Chinese Chipmakers to Reform in Wake of Anti-Corruption Campaign

小柚财经报道:

《Chinese Chipmakers to Reform in Wake of Anti-Corruption Campaign》

Image source: China Visual

By Shaw Wan

BEIJING, August 8 (TMTPOST) — China chipmakers bounced back last Friday, with dozens of stocks reaching their daily limit, a silver lining for the beleaguered industry.

Chinese chipmakers went on a roller coaster , with two companies going bankrupt, several heavyweight players being probed and the United States limiting China’s access to chipmaking gear. Shares of Shenzhen Bluetrum Tech, a chipmaker for bluetooth headsets, fell in their first day of trading in Shanghai in early July. It declined 29.85 percent to finish at 64.3 yuan ($9.52), and investors lost 13,700 yuan ($2,029) over a round lot, or 500 share units. Share price of the company dropped by one third a month later, with its market value evaporating by 3 billion (444 million).

“This year might be a watershed for the Chinese semiconductor industry. And investors would pay more attention to innovation,” Zhao Zhanxiang, partner and chief technology officer of Winsoul Capital, said at a summit.

Risks of Cyclicality

Semiconductor manufacturing runs in boom and bust cycles along with market demand and related policies. The past months have been the darkest period for chipmakers, some of which went bankrupt before dawn. China’s Qualcomm Nurlink, a chip startup with a Series B financing of 200 million yuan ($30 million) collapsed, owing employees two months’ wages. Another electronics manufacturer Dongguan Koppo Electronics  Co., Ltd. announced bankruptcy on July 18 .

Investigations were underway for several key figures in the field. Xiao  Yaqing, head of the Ministry of Industry and Information Technology, was under investigation  for suspected violations of discipline and law on July 28. Two days later, Ding Wenwu, the president of National Integrated Circuit Industry Investment Fund Co., Ltd. , China’s biggest semiconductor industry investment fund or the Big Fund, was also under disciplinary investigation, according to the Beijing Supervisory Commission . The former president of the management entity of China’s Big Fund, Sino-Ic Capital Ltd., Lu Jun, was put under investigation two weeks prior to that.

In the same week, the United States tightened curbs on China’s access to chipmaking gear, as the nation passed the Chips and Science Act, a legislation intended to subsidize its domestic semiconductor industry. It has also banned the sale of equipment that can make chips smaller than 14 nanometers to Chinese enterprises, according to Tim Archer, chief executive officer of Lam Research Corporation, an American supplier to the semiconductor industry.

Chip stocks slipped as uncertainties mounted. Shares of Guotai CES Semi-conductor Industry ETF (512760 ) shrank 17.99  percent over the past six months. And the electronics sector fell 0.52 percent in Q2, underperforming the Shanghai Stock Exchange Composite Index and the Shenzhen Stock Exchange Component Index, indicators of China’s stock market.

However, things were moving in the chip industry’s favor for the previous three years, since China set up the Sci-Tech Innovation Board in 2018. National authorities have been boosting domestic manufacturing of chips to make up for the shortage. Shares of Guotai CES Semi-conductor Industry ETF (512760) grew by 88.76 percent compared with three years ago, according to Wind Information, a financial software service provider. The number of semiconductor stocks has increased to 105 with a market value of 2.7 trillion yuan ($399 billion). And for the gross revenue of the global semiconductor companies that have gone public, A-shares listed semiconductor companies took up 10.36 percent.

Shortages of Certain Chips

After years of development, Chinese chipmakers have succeeded in fields like manufacturing smartphone chipsets. But for industries such as automobiles, servers and memory devices, they still lag behind. According to World Semiconductor Trade Statistics, the market value of global computing chip was $154.8 billion, accounting for 28 percent of the semiconductor market. However, among nearly 20 million servers in China, the market share of domestic chips was less than 2 percent.

“Domestic server chips are not good enough, making them less competitive in the global market,” said Wei Shaojun, professor at Institute of Microelectronics, Tsinghua University, at China Computer Federation Chip Conference 2022. For example, domestic chips were not equipped with the critical surface-mount technology.

“We put a lot of efforts into building artificial intelligence ​​platforms, which aren’t performing very well. To put it in other words, they haven’t been able to meet our requirements. We still need to wait,” he added.

Domestic information technology companies, such as Inspur Group, Alibaba Cloud, and Tencent Cloud, rely on chips from American giants like Nvidia, AMD and Intel. “Many domestic chips are just not working in clients’ devices because of poor adaptation,” an executive of a domestic graphics processing unit (GPU) company told TMTPost.

Chip investment and financing in the primary market were becoming more rational. Investors would value those chipmakers with better technical barriers to trade and more room for growth, another executive from a domestic chip company said.

“Automotive electronics, semiconductor manufacturing, electronic design automation and compound semiconductors are worthy of more attention,” said Xiao Chunan, executive director of investment banking at China Renaissance Securities.

Success doesn’t happen overnight

China’s largest  chipmaker, Semiconductor Manufacturing International (SMIC), was founded in 2000. The past 22 years have witnessed ups and downs in the semiconductor industry.

Chinese chipmakers adopted a market differentiation strategy  in the beginning, crafting unique products and services in consumer electronics to avoid head-on competition against foreign semiconductor giants.

However, in 2018, the United States banned American companies from selling parts and software to ZTE Corporation, a Chinese tech firm. Although the ban was lifted several months later, Chinese companies started to work on high-end chips to get rid of dependence on foreign enterprises. Since then, many replacing options have emerged, including Loongson processors, Kunpeng chipsets from Huawei and WPS Office by Kingsoft Corporation.

Investors have been enthusiastic about such trends. According to the Securities Times, a national financial newspaper in China, 81 companies listed in mainland China have set up industry funds as of March this year, of which more than 60 percent aimed at mergers and acquisitions in the semiconductor and new energy fields. As of 2019, investment funds for the chip industry valued 500 billion yuan ($74 billion), the China Semiconductor Industry Association estimated.

With such passion from investors, Chinese chipmakers should not be blinded by the spotlight. “On the journey to independent innovation, no academic fraudulence should be allowed in the chip industry,” an editorial of Global Times, a state-owned newspaper, wrote.

2006 has seen an elaborate chip fraud. Chen Jin, the dean of School of Microelectronics at Shanghai Jiaotong University, was fired for faking the development of the Hanxin, a series of digital signal processors (DSPs). Launched in 2003, the Hanxin 1 chip was considered a breakthrough for China’s chip industry, which claimed to be the first DSP chip that China had fully independent intellectual property rights to.

Eight years later, the State Council issued  the Outline for Advancing the National Integrated Circuit Industry  to support economic and social development and safeguard national security. In the same year, the Big Fund, a state-owned investment fund, was founded to bolster the integrated circuit industry, including chip design, production, packaging and testing.

“Different segments of the semiconductor are still in their initial stages. They haven’t scaled up,” said He Hui, a lead analyst at research institute Omdia.

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