China will use ageing chips as its semiconductor industry is catching up.

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A ambitious plan to get around to US export controls

China aims to become a leading power in technology, but in the end it could have taken a few shortcuts, which explains why it is engaged in an expensive trade war with the United States. Semiconductors, however, are among the key pain points, which is why the country is spending $155 billion in research and development of advanced chip producing technologies.

As the trade war between China and the US rages, the Chinese government is doing everything in its power to support the local technology industry. Flagship Chinese companies like Huawei no longer have access to American silicon or the software needed for their devices.

As far as writing is concerned, China is capable of covering more than 20 per cent of the chips required by the local industry, but the Chinese government expects to raise that figure to 70 per cent by 2025.

This is part of the country’s famed “3-5-2” strategy of replacing all international hardware and software from its public networks with home-grown solutions that would eventually have an effect on certain U.S. tech giants like Dell, HP, and Microsoft.

 

China is investing exorbitant amounts of funding into local tech firms aiming to bridge the technological gap as quickly as possible. In 2019 alone, the government granted $29 billion in subsidies to firms such as Zhaoxin, Huawei and SMIC.

Zhaoxin is reportedly producing x86 processors, while Huawei is focused on arm-based CPUs, GPUs and AI accelerator cards. SMIC is by far the most critical piece of the puzzle, as shown by last year’s $7.6 billion share sales. It is, after all, the country’s largest foundry and the secret to reducing China’s dependence on imported chips.

This would be a daunting challenge, as the country’s demand for silicon has grown rapidly, hitting 543 billion units in $350 billion in 2020. That is why China is spending no less than $155 billion through 2025 to strengthen its local semiconductor manufacturing capability over the next five years. And it’s just one portion of the projected $1.4 trillion budget that President Xi Jinping has promised for China’s digital transition path over the coming years.

Last year, the Trump administration tightened the screws on SMIC’s right to trade with photolithography equipment suppliers producing advanced EUV machines. As a result, China is now purchasing almost every used computer from countries like Japan for $1 million apiece, even though much more modern technology has made it obsolete. At the same time, it also purchases $1.2 billion worth of vintage, deep ultraviolet lithography (DUV) equipment from the Dutch maker ASML.

The plan is to use this older equipment to produce chips for automobile, manufacturing and military applications where process nodes like 14 nm and 28 nm are advanced and perfectly suitable for these applications.

In the meantime, SMIC is working to develop more than 300 mm wafer processing plants and to keep up with TSMC and Samsung on more mature process nodes. It’s an ambitious idea, and it’s going to take a decade to unfold, and it’s going to be peppered with mistakes along the way. It is, though, better than attempting to adjust the way the Internet operates, which goes nowhere quickly.

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