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China reveals policy to increase chipmakers as tensions with US increase

Integrated circuits on a circuit board. The semiconductor industry has been in focus during the trade war between the United States and China.

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China has unveiled a series of policies to help boost its domestic semiconductor industry as tensions with the United States continue to rise, but analysts have expressed doubts whether they will have a major impact.

A large part of the incentives from China̵

7;s government focus on tax breaks. For example, a manufacturer that has been in operation for more than 15 years and that makes so-called 28 nanometers or more advanced chips, exempt from corporate income tax for up to ten years.

For chip manufacturers, the benefit treatment period begins from the first profit year.

But it’s not just the actual manufacturing side of the industry that gets tax breaks. Other players working in areas from chip design and software, areas where the US and Europe have traditionally been very strong, also received tax incentives.

Beijing’s new policy also focuses on financing and encourages companies to list on China’s technology – focused exchanges such as the Shanghai Science and Technology Innovation Board, often referred to as the STAR Market.

According to the so-called “Made in China 2025” industrial plan, the country aims to produce 40% of the semiconductors it uses by 2020 and 70% by 2025. It is unclear what that figure is at present. But it is a key focus for the government and one that has increased over the past 18 months as tensions between China and the United States have escalated.

“I think this new cold technology war is exactly why China is peeling off the technology curve and aggressively developing mainland technology for the threat of being interrupted and cut off by aggressive US policies,” Neil Campling, head of technology, media and telecom research at Mirabaud Securities, told CNBC via email.

Semiconductor search?

Analysts have doubted that the latest announcement could give a meaningful boost to the semiconductor industry in the world’s second largest economy.

“The Prime Minister’s announcement focuses primarily on tax breaks, which are unlikely to overlap with China’s semiconductor development,” Dan Wang, a technology analyst at Gavekal Dragonomics, a Beijing-based research firm, told CNBC. “But it signals that the central government has strong political support for the sector.”

The stimulus for the chip industry in China is not new. In 2014, Beijing set up a multi-billion dollar national fund to invest in chipmakers and last year created another. But China is still far behind the United States and other countries such as Taiwan and South Korea.

“Beijing has been pouring money into parts of the semiconductor industry since the establishment of the National IC (Integrated Circuit) Investment Fund in 2014, with so far only gradual success. This is because the sector is highly globalized, competitive and market driven and companies need more than cash to compete. “Paul Triolo, Head of Geotechnology Practice at Eurasia Group, told CNBC.

“The preferential treatment plan in the new policy will help in some areas, but in the short term will have only a marginal impact on the ability of Chinese semiconductor companies to move up the value chain and become more competitive globally.”


The US’s latest sanctions on Huawei have revealed China’s confidence in external chipmakers. Washington’s latest rule requires foreign manufacturers using US chip production equipment to obtain a license before they can sell semiconductors to Huawei.

Huawei relies on Taiwan’s TSMC to manufacture so-called 7-nanometer chips for its smartphones. TSMC will be affected by the latest US sanctions. These are some of the most advanced semiconductors and there is no Chinese player that can produce them on the scale that Huawei needs.

Even China’s largest chipmaker, SMIC, which sold 46.28 billion yuan ($ 6.64 billion) of shares in Shanghai last month, will not be able to meet Huawi’s demands.

The semiconductor supply chain is quite complex. While Huawei, for example, designs its own chips, it needs TSMC to actually make them. And the manufacturing process consists of various very complicated equipment made by very few players.

For example, the Dutch company ASML manufactures a machine that uses so-called extreme ultraviolet (EUV) and is required to make the most advanced chips such as those manufactured by TSMC and Samsung. But earlier this year, Reuters reported that the United States was pressuring the Dutch government to stop selling an ASML machine to SMIC. That delivery has not arrived in China.

An ASML spokesman told CNBC that the company was waiting for an export license from the Dutch government to send its machines to China.

“The Dutch Ministry of Foreign Affairs and the ASML are talking about the export license. No further details will be provided,” the spokesman said, adding that the company “has never confirmed the customer’s name and will not do so.”

Such measures could prevent China from catching up with the United States now.

“Here, access to cutting-edge tools that remain under US government control because they contain IP origin from the United States (intellectual property) is the limiting factor for China,” Triolo said. “No amount of government investment can overcome restrictions on tools such as extreme ultraviolet lithography, for example, which are currently being denied to China’s leading foundry SMIC.”

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