INSIGHTS: Shanghai tech board to push semiconductor independence

Announced by President Xi Jinping at the first China International Import Expo in November 2018, the Shanghai Stock Exchange’s Science and Technology Innovation Board focuses on companies in high-tech and strategic emerging sectors. Of the nine companies first slated to go public on the board, three are chipmakers: Hejian Technology, Amlogic and Raytron Technology. On top of that, three other companies have scrapped plans to list in Hong Kong in favor of Shanghai’s new tech board.

By launching the new board, the state is in fact providing venture capital with a smooth exit option, and stimulating more funds to flow into the high-tech sectors.
—Dong Dengxin, director of the Financial Securities Institute at the Wuhan University of Science and Technology

Semiconductors not only top the list of sectors recommended for the board by the China Securities Regulatory Commission, but also feature as a top 10 priority sector in the Made in China 2025 plan.

Bottom line: China is still reliant on imported semiconductors—but probably not forever. Long-term state support is driving independence in more categories of semiconductors, especially emerging chip types like application-specific integrated circuits (ASICs).

Deadline 2025: First proposed in 2015, the Made in China 2025 (MIC 2025) initiative is superficially about higher-value manufacturing. But it goes much deeper than production by getting at the core of China’s most recent push: innovation. MIC 2025’s guiding principles include the following: that manufacturing should be innovation-driven, emphasize quality over quantity, achieve green development, optimize the structure of Chinese industry, and nurture human talent.

Long-term effort: MIC 2025 is the third document issued by China’s State Council to address innovation and the need for industrial upgrading. In 2006, the central government issued the National Medium- and Long-Term Program for Science and Technology Development (2006-2020), which emphasized “indigenous innovation.” In 2010, the “Decision on Accelerating the Fostering and Development of Strategic Emerging Industries” named seven strategic industries. However, MIC 2025 differs in key ways, according to Scott Kennedy, senior adviser of the Freeman Chair in China Studies and director of the Project on Chinese Business and Political Economy (my emphasis):

Made in China 2025 is different in multiple respects:

1. It focuses on the entire manufacturing process and not just innovation;
2. It promotes the development of not only advanced industries, but traditional industries and modern services;
3. There is still a focus on state involvement, but market mechanisms are more prominent than in the [Decision on Accelerating the Fostering and Development of Strategic Emerging Industries]. For example, instead of focusing on top-down, unique domestic technical standards, the attention is on self-declared standards and the international standards system;
4. There are clear and specific measures for innovation, quality, intelligent manufacturing, and green production, with benchmarks identified for 2013 and 2015 and goals set for 2020 and 2025.

The chip connection: China has been striving for technological independence since the founding of the People’s Republic. Chips are essential not just for those cool devices you hold in your hand, but also for weapons systems, cryptography and supercomputers. When the Trump administration almost killed ZTE with a semiconductor export ban, chips—always an industrial policy priority—became part of a much bigger discussion.

Not spending enough:

• Taiwan Semiconductor Manufacturing, the world’s largest contract chipmaker, spent almost $2.9 billion on R&D in 2018
• Semiconductor Manufacturing International, China’s chip manufacturing champion, only spent $550 million on R&D in 2018 (Financial Times)

Only a matter of time: Velu Sinha, a partner at Bain & Company in Shanghai, says China will eventually be a competitive chipmaker: “It is not a question of if, it is a question of when. But we are not talking a year or two, we’re talking five to 10 [years] before those technologies [in China] get caught up.”

AI to the rescue: While China may lag behind in general-purpose CPU and GPU manufacturing, ASICs are gaining steam, especially with the rise of AI applications, including facial recognition, voice recognition and autonomous driving.

Heavy hitters

• Bitmain—makers of bitcoin ASICs, now making ASICs for AI applications
• Cambricon—makers of Huawei’s Kirin NPU chip. They have received funding from the Chinese Academy of Sciences, iFlytek, Alibaba and Lenovo. In June, they were valued at $2.5 billion in their Series B.
• Horizon Robotics—founded by the former head of Baidu’s Institute of Deep Learning. Backed by Intel and SK, their latest funding round in February 2019 values them at $3 billion.
• Alibaba—In September, the e-commerce giant established “Pingtouge,” an AI chip company that integrates the chip business from their own Damo Academy with C-Sky Microsystems, which they acquired in April 2018.
• Huawei—The telecoms and smartphone giant revealed its AI chip ambitions in October with the announcement of the Ascend 910 and Ascend 310.
• Baidu—The search giant announced its Kunlun AI chips in July for edge and cloud computing.