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At $260 billion, spends more each year imports than it does on oil. To end the country’s reliance on foreign technology and break the dominance of U.S., South Korean, Taiwanese and Japanese chip companies, the government is pouring billions into creating Chinese versions of industry leaders. The potential for market upheaval is enormous -- if these up-and-comers can clear the technical hurdles in their way.

CHENG TING-FANG Nikkei staff writer

SHANGHAI/TAIPEI Business is booming at the Gansu and Yunnan and even Mongolia. All told, Shanghai Integrated Circuit Museum. some 200 groups came last year for an education in For most of its nine-year history, the museum China’s next big thing. has been mostly a place for school children to learn “Many of these representatives knew very little about the uses of computer chips. But it has become about chips, but they all want to capture this once- a hot ticket for officials from all over China ever in-a-lifetime investment opportunity being led by since Beijing declared that creating a world-leading high-ranked policymakers,” Long told was a top national priority. Asian Review. On a recent weekday this spring, Lance Long, the This national enthusiasm reflects China’s tower- museum’s director, was hosting a tour for offi- ing ambitions for its semiconductor industry. China, cials from Urumqi, the Xinjiang capital known for and its young chipmakers, are clear about their being the world’s most landlocked city. Before that, goal: to break the dominance of American, South Long hosted groups from distant provinces such as Korean, Taiwanese and Japanese semiconductor

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1990s, were mostly unsuccessful. Its technology is first batch of memory chips. Right now, China has

far behind that of global giants such as Samsung yet to produce such chips in substantial volumes. Electronics and , making China’s goal of pro- But industry executives say Chinese memory chips ducing 75% of the chips it uses domestically by 2025 could cause a major disruption in the market once seem highly ambitious, analysts at Natixis say. its manufacturers are able to produce them in suf-

oup Unlike its previous efforts, when its investments ficient quantities, which they expect to happen in r were scattered and ill-placed, China is seeking to three to five years. Unig

bring in expertise from the outside by luring foreign When that happens, it could have an impact on

companies to set up advanced production facilities two markets: NAND and DRAM singhua

T within its territories. This will memory chips. of help create a supply chain and Production of global NAND attract talent. The latest move flash memory-- a $58 billion

Courtesy by the U.S. to bar American market annually -- is con- companies from selling any trolled by only six companies: components to ZTE, a Chinese , , companies. The government wants to create Yangtze Memory -- from and PCs to connected cars and telecom equipment provider , SK Hynix, Chinese versions of most of the industry’s leaders, Technologies is data centers -- and therefore have strong implica- and maker, has and Intel. spending $24 billion then leapfrog them in the race for advanced chips tions for intelligence. China wants to defend against only strengthened China’s de- DRAMs are dominated by to build one used in artificial intelligence. of China’s first the types of national security breaches exposed by termination to replace as many an even smaller group of com- In March, Premier Li Keqiang named semi- advanced memory Edward Snowden’s 2013 leaks, which revealed con- foreign suppliers as possible, panies: Samsung, SK Hynix conductors as the top priority of the 10 industries chip factories nections between American technology providers according to multiple industry and Micron, which together China wants to foster in its “Made in China 2025” in the city of Wuhan. and the U.S. National Security Agency’s vast sur- executives. (See related story on held 95% of the $71 billion initiative. But China’s ambitions were already clear veillance program. Page 20.) global market in 2017, accord- in 2014 when it launched the National Integrated This position is a mirror-image of the increas- Analysts also say China has ing to Taipei-based research Circuit Industry Investment Fund -- better known ingly hard-line U.S. stance toward China. American learned from its past mistakes. company TrendForce. as the Big Fund -- in 2014 with 138 billion yuan regulators have cited national security concerns “It’s totally different from Helped by strong demand ($21.9 billion) in seed capital, which it hoped would when it has curbed chip and other deals with decades ago when China suf- and tight supplies, Samsung turbocharge investment from local governments Chinese groups, and has recently fired the opening fered through a frustrating ex- CHINESE CHIP INDUSTRY EXECUTIVE and SK Hynix generated some and the private sector. The Big Fund is in its second shots in a trade war to penalize China for stealing perience to build semiconduc- $85 billion in memory chip phase of fundraising for at least 150 billion yuan. high-tech intellectual property. To Beijing, such tors out of nowhere,” Mark Li, an analyst at Bernstein sales in 2017, higher than the gross domestic prod- Credit Suisse estimates China’s total investment to moves point to an all-out U.S. effort to slow China’s Research said. “This time, it’s a totally different story uct of Luxembourg. The combined semiconductor be about $140 billion. aggressive attempt to become a new semiconductor as the country has all the right ingredients, including operating profit from both companies -- about $46 China wants to end its reliance on foreign tech- superpower. a massive market and strong local makers of smart- billion -- would be 1.6 times higher than what the nology -- its annual imports of $260 billion worth of “The U.S. is really feeling the threat,” said Jerry phones, TVs, PCs, and automobiles ... . It could be two biggest Japanese companies, Toyota Motor and semiconductor-related products have recently risen Peng, an analyst at research unit IEK of Industrial just a matter of time for them to bear fruit.” SoftBank Group, earned together in fiscal 2017. above its spending on oil. And it also wants to move Technology Research Institute in Taiwan. “It’s so unhealthy about the recent memory price its manufacturing sector to higher-value products. There is no guarantee of success for China’s chip MEMORY CHIP PUSH The first fruits of Beijing’s hike, and it’s so unfair that such important com- But there are also national security concerns. push, however. The country’s previous efforts to big investment in chips could come as soon as the ponents are controlled by very few companies,” a Chips serve as the brains for every electronic device build a chip industry, including a major drive in the end of next year, when it will begin shipping its Chinese chip industry executive told the Nikkei

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Asian Review. “The road could be bumpy, but we and analysts have said. need to have our domestic memory chips for sure, Roger Sheng, an analyst at Gartner, said Chinese and we wouldn’t care at first whether we could memory chipmakers still have a long way to go be- make a profit or whether we cause a price crash in fore they make a dent in the market. Still, his com- the market.” pany expects that in the NAND flash memory seg- A little-known state-backed called ment, Yangtze Memory could come to replace some will play a key role in determin- low-end providers in three years and compete with ing whether Chinese chipmakers can successfully first-tier players in five years. challenge the dominance of Samsung, SK Hynix Samsung Electronics CEO Kim Ki-nam and and Toshiba in the memory market. Micron CEO Sanjay Mehrotra are aware of China’s

Tsinghua initially tried to buy its way into the offensive, but both say Chinese chipmakers face market, but its $23 billion bid to acquire Micron high technological barriers to entering the market. and a separate attempt to become the largest share- “We recognize that the Chinese government is sup- holder of Western Digital were blocked by the U.S. porting [these emerging players] actively ... but it’s government. At the same time, the industry’s dom- difficult to narrow technological gaps in the short inant players were reluctant term solely through big in- to license their technology to vestments,” Samsung’s Kim the aggressive latecomer. But said at the company’s annual those setbacks did not dampen general meeting in March. Tsinghua’s enthusiasm. The memory chip market Tsinghua Unigroup Chairman Zhao Weiguo The group’s affiliate, Yangtze is notoriously volatile, swing-

Memory Technologies, is ing between periods of supply spending $24 billion to build shortages and serious gluts. the country’s first advanced Despite China’s technological Another potential hurdle -- intellectual prop- memory chip factories in the hurdles, executives from top erty, including chip design and production tech- city of Wuhan. It has poached memory chipmakers worry niques -- is not a worry for Chinese chipmakers, thousands of engineers from that Chinese companies could analysts say. “Intellectual property issues would Samsung, SK Hynix, Micron flood the market with cheap never be a roadblock for these newcomers,” said and Nanya Technology (see semiconductors, leading to a IEK’s Peng. “The most important task is to deliver sidebar on Page 15), and on April repeat of the massive over- the results, and even if there is any concerns with 11, it began moving equipment supply that hit the industry a IPs, they can always later come back to negotiate into the factory. decade ago. with these big guys to settle the case with a certain

Tsinghua Unigroup There may be good reason license fee.”

Chairman Zhao Weiguo an- for such concern -- the planned nounced that the company JERRY PENG Analyst at IEK capacity from China is huge. A DILEMMA FOR FOREIGN CHIPMAKERS While should begin producing its Yangtze Memory has set out Source: Natixis IP may not be a worry for the Chinese companies, first batch of 32-layer NAND flash memory chips to make 300,000 NAND flash wafers a month in it is a very real concern for foreign chip giants this year. But Avril Wu, a longtime market watcher years to come, equivalent to some 20% of current such as Intel, Samsung, Taiwan Semiconductor at TrendForce, said it is likely that Yangtze Memory global output. “Even if only some one-third or even Manufacturing Co. (TSMC) and SK Hynix. Like will not be ready to ship the more advanced 64- less of [planned production] is realized in three companies in other sectors, high-tech groups are layer chips, currently the industry standard, until to five years, it could cause a major price drop eager to have to the Chinese market, but the end of 2019 at the earliest. for memory chips and hurt the profitability of wary of handing over valuable technology secrets Apple, the world’s biggest consumer of NAND current suppliers,” said Sean Yang, an analyst at 5 to state-sponsored competitors. flash memory, recently visited Yangtze Memory Shanghai-based CINNO. For China, bringing in as many world-class for- 4 to learn about its development status, according Chinese chipmakers will have the advantage of eign chip producers as possible is the easiest way to to people familiar with the matter. It is not clear a vast end market of local gadget makers eager to 3 achieve its goal of cultivating a supply chain ecosys- whether the iPhone maker received pressure from use more domestic chips. Chinese brands controlled 2 tem to support its new industry. China to evaluate a potential supply deal, but roughly 50% of the global smartphone market and “For the longer term, expanding advanced Apple will undoubtedly want to continue diversi- 36% of the PC and market in 2017, 1 production sites in China could be a trade-off for fying its memory chip suppliers in order to reduce according to Gartner. Government agencies would 0 the existing players because they are potentially its reliance on Samsung, multiple industry sources also be first-wave adopters. 2014 ’15 ’16 ’17 helping their competitors,” said a Taiwanese chip Sources: Natixis, Bloomberg

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industry executive who asked not to be named. “It’s Chinese companies like Semiconductor like these newcomers can go to Harvard or MIT Manufacturing International Corp. are near their home rather than going abroad.” counting on massive domestic demand for their chips. TSMC, for instance, has spent $3 billion on an ad- vanced 12-inch chip facility in the Chinese city of , which began production ahead of sched- distant cities should they have a facility there,” said fall in cross-border ule in April. The world’s No. 1 contract chipmaker semiconductor M&A Gartner’s Sheng. “And these foreign chipmakers relies on Apple, , and other U.S. deals by China from could help us train a huge group of engineers that clients for 60% of its revenue, but Chinese custom- 2016 to 2017 could later work for local Chinese companies.” ers are its fastest growing, making up some 11% of This complicated dynamic will only be exacer- sales in 2017, up from 9% the previous year. bated once homegrown Chinese chipmakers make Not far away from TSMC’s Nanjing facility, Effective tax rates it to the global stage. on semiconductor Tsinghua Unigroup is planning to build a $30 bil- companies: “We will see more and more conflicts of interests lion megasite the size of 2,380 basketball courts later -- between countries and also between local to produce memory chips. The Tsinghua project and foreign suppliers later,” said CINNO’s Yang. would benefit from any suppliers that TSMC brings “This ongoing trade friction between the U.S. and to the community. China is just one example.” “It’s very difficult for emerging players to secure good support from best-in-class chip equipment Nikkei staff writers Hiromi Sato in Silicon Valley, and material suppliers, but foreign chipmakers Kim Jaewon in Seoul and Lauly Li in Taipei would bring a whole cluster of them even to some Sources: Natixis, Bloomberg contributed to this report.

Crude oil Crude oil Integrated circuits Integrated circuits

(in billions of dollars) (in percent of total imports)

400 16

300 12

200 8

China’s chip industry still roughly 100 4 nine times smaller than that of the U.S.

0 0 0 50 100 150 200 250 2012 ’13 ’14 ’15 ’16 ’17

Sources: Natixis, CEIC As of 2017 Source: IEK

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