Chinese companies continue to increase investment in domestic chip production as Beijing keeps focus on self-sufficiency

  • China’s IC sales hit 1.05 trillion yuan in 2021, up 18.2 per cent from a year earlier
  • Chinese companies are lining up to invest in semiconductor sector amid Beijing’s efforts to spur greater self-sufficiency amid US tech rivalry

Spurred on by Beijing, Chinese companies are upping their investment in the domestic semiconductor sector, after a year that saw sales of integrated circuits (IC) in the country surge 18 per cent to the highest growth rate in three years, according to Chinese media reports and industry data.

China’s IC sales hit 1.05 trillion yuan (US$158.6 billion) in 2021, an 18.2 per cent jump from a year earlier, according to data released on Wednesday by the China Semiconductor Industry Association, which represents 744 companies in the industry. It is the fastest pace in the past three years.

Providing a breakdown, the association said sales of the manufacturing sector increased 24.1 per cent to 317.6 billion yuan, higher than the growth rate of the design sector and the packaging and testing sector, which were up 19.6 per cent and 10.1 per cent respectively.

“The growth rate in 2021 sales shows signs of significant potential for future growth in China’s semiconductor device market”, said Wang Lifu, a Shanghai-based analyst at semiconductor consultancy ICWise.

Future momentum will depend on three main factors – whether the US will impose new sanctions on Chinese chip companies, whether Japan will restrict China’s access to semiconductor materials and equipment under US pressure, and whether domestic policies will be eased to support private-owned chip making companies, according to Wang.

As of Thursday, 81 companies listed in mainland China have set up industrial funds this year, and more than 60 per cent of them are targeting mergers and acquisitions in the semiconductor and new energy sectors, according to state-owned newspaper Securities Daily.

The numbers highlight the growing interest of Chinese companies in the semiconductor sector amid Beijing’s efforts to spur greater self-sufficiency in the production of ICs amid intensifying tech rivalry with the US.

China produced 359.4 billion ICs in 2021, up 33.3 per cent year-on-year, doubling the rate seen in 2020, according to data released by China’s National Bureau of Statistics in January.

Although well behind the leading edge of global chip leaders, China is making progress in localising some of the tools needed for IC production, according to UBS Securities.

“The industry has tried to resolve some of its semiconductor supply issues by qualifying new suppliers, giving China’s local semi vendors an opportunity to penetrate China’s machinery industry,” Phyllis Wang, an analyst in Shanghai at UBS, said in a report in January.

China’s efforts to grow its chip industry with government subsidies, procurement preferences, and other preferential policies has triggered an investment boom.

In 2021, the government announced 28 additional wafer fabrication construction projects totalling US$26 billion, although many were for mature technologies like analogue chips and micro electro mechanical systems, according to the US-based Semiconductor Industry Association.

Last month, Shenzhen Hongfuhan Technology Co, listed on the Nasdaq-styles ChiNext board, said it would take a 37 per cent stake worth 10.6 million yuan in a newly-established fund for the semiconductor industry.

Hongfuhan, a supplier of smartphone, computer and display components, said the move would “have synergy with its main business and elevate its core competitiveness”.

Days before that deal, Shenzhen-listed Jiangsu Dagang Co, which owns several IC subsidiaries, decided to put 45 million yuan in a 100-million-yuan semiconductor industrial fund in Zhenjiang city, Jiangsu province.

The establishment of industry funds can strengthen links between the upstream and downstream chip industry, and lower the threshold for start-ups to enter the market, said Wang at ICWise.

However, the influx of money might “inevitably lead to the dispersion and waste of resources”. “It is very likely to create the illusion that entrepreneurial success is too easy, leading to the dispersion of capital and talents,” added Wang.

The value of IC exports increased 32 per cent to US$153.8 billion in 2021, more than double the rate in 2020. The value of IC imports climbed 23.6 per cent to US$432.6 billion, versus a 14.6 per cent growth in the same period last year, according to official customs data. The gap illustrates how China is still reliant on IC imports, especially when it comes to the most advanced chips.

Authors: Ann Cao, Coco Feng, SCMP

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