A major state-backed investment fund in China is in shambles as several top executives have been arrested. From the MIT Technology Review:
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China’s chipmaking industry descended into chaos last week, with at least four top executives associated with a state-owned semiconductor fund arrested on corruption charges. It’s an explosive turn of events that could force the country to fundamentally rethink how it invests in chip development, according to analysts and experts.
On July 30, China’s top anticorruption institution announced that Ding Wenwu, the chief executive of the China Integrated Circuit Industry Investment Fund, nicknamed the “Big Fund,” had been arrested for “suspected serious violations of the law.” Ding is not the only person in trouble. Two weeks ago, Lu Jun, a former executive at the Big Fund’s management institution, was also taken into custody, along with two other fund managers, according to the Chinese news outlet Caixin.
‘Made in China’
Let’s back up a bit. In 2014, China’s government created the China Integrated Circuit Industry Investment Fund (CICF) to invest in domestic chip making. Becoming self-sufficient in these critical components is a top priority of the Communist Party.
At that time, China could only make about 10% of the chips it needed. Its goal was to get to 70% by 2025.
The fund made over $30 billion in investments, with $20 billion more planned. But those investments have started to go sour.
The ‘Big Fund’ Takes Big Losses
One of its biggest investments, Tsinghua Unigroup, went bankrupt last year. Unigroup executives are under investigation and CICF’s $2 billion investment is likely up in smoke.
Riven by bad bets and likely self-dealing, CICF has failed to make China self-sufficient in chips. Today, China can only make about 20 or 30% of the chips it needs — well below target.
A Critical Moment
For China, being able to make semiconductors has never been more important. The US and its allies Taiwan, Korea and the Netherlands make virtually all the chips China imports.
The Trump Administration cut major Chinese telecom Huawei off from critical tech in 2019. Now, the US is pressuring Dutch chipmaker ASML not to sell certain chipmaking machines to China.
China is dependent on chip imports and cut off from the latest tech. Its efforts to develop its own industry have been mired in incompetence and corruption.
China’s Missed Opportunity
What should China have done differently?
Rather than giving government bureaucrats a mountain of state money to invest, use real investors!
With the right tax breaks, chipmakers and technology investors would’ve been eager to set up Chinese fabs. Perhaps TSMC would’ve built more plants in China and China would already be self-sufficient.
The Empire Strikes Back
Turns out another country is doing exactly this: the United States.
The recently passed CHIPS Act offers huge tax breaks for making semiconductors in America. Already, Intel, Samsung, and TSMC are setting up plants.
Worse yet for China, the CHIPS act bars companies that get those incentives from investing in cutting edge chipmaking in China.
I don’t think China will succeed in creating a major domestic semiconductor industry any time soon.
Its poor relations with other countries cut it off from foreign help. And China’s politicized investment climate results in little besides bankruptcies and prosecutions.
As much as we Americans complain about our government, turns out they’re actually doing a few things right.
What do you think the future holds for Chinese tech? Leave a comment at the bottom and let me know.
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