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SEPTEMBER 2020

China Sets Out $29 Billion Fund For Microprocessors’ War With United States

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China Sets Out $29 Billion Fund For Microprocessors' War With United States

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On October 31st, China introduced a $29 billion state-backed fund to build up its domestic semiconductor industry and stop relying heavily on US producers.

China is the world’s biggest chip importer, and the long-awaited 204 billion yuan ($28.9 billion) fund will fuel Beijing’s efforts to develop its own semiconductor supply chain from chip design to manufacturing.

Beijing’s effort to reduce its reliance on US chips is becoming more urgent as the Trump administration adds more Chinese companies to its export blacklist, prohibiting chip sales to companies such as tech giant Huawei.

Twenty-seven organizations participated in the second financing round of the China National Integrated Circuit Industry Investment Fund, with China’s Ministry of Finance the largest shareholder after a RMB 22.5 billion investment, according to corporate intelligence information platform Tianyancha.

Other backers of the fund include China Development Bank Capital, state-owned firms such as China National Tobacco and the country’s three major telecom operators, local government-supported enterprises.

China imports approximately $200 billion in chips each year, it imports 95% of its high-end chips and several US companies, specifically Qualcomm and Broadcom owe a significant share of their sales to China.

China Sets Out $29 Billion Fund For Microprocessors' War With United States

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Intel, Qualcomm, and Micron, make up 30% of the global chip market and many derive large parts of their revenue from China as can be seen on the graph. The fund impacts chip exporters such as South Korea and Japan, but none more than the U.S. American companies.

This doesn’t mean that a shift would take place immediately, it would likely take years for a Chinese company to compete with the US competitors, but it is not impossible.

Mobile phone companies like Huawei, Oppo and Xiaomi have grown in popularity in the West – with Huawei becoming one of the most popular Android phone manufacturers.

Even without the Trump administration’s pressure, China is aggressively chasing higher domestic chip production under its “Made in China 2025” project.

This investment fund is not the first one, in 2018 there were reports of another fund of $47 billion, but whether it actually launched or not remained unclear.

The Wall Street Journal, citing unnamed sources, reported that the government-backed China Integrated Circuit Industry Investment Fund would allocate the funding to — among other things — improving China’s ability to design and manufacture advanced processors and GPUs.

It is also wholly possible that the $29 billion fund is the one named in the WSJ report, just after a delay, due to one reason or another. Since a $47 billion investment fund would be difficult to pass under the radar.

The first such fund aimed at enhancing China’s production of chips was launched in 2014 and it was worth $21.8 billion and was largely funded by central and local government-backed enterprises and industry players.

China’s State Council, the country’s cabinet, published the “National Integrated Circuit Industry Development Guidelines” in June 2014, which initially proposed setting up a special national industry investment fund to boost the semiconductor industry. The guidelines pledged to stimulate dynamism and creativity in China’s semiconductor companies and accelerate the pace of China’s semiconductor industry in order to catch up with international leaders.

China urgently trying to stop relying heavily on the US is quite showing on the progress of a conclusion of the Washington-Beijing trade war, and it means that the “first phase deal” is nothing conclusive. Regardless, China is following its “Made in China 2025” plan, but it may simply be ramping up efforts to fit into an accelerated schedule.

Huawei is still blacklisted, despite some waivers being given out to some US producers and the “first phase deal” did very little to address any of the actual issues of the trade dispute.

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