circuits to 40 by 2020 and 70 percent by 2025. these numbers were set forth in the made in china 2025 industrial policy announced by premier league chang in may 2015. semiconductors were just one of 10 strategic industries name others include advanced rail maritime vessels robotics and so on the policy itself is ambitious it essentially calls for an independent controllable semiconductor manufacturing ecosystem from ic design to packaging this is pretty difficult apple needs tsmc in taiwan tsmc needs asml in the netherlands asml needs zeiss in germany and cymer in the united states and so on each area depends on another output from somewhere else to complete their share of the product i don't think the industry has good control over even itself all in all the big fund has received about 50 billion dollars over two rounds of funding the first round of 120 billion rmb or about 17.8 billion usd
came in on september 2014 from a variety of public and semi-private entities the government is a significant shareholder through the ministry of finance other entities include china development bank capital an investment institution owned by the powerful china development bank china mobile the country's biggest telecom and various municipal owned development entities for instance beijing e-town owned by the beijing municipal government a bit strangely china tobacco the country's tobacco monopoly appears on the list they contributed something like a billion dollars i can only imagine that they were brought into the deal because they had obscene amounts of money to burn five years later in 2019 the big fund closed a second round of funding the fund size was almost twice as big 204 billion rmb or nearly 30 billion usd by then the fund seems to have changed the strategy but we will talk more about that later i would classify the big fund as a type of government guided investment fund a financialized market-based tool for encouraging economic development when done right these funds are perceived to have a lot of benefits state funds are seen as being more patient than private funds there is no pressure to generate quick profit so they get to invest with an eye towards the long term yet at the same time the involvement of private money brings a force multiplier and means that you can employ market forces towards government developmental goals the big fund is managed by a private firm which can work faster and move more flexibly outside of the state bureaucracy and having the state be a shareholder in a business rather than owning it outright helps create a wall of separation and impose more discipline the chinese government has been running these since the end of the 1990s but after 2008 they have seen wider adoption the government seems to like these funds use of market forces towards achieving their societal or economic goals for instance pushing state-owned companies to list themselves on chinese stock exchanges to raise capital and become more market-focused other governments have funds like this too for instance some of these development-oriented arms of sovereign wealth funds like mubadala investment from abu dhabi venture group yosema group of israel and the london co-investment fund one of the big fund's objectives when starting off was to acquire useful semiconductor technologies from abroad to bring home these would be done with investments made in foreign companies that opened doors to technology transfers into china state support financial development bureaucratic or otherwise would then help build up a collection of national champions capable of eventually entering the global export markets when thinking about this i think about china's rise in solar cells i did a video about this a long while back disregarding the subtle technical differences between various types of solar cells solar panels are largely fungible their manufacturing process is largely automated the buyers tend to be government or government dependent and the equipment is relatively available for foreign acquisition so chinese companies entered the market by purchasing the latest solar cell manufacturing equipment got really good at manufacturing them and sold their output into the world market in march 2021 the communist party of china's leading theoretical journal quoted president xi jinping as saying in 2018 core technologies are not something that can be demanded bought or invited only by acquiring it can we fundamentally guarantee the nation's economic national defense and other security we might get cute with the language and all but that is essentially what big funds phase one was about acquire technology bring it home improve on it and start making money from it and ching hua uni group's activities during the 2010s were probably the most public symbol of this outward investment i have also covered ching hwa's work in a previous video but here is a quick recap qinghua uni group is a holding company majority owned by qinghua university probably china's most prestigious university with minority ownership from zhao's company it had both invested in and received funds from the big fund from there unigroup acquired and sought to acquire various semiconductor companies in 2013 they acquired china's largest fabless semiconductor company spreadtrum after that they acquired another rda microelectronics and merged the two to create unisock separately they acquired a wuhan based foundry built around a former bankrupt smic memory factory combined with billions of dollars from the big fund and the chope provincial government they turned this factory into yangtze memory yangtze memory is a legitimate chinese semiconductor national champion their technology partnership with the american company expansion a joint memory venture between amd and fujitsu helped them upscale their memory production capabilities but the company took on too much debt new laws severing its financial links with ching hua university as well as the fallout from kovid caused the company to fall into bankruptcy zhao has gone public about his displeasure over how the bankruptcy process is unfolding which probably resulted in his detainment the goal of achieving 40 semiconductor self-sufficiency rate by 2020 apparently relied on successfully executing the strategy so this was missed what has happened here who knows but i consider there to be a few big differences between semiconductors and other industries like solar cells or textiles i want to talk about some of them the first major issue has to do with the strategy itself companies now know that they need to watch for and manage technology transfer agreements for instance car companies in general have gotten very good at managing technology transfers many foreign countries demand that a foreign company's cars be made on native soil has a condition for market entry the companies agree but send over quo unquote knocked down units the native partner participates to some degree putting together what are essentially kits to create a completed car but the real engineering work and its associated secrets remains with the company specifically in the semiconductor industry china's projects 908 and 909 in the late 1990s failed to see significant technology spillover in particular a hyped 1998 joint venture between the chinese company hua hong and japan's nec failed to achieve the full extent of its ambitions nec managed to retain a close hold on the manufacturing secrets of their mature manufacturing technologies the joint venture produced wafers but never set the world on fire it became a pure play foundry like tsmc and then merged with grace semiconductor to become china's second leading foundry after smic my second point is an obvious one semiconductors have long been a highly competitive nationally strategic and protected industry the united states watched successful transfers to the soviet union japan taiwan and south korea in the past they know other governments will try this strategy too the big fund seemed to have suffered negatively as a result additionally its size and association with the made in china 2025 initiative probably made its tasks doubly hard yangtze memory expansion partnership which started back in 2008 seems to have been the case of a rare partnership that has managed to bloom into a transfer but unigroup's other attempts to take stakes in micron and western digital were blocked by the us government in april 2017 sino ic capital attempted to acquire american semiconductor testing equipment company xera for 580 million dollars cephas promptly blocked the deal xera tried to save it but in february 2018 they abandoned it the big funds flashy acquisitions aside china has still managed to acquire specific components and technologies vital to semiconductor manufacturing they aren't leading edge but still quite advanced they have also acquired such equipment not made in the united states like lithography machines and the third difference here is the thing about the advanced semiconductor manufacturing value chain it is not only extremely geographically distributed but also unusually integrated its various companies have been working together for decades and as a result it is rather closed in a little clannish many times the industry's entire technical trajectory is determined in a few closed door councils between one or two company representatives open technical standards are in the spirit of open source code silicon valley tech and libertarian minded individuals i agree open technical standards also leave the door open for chinese companies to take leadership and in such cases chinese companies have a good chance to achieve it in my video about china's security camera giant hikvision i mentioned that one of the key to market technology trends that allowed the company to gain global prominence was the open network video interface forum or onvif founded in 2008 onviv released a single unified video standard that allowed digital ip cameras to talk to the rest of the security system hikvision and its fellow state-backed manufacturer da hua jumped on this open onviv standard now it was easy for the two companies to make a product that can be plugged into incumbent western security systems they went global and out competed the western incumbents it has been eight years since the fun has been set up and in the realm of semiconductor production china will miss its 2025 goals on one hand the chinese industry has been awakened to the importance of semiconductors and that in turn has led to its flowering as quoted from the new york times china's chip makers have made more progress in the past five years than they have in the previous ten chinese chip exports have risen from 70 billion dollars in 2015 to 155 billion in 2021 per un comm trade data exports are growing faster than imports but due to a lower base number yet despite this the country has been the world's biggest consumer of semiconductors since 2005 and remains so to this day chinese integrated circuit imports have risen in recent years from 230 billion dollars in 2015 to 433 billion in 2021 again per com trade data this mismatch indicates the obvious that china's chip makers do not yet produce a product good enough for its own domestic consumption in may 2022 ic insights reported that china produced about 16.7 percent of its semiconductors inside the country that number is forecasted to rise to about 21 by 2026 thanks to the multitude of fab buildups currently underway drilling down however chinese headquartered companies produced only a minority of that 16.7 percent slightly less than forty percent the rest are produced by foreign companies like samsung ski hynix tsmc umc and intel so all in all there are some encouraging signs but on the whole progress has been maddeningly slow over the past eight years especially considering the billions of public and private dollars put in we need to talk about the bankruptcies as i mentioned china is now awakened to its need to take leadership in domestic semiconductor manufacturing since 2019 nearly 20 000 companies have switched into integrated circuits chips and semiconductors many of these companies did construction hr biomedicine and the like i wouldn't doubt their earnestness and contributing to the national cause but it is also just as likely that they are looking to soak up subsidies in such situations you can expect more than a few failures wuhan's hongxing semiconductor and its 18 billion or whatever investment loss is well cited in the media but there have also been nanjing tacoma semiconductor technology de hawaii semiconductor kuntong semiconductor guandong hai sheen integrated circuit and so on each failure failed for its own reasons perhaps some were dead from the start and some were just bad luck but it is not a good look to their credit the national fund never really invested in those projects the money for those seemed to have come from over-eager local governments using their own government-guided investment funds but it is not like those local governments are flush with cash that's taxpayer money that can be better spent on social services or whatnot and it demonstrates a lack of understanding of the industry which can lead to financial disaster you cannot throw a bunch of experts cash and free land into a pot and expect silicon magic okay i have one last thing to say about the national fund the funds phase 1 eventually invested in 77 projects and 55 enterprises across the entire ic industry all the money was committed by the end of 2018. reviewing some of these investments you find that the companies are fairly vanilla they reflect the style of your average hedge fund seeking large sums into already large companies for instance in the fund's manufacturing related investments some 20 billion rmb invested in smic china's leading semiconductor foundry some 6 billion rmb invested into the aforementioned hua hong semiconductor china's second leading foundry and another 6.4 billion rmb into san an opto electronics an led manufacturer there are others but those are the highlights in the manufacturing part of the portfolio in the design packaging and materials part of the value chain the funds seem to have more varied choices though the largest investment by far was 10 billion rmb into qinghua unit group other notables include tongfu microelectronics a packaging services provider that has been in business since the 1990s shenzhen chang diane technology another osat and so on in the end i think the fund acted a bit too much like a standard sector-focused private equity fund it had to straddle the finance and industrial policy world and stuck to safe bets in whatever companies were already big this is reflected in phase one's lack of big investments in the semiconductor equipment side of the industry which in total received just 2 billion rmb of investment as opposed to some 30 billion for foundry expansion these investments will probably make good money recent market events and qinghua's bankruptcy notwithstanding but in doing so the fund fell short of its industrial development goals one can argue that in the long wild world of semiconductor manufacturing achieving both might be extremely hard for phase 2 the ic fund seems to adopted a new game plan ding wen wu said to build an ic industrial supply chain each link must be organically integrated with users of domestic equipment and materials only in this way can we achieve independence making the supply chain controllable based on these remarks you would expect that the fund is now looking to invest in companies or technologies that encourage more integration between chinese semiconductor related companies so more like y combinator and ecosystem of small companies than silver lake capital whether the investments so far are in line with the strategy hard to say i can look at it in a future video but with ding and his minister removed from power things are in flux right now in july 2022 the chinese government named its new cabinet minister jin juan long he is an aerospace expert who came up from within china's aerospace science and technology corporation his crowning achievement was overseeing comax c-919 china's first domestically developed large passenger plane for 10 years from approval to first flight meanwhile the united states is moving to build new partnerships to lock china out of the western ship supply chain the rumored chip for alliance china's defense and aerospace achievements are some of its proudest now those ministers face a new very intimidating challenge all right that's it for tonight thanks for watching subscribe to the channel sign up for the newsletter and i'll see you guys next time
2022-09-09