Tuesday October 27, 2020
From Max Borowski
The communist leadership in Beijing is currently planning its economic policy for the coming years. The focus is on its own chip industry that is independent of the USA and is to be built up with gigantic sums of money. The success of this project is doubtful.
In official announcements and the Chinese media, it reads quite simply: As part of the five-year plan just discussed by the communist party leadership, China will concentrate on developing its own world-class chip industry. According to reports, head of state Xi Jinping has already announced the prospect of providing up to the equivalent of 1.4 trillion (1,400 billion) dollars – including private capital – for investments in order to make the technology industry independent of the import of foreign chips – especially from the dominance of the USA . At the same time the economy of the People’s Republic should get a “turbo boost”. Both goals will be difficult to achieve for the industry despite the trillions of rain.
The subject is equally important for China economically and politically. The country imports more than $ 300 billion worth of microchips annually. That is more than it spends on oil imports. Even though the main manufacturers are based in South Korea and Taiwan, the US controls the technology and patents that are necessary to design the most powerful chips currently available and vital for a wide range of industries from cellular communications to the auto industry. US President Donald Trump has already begun cutting off Chinese companies such as cell phone giant Huawei from supplying this technology.
Hotter than the real estate sector
Without the latest processors, China’s industry threatens to lose touch with the world leaders in future technologies such as 5G, as does the military arms race with the USA. Even with a possible change of government in Washington after the elections, observers do not assume that the US under new leadership would give China free access to this key technology. The creation of a Chinese chip development independent of foreign countries is even compared in comments with the development of the Chinese nuclear program decades ago.
In view of these developments and in anticipation of gigantic government investments, a boom in Chinese chip developers has already started before details of the new five-year plan, which is supposed to set the framework for economic policy from 2021 to 2025, are known. In recent years it was still difficult to raise capital, “Bloomberg” quotes the head of the Association of the Semiconductor Industry in Shenzhen. But now the industry is “hotter” than the metropolis’s real estate sector, which is notorious for wild speculation. This year alone, around 9,500 companies have entered the field of chip production, most of them from outside the industry. Should they fail, a huge bubble threatens to burst.
The People’s Republic not only risks speculating huge sums of money, but also its goal of catching up with the world’s best in terms of technology. Experts from the Eurasia Group think tank estimate that China will need at least a decade to develop a leading chip manufacturer on its own. Until then, the dependency on the USA remains.
In the meantime, both sides are likely to lose a lot financially in the battle for control of the IT industry. Should China, permanently cut off from US technology, develop a completely independent chip industry, the western manufacturers would lose their largest market by far and many technology groups would lose important parts of the supply chain. China, on the other hand, could only supply its own market with second-class IT products that would not be internationally competitive for years to come.