China unveils policy to encourage chipmakers as tensions with US rise

Integrated circuits on a circuit board. The semiconductor industry has been in focus during the US-China trade war.

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China has unveiled many policies to help boost its domestic semiconductor sector as tensions with the US continue, but analysts have questioned whether they will have a major impact.

A large portion of China’s State Council incentives focused on tax relief. For example, a manufacturer who has been in business for more than 15 years and who makes so-called 28 nanometers or more advanced chips will be exempt from business tax for up to 10 years.

For chip manufacturers, the preference period for treatment of the first profit year begins.

But it is not just the actual manufacturer side of the sector that is getting tax relief. Other players working in areas of chip design and software, areas where the US and Europe used to be very strong, also received tax incentives.

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

Under 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 recovered in the past 18 months as tensions between China and the US have escalated.

“I think this new war on cold technology is exactly why China is scaling up the technology curve and aggressively developing mainland technology to threaten austerity and cuts due to aggressive US policies,” said Neil Campling, head of technology, media and telecom research at Mirabaud Securities , told CNBC by email.

Semiconductor boost?

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

“The State Council’s announcement focuses on tax cuts that probably did not overwhelm China’s semiconductor development,” Dan Wang, a technology analyst at Gavekal Dragonomics, a Beijing-based research firm, told CNBC. “However, it signals that the central government has strong political support for the sector.”

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

“Beijing has been investing in parts of the semiconductor sector since the establishment of the National IC (Integrated Circuit) Investment Fund in 2014, with only incremental success so far. This is because the sector is highly globalized, competitive and market-driven, and companies need more than cash to compete, “Paul Triolo, head of geo-technology practice at Eurasia Group, told CNBC.

“The preference for treatment in the new policy will help in some areas, but in the short term it will only have marginal consequences from the ability of Chinese semiconductor companies to move up the value chain and become globally competitive.”


The recent US sanctions on Huawei have exposed China’s confidence in external chipmakers. Washington’s latest rule requires foreign manufacturers to use U.S. chipmaking equipment to obtain a license before they can sell semiconductors to Huawei.

Huawei relied on the TSMC of Taiwan to produce 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 last month traded 46.28 billion yuan ($ 6.64 billion) in Shanghai, will not be able to meet Huawei’s requirements.

The semiconductor circuit is quite complex. Although Huawei, for example, designs its own chips, it needs TSMC to actually make them. And the production process consists of several very complex pieces of equipment made by very few players.

For example, Dutch company ASML makes a machine that uses so-called extreme ultraviolet (EUV) and is required to make the most advanced chips such as those produced by TSMC and Samsung. But earlier this year, Reuters reported that the US was pressuring the Dutch government to stop the sale of an ASML machine to SMIC. That shipment did not make it to China.

An ASML spokesman told CNBC that the company was awaiting an export permit from the Dutch government to ship its machinery to China.

“The Dutch Ministry of Foreign Affairs and ASML are in talks 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 actions could deter China from taking over the US for now.

“Here, access to carving tools that remain under the control of the US government because they contain IP of US origin (intellectual property) will be the limiting factor for China,” Triolo said. “No amount of government investment can exceed restrictions on tools such as extreme ultraviolet lithography, for example, which is currently being rejected for the leading SMIC of the lower SMIC.