Editor’s note: China’s semiconductor industry has been on edge since mid-July. This time, the threat comes from within. China’s corruption regulator has launched a series of investigations into some of the country’s leading figures in the semiconductor industry. Many work directly or indirectly with the state-backed China National Integrated Circuit Industry Investment Fund, also known as the “Big Fund.”
Established in September 2014, the fund has been instrumental in nurturing China’s homegrown chipmakers, including successful examples like SMIC and YMTC. The fund runs on a market-orientated model and has more than a quarter of its equity held by the Ministry of Finance. These investigations could reshape the country’s most influential backer in the field and have implications for years to come. Below is an opinion piece looking at what we know so far, why it matters – and where things may go next.
Leaders under investigation
Xiao Yaqing, head of MIIT; Ding Wenwu, President of China’s National IC Industry Investment Fund (Big Fund); Lu Jun, Chief Executive of Sino IC Capital and asset manager for the Big Fund; Wang Wenzhong, a partner at Hongtai Fund in Shenzhen and asset manager for the Big Fund; Yang Zhengfan, Deputy Head of an investment division of Sino IC Capital; Zhao Weiguo, ousted CEO of Unigroup, one of the largest beneficiaries of the Big Fund. These people may not be household names or even familiar to those who follow the China tech industry but they have all played a key role in government efforts to become self-sufficient in semiconductors. And all of them have now been placed under investigation by China’s corruption watchdog, the Central Commission for Discipline Inspection (CCDI).
What is the Big Fund? How successful has it been? And what problems does it have?
The Big Fund(s)
So, what is the Big Fund? Or perhaps we should say “What are they?” because there are officially two phases of the fund.
Big Fund I raised a total of RMB 98.72 billion in 2014. Its major shareholders are central governmental institutions and leading state-owned enterprises (SOEs). The majority of Fund I went to increasing the capacity and design capabilities of China’s semiconductor industry. For example, approximately RMB 30 billion went to foundry expansion, RMB 20 billion to IC design companies, RMB 19 billion to memory, and RMB 10 billion to assembly, test, and packaging (ATP). Equipment only received RMB 2 billion. The focus is clear: expand the capacity of logic and memory foundries, grow China’s design firms and solidify the country’s strong packaging industry. Most investments from Big Fund I took place between 2014 and 2019 – it planned to exit from these investments between 2019 and 2024 but may remain invested in some after this period.
The top recipients of Big Fund I money include YMTC (RMB 13.5 billion to RMB 19 billion, most that was invested into memory), HLMC (RMB 11.6 billion), SMIC North (RMB 10.4 billion), SMIC South (RMB 6.3 billion), San’an Optoelectronics (RMB 4.7 billion), and JCET (RMB 4.6 billion).
When we look at how these companies are doing today, we can conclude these investments have been a success. YMTC is beginning to become a respectable competitor to Micron, SK Hynix, and Samsung; SMIC, despite limitations thrust upon it, is experimenting with multi-patterning techniques to create simple 7nm chips; San’an Optoelectronics is China’s leading compound semiconductor IDM; and JCET remains mainland China’s leading ATP firm, perhaps as good as rivals from Taiwan. Chip maker HLMC is maybe less of a success.
Phase two of the fund, Big Fund II, started in 2019 and will finish in 2024. It has similar shareholders but sees more SOEs participating. The total amount raised to date is roughly RMB 204 billion. While a large part of the fund still goes to the capital-intensive foundry sector, Big Fund II aims to focus on large investments to fewer companies in design and materials, though investments don’t seem to follow this stated goal.
Different from Big Fund I, Big Fund II helps develop key companies through investing in their upstream suppliers and downstream suppliers, usually coinciding with the establishment of an industrial park. Big Fund II also aims to promote downstream applications in key sectors like automotive, big data, and communications. Big Fund II has only invested RMB 86.9 billion to date and expects future investments to focus on key sectors outlined in the 14th Five-Year Plan (2021 to 2025).
To date RMB 55 billion of Big Fund II has been invested in foundry expansion, RMB 18 billion in design, and RMB 13 billion in ATP. Very little has gone into equipment or materials. While this could be more related to the costs involved in chip manufacturing, which far outweigh the cost needed for equipment research, one would think this key bottleneck would have more focus. To date only around RMB 500 million seems to have been invested into equipment. For comparison, Dutch semiconductor equipment maker ASML spent 2.55 billion euros (RMB 17.67 billion) alone on research and development in 2021.
Nevertheless, the Big Funds have helped to drive private capital into areas the government wants. From 2015 to 2019, private capital driven by Big Fund I raised up to RMB 500 billion. It is estimated that Big Fund II might drive as much as RMB 600 billion. This brings the total raised capital from 2014 to the present to approximately RMB 1.1 trillion to RMB 1.4 trillion, to be invested over the next decade.
Big Fund Problems
While I think there have been some successes, such as YMTC, Changxin Memory, and SMIC (despite more board departures) among others, the funds haven’t always been spent wisely, and this is especially true at the local level. Local government funds have perhaps wasted billions of yuan in the semiconductor industry since 2019.
It is not uncommon for local governments to blindly rush into popular industries, especially those that are key parts of the central government’s Five-Year Plan. This can create room for scams, which we’ve seen in several provincially funded projects due to corruption and poor due diligence. One good example is Wuhan Hongxin (HSMC), which aimed to produce chips from 90nm to 7nm. None of its founding members had any semiconductor experience yet they managed to entice a leading TSMC veteran to join as CEO, convince the Wuhan government to invest, and even managed to purchase some lower-end equipment from ASML.
It is common for the managing company to invest very little or even nothing in such projects, while most money comes from the local government. The Nanjing Huaiyin District government for instance invested more than RMB 2 billion in Dehuai Semiconductor in 2017, while its own annual public budget was only RMB 2.56 billion. More financing rounds followed, with most funds coming from the Huaiyin District government. Before mid-2020, it was common for local governments to conduct such billion yuan investments, and there are many more examples of wasted investments and unnecessarily large industrial parks that remain mostly empty. Phytium’s large 30-story building in Tianjin with only two floors used springs to mind, although this may have started to fill since my last visit in 2019.
In my experience, local investment decisions are often made by rooms filled with politicians and only one or two industry experts whose views may get crowded out. Such a trend was also criticized by the State Council in October 2020, but such investments have continued albeit in a more hidden manner.
We must remember the original goal of these funds: reducing foreign dependency on semiconductors. Yet China is importing more chips than ever. Despite its local production growing, imports have too, and the deficit has grown from a pure monetary perspective.
In its updated ‘Made in China 2025’ plan revised in 2019, China explicitly states that it is targeting 58% of the chips it uses to be made in China by 2020 and 80% by 2030. In 2021, chips manufactured within China’s borders only accounted for 16% of the chips the country was using. It has massively failed at reaching this goal. Moving from the unrealistic goal of 40% by 2020 to 58% by 2020 really highlights to me just how out of touch with the industry Beijing is. Even the head of the Big Fund, Ding Wenwu, who is now under investigation, once warned it was “unrealistic” to cut corners. Well, it seems that is what was expected.
Chinese investment into the semiconductor industry in my view has faced the following problems:
1. Unrealistic targets set by people with little knowledge of the industry – some of the timelines and goals were way too ambitious – which lead to inefficient investments a lot of the time.
2. Lack of industry experts making decisions or being listened to.
3. Tens of thousands of “semiconductor” companies appeared overnight to scam government cash; local and central government have a hard time telling which businesses are serious and which aren’t. Once they do get their hands burnt the process to get funds becomes harder for legitimate businesses as they are fighting against imposters.
4. Money is spread out among many companies, a lot is wasted, and a lack of investible ideas also means money often goes to companies that are unsuitable.
5. With this amount of money flowing, not having any corruption would be a big surprise.
In my opinion, China needs to realize the semiconductor industry is a global industry – no single country can be self-sufficient and such goals lead to spreading oneself too thin. Investments should focus on where China is strong: ATP, design, memory, and mature process nodes. YMTC’s success is a positive sign for Beijing. Becoming strong in memory first is a path Korea and Japan took, and perhaps Beijing can learn from them. Right now though, it risks becoming a jack of all trades.
And with the US CHIPs Act passing, China may well feel more threatened than ever, so doubling down on its current path and investigating some executives to be scapegoats for any potential failures may be what it has decided is its best course of action. One has to ask oneself though, would the CHIPs Act even be a thing if China had not so aggressively pushed for the self-sufficiency dream?