February 19, 2019 / 2:53 AM / 3 months ago

Breakingviews - Money can’t buy China’s chip industry much love

Employees work at a production line in the clean room of Semiconductor Manufacturing International Corporation (SMIC) in Shanghai February 25, 2008. SMIC is the biggest semiconductor manufacturer in China. REUTERS/ Nir Elias (CHINA)

HONG KONG (Reuters Breakingviews) - Sometimes money isn’t enough. Beijing may offer to buy more semiconductors from the United States, a move that underscores the challenges it has faced in its bid to make advanced ones at home. Industrial policies like Made in China 2025 draw fury abroad, but the People’s Republic’s scant progress in churning out high-tech chips suggests it’s unclear if such measures even work. 

China has proposed to boost imports of U.S. semiconductors to $200 billion over six years, in an effort to placate American trade negotiators, the Wall Street Journal reported on Thursday. That would require imports to rise from about $6 billion in 2017 to an average of $33 billion in coming years. Part of that might come from shifting final assembly from third countries to China – but it would probably require more actual buying, too.

That fits awkwardly with Beijing’s plans to make more advanced chips at home. Officials have in recent years set myriad goals and targeted as much as $150 billion in state and other investments for the industry, according to a McKinsey tally based on an official 2014 policy roadmap.

Yet despite oodles of support, China has made modest progress. Sure, it is producing lots of semiconductors – almost $80 billion worth in 2017, according to Deloitte – but the country remains almost entirely dependent on foreign suppliers for cutting-edge technology. Analysts estimate that China is as many as five years behind the United States in memory chips and up to 15 years in other key areas, such as some types of processing. State-backed manufacturer SMIC has failed to close the technological gap with the global leader, Taiwan’s $190 billion TSMC.

There are some bright spots – Huawei’s subsidiary HiSilicon, for instance, designs impressive mobile phone chips – and many in the industry think China will eventually catch up over the course of decades. But that’s mostly due to the country’s enormous appetite for consumer electronics. Evidence so far suggests that soft factors such as talent and intellectual property are as important as cash. As U.S. negotiators clash with Beijing over distorting subsidies, chips are a reminder of how these grand plans can fall flat.

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