China doesn’t want to depend on the US, so it’s reinvesting billions in its chip industry

Again, the Chinese government is allocating tens of billions of euros to stimulate its own chip industry. China is investing 44 billion euros in funds that invest mainly in Chinese companies that make equipment for chipmakers, such as chip machines.

This is President Xi Jinping’s latest attempt to reduce dependence on the US and its allies for chips. Between 2014 and 2019, the fund has already invested billions of euros in Chinese chip factories.

“Beijing is still dependent on the US and its allies,” says Joris Deer of the European Union Institute for Security Studies (EUISS). “China spends more money importing semiconductors than importing oil. Xi Jinping fears that the US could restrict trade flows in the event of a military conflict over Taiwan.

In turn, the US wants to prevent China from becoming more independent on chips. US President Joe Biden has announced export restrictions starting in 2022 for Western companies that sell advanced chip-making technology to China. The US government has pressured South Korea, Taiwan, the Netherlands and Japan not to supply advanced chip technology to China. Weldoven manufacturer of chip machines ASML noticed the consequences: the company was no longer allowed to export its state-of-the-art machines to China.

The US government wants to slow down China technologically to gain military superiority. Chips are used not only in consumer products such as mobile phones, but also in weapons and military equipment. At the same time, the US also wants to be less dependent on advanced chips from Asia. By offering subsidies and tax breaks to chip companies, the US hopes to produce more chips on its own soil.

The economic war between China and the US is now creating subsidy competition. Because the EU also wants to become “strategic autonomous” and produce 20 percent of the world’s chips by 2030. The European Union is allocating billions of euros in subsidies to set up its own chip industry. In Germany, US chipmaker Intel and Taiwanese chipmaker TSMC are now building factories with the help of subsidies.

China already spends more money than the US and the EU, Deer says. Before the new fund was set up, it had already raised about $140 billion, Bloomberg News estimated. The US has provided about $110 billion in grants, soft loans and tax breaks. According to Bloomberg, the EU is about $46 billion.

What does China achieve with those billions? China now has many chip factories, but it is still not as efficient at making advanced chips as South Korea and Taiwan.

“In recent years, it has become clear that setting up your own chip industry is not that easy,” says Frans-Paul van der Putten. “A lot of money is involved and China has yet to reach the same level as Western countries and their allies.” Look at ASML, says van der Putten. “ASML’s machines contain many components and ancillary technologies offered by other European companies.” You cannot recreate such an economic network.

China risks dominating production of less advanced chipsJoris Deer EUISS

Deer says it’s more difficult to build your own business in chips than in solar panels or plug-in cars, for example. “ASML chip machines are among the most complex systems ever created by mankind.”

Van der Putten says US export sanctions encourage China to continue subsidizing. “An unintended consequence of US export restrictions is that Chinese chip machine makers now have an opportunity to grow. Until now, Chinese chip makers have chosen machines from ASML and Japan because they are better than Chinese alternatives.

A huge debt

Thier sees another danger. “China needs to catch up on those chip machines. China is more than ten years behind. I don’t see that happening anytime soon. A big risk is that China is very dominant in the production of low-quality chips that are so important to the West. “The biggest misconception I see often is that It’s about who can make chips with more computing power. The risk is high that China will dominate the production of less advanced chips used in MRI scanners, pacemakers, offshore wind turbines, telecommunications, fighter jets and weapons to deter Russia. Semiconductors are the nervous system of the modern manufacturing industry. Low-advanced semiconductors are vital to the full range of key sectors and the economy in the wider sense.

The EU is weak in this economic chip race. According to van der Putten, the EU does not control very large parts of the chain and a lot needs to be built. But van der Putten thinks America will not become completely independent in the end.

“The U.S. wants to control almost the entire chip manufacturing chain with its allies. But the U.S. also depends on China when it comes to key raw materials needed to make chips. Like cobalt and germanium. “The key players are interdependent.”

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