First of all, I explain about “semiconductor,” a main topic of this article, according to the website of Semiconductor Equipment Association of Japan (SEAJ) as follows:
“A semiconductor is a like-silicon material that has an electrical conductivity between that of a conductor, such as metals, and that of an insulator, such as gum. However, a transistor and an integrated circuit including something equipped with many transistors, are idiomatically called a semiconductor. A semiconductor has intellectual and information processing features that enable electronic devices to memorize information and to perform numerical calculations and logical operations, and plays a central role as a brain.
The semiconductor manufacturing equipment is an equipment for manufacturing a semiconductor (integrated circuit). There are various types of semiconductor manufacturing equipment, which forms material films, processes the films by using photolithography, adds a tiny amount of impurities and performs assembly and verifications. Innovation of a semiconductor manufacturing equipment is crucial for the development of a semiconductor itself1.”
The history of a semiconductor began in 1948, when William Shockley, an American physicist and inventor in the Bell Laboratories, invested a junction transistor. Shockley, who further kept studying semiconductor research, won a Nobel prize in Physics in 1956. Following the United States, Japan had also got devoted itself to the research and development in the semiconductor field, and in 1980s, Japan achieved over 50% of the world share, passing the U.S. in the amount of sales as well as technological capabilities, because Japan had a stronger competitiveness in the international market than the U.S., especially in the field of Dynamic Random Access Memory (DRAM) with low-price and its advantage.
Countering with lawsuits against Japan based on the Section 301 of Trade Act, the U.S. criticized Japan's policies on the semiconductor industry, saying the Japan's threats to the American market in the field of a semiconductor could be threats to the national security as well as to the American industry. In addition, the U.S.-Japan Semiconductor Agreement signed in 1986 also imposed so severe pressures on Japan's semiconductor industry that it was forced completely declined. Meanwhile, Samsung Electronics, a South Korean multinational electronic company, hired Japanese researchers and technicians with huge salaries, who had been fired in Japan, and the company has made an innovative achievement. As a result of technological transference at that time, Samsung Electronics has held the world's leading position now. Also, HiSilicon, a semiconductor company owned by Huawei, was ranked in the top ten as the first Chinese company. Many Chinese companies, however, largely depend on foreign products or technology in the field of a semiconductor crucial for the IT industry.
The purposes of this article are to discuss how China has proceeded with domestic production of semiconductors against sanctions by the U.S., to disclose problems of the nationalization, and to make some propositions for the Japan's future.
1. U.S. Clean Network
The U.S. has called on the countries all over the world to join “Clean Network,” which aims to exclude from the market Chinese IT companies like Huawei. This concept that U.S. Secretary of State Mike Pompeo announced on August 5, 20202, is to safeguard 5G networks, mobile applications, app stores, cloud systems and undersea cables from invasions of Chinese products. It has five factors: “Clean Carrier,” “Clean Store,” “Clean Apps,” “Clean Cloud” and “Clean Cable.” This is also to establish a telecommunication system without China, and to allow certified companies to access the U.S. systems. This certification system has been already adopted in the 5G system, and will be introduced into all the fields of telecommunication.
Pompeo added “The Clean Network program is the Trump Administration's comprehensive approach to guarding our citizens' privacy and our companies' most sensitive information from aggressive intrusions by malign actors, such as the Chinese Communist Party (CCP).3” Moreover, the Department of State put, in the website, the list of nations not using the Huawei systems, and also shows the names of large telecommunication enterprise leaving a relationship with China: NTT in Japan, Orange S.A. (formerly France Télécom) in France, SK and KT (formerly Korea Telecom) in South Korea, and Telus and BCE in Canada4. Along with the momentum, the United Kingdom has aimed to build a 5G alliance of ten democracies including the countries in G7, Australia, South Korea and India, with the view of creating alternative 5G suppliers to Huawei by using technologies of Nokia and Ericsson5.
In addition, the U.S. National Defense Authorization Act requires to clean out Chinese high-tech companies, such as Huawei, ZTE and Hikvision from foreign companies using those technologies and services in the supply chain with the American government agencies. The U.S. policy would not be largely changed under the Biden administration. Because of this, the market can't help depending on the U.S. technologies in the field of semiconductors, and the global trade embargo on China has been created6.
2. China's Counterattacks against U.S. Sanctions
In last year, it was reported that the inclusion of the development of the third-generation semiconductor, which the Xi administration had been planning, into China's 14th Five-Year Plan (2021 to 2025) was expected7, which would boost about 20% of its self-sufficiency ratio to 70%.
The third-generation semiconductor is made of new materials such as silicon carbide (SiC), gallium nitride (GaN), zinc oxide (ZnO) and graphite (C), and is used in wide-range fields, including 5G system and new energy vehicles. Incidentally, the first-generation semiconductor made of silicon and germanium (Ge) is equipped into CPU and GPU, while the second-generation semiconductor composed of gallium arsenide (GaAs) and indium phosphide (InP) is a component required for relay of optical communication equipment all over the world. The Chinese government also announced that it planned to strengthen the domestic manufacturing system by several means including exempting or reducing corporate tax for not longer than ten years, as well as adopting supporting policy for Chinese semiconductor makers.
In response to this, Chinese chipmakers have continued to raise funds for nationalization of semiconductors, with 20.5 billion USD as of July in 2020, which was roughly 2.2 times as much as that of last year. They received the supports mainly from state-backed funds and a stock market newly opened in 20198.
Chinese smartphones and equipment for 5G system have brought out its international influences in the world, while its chip self-sufficiency ratio remains the middle 10% range. With the U.S. pushing out Chinese chipmakers from the market, China would be possibly dropped out of the US-China competition, as well as struggling with chip production. The Nihon Keizai Shimbun, a Japanese financial newspaper, reported that Chinese chipmakers had received 144 billion RMB (20.5 billion USD) as of July in 2020, including commitments, according to data based on Chinese private databases, company filings and news reports. This surpassed 64 billion RMB (10 billion USD) from 20199, and the total amount of recent years reached 37 billion (5.8 billion USD) to 64 billion RMB (9.9 billion USD).
In 2014, China had established, China National Integrated Circuit Industry Investment Fund (CICIIF), a new state-owned semiconductor fund, and raised 140 billion RMB (22 billion USD) by 2019. In addition, the second fund had been also created in the fall of 2019 and started raising fund officially in 2020. The typical fund is Semiconductor Manufacturing International Corporation (SMIC). The China's largest semiconductor company with 61 billion RMB (9.5 billion USD) of the total group-wide amount of fund in 2020, listed, in July, on the Shanghai Stock Exchange STAR Market, which is touted as China's equivalent to America's Nasdaq, and is going to raise at most 50 billion RMB (7.7 billion USD). Furthermore, the subsidiary companies will receive funding of 15 billion RMB (2.25 billion USD) from the local state-owned funds. China aims to help it overtake Taiwan Semiconductor Manufacturing Company (TSMC), the world's largest semiconductor company.
However, there is still a wide gap of technology for semiconductors between China and foreign companies in the fields of mass-production capacity and manufacturing equipment. It is said that SMIC lags behind TSMC by over two-generation in the technology level. In order to achieve its international strategy as planned, China still faces many technological challenges as well as funding issues.
3. Setbacks of China's Chip Industry
(1) Tsinghua Unigroup on the brink of Bankruptcy
Tsinghua Unigroup, which is symbolic of “Emerging Semiconductor”, is on the brink of bankruptcy. The group is a de facto state-owned company, 51% of whose shares are held by Tsinghua University, where Chinese President Xin Jinping graduated. Tsinghua Unigroup recently planned to spread its business range of chip production from NAND flash memories to DRAM. It was reported that the liabilities of Tsinghua Unigroup amounted to 52.8 billion RMB (8.2 billion USD) during the third quarter term, 60% of which was the short-term liabilities for less than one year. The group has kept only 4 billion RMB (620 million USD) of cash for ensuring liquidity, while it ran an operating deficit of 3.3 billion (510 million USD) RMB in the first half of 2020.
The reason why Tsinghua Unigroup is facing a financial crisis, is an excess investment without considering the financial condition. The group was encouraged to manufacture DRAM by the Chinese government while it already started producing NAND flash memories through its subsidiary company, Yangtze Memory Technologies (YMTC), as Fujian Jinhua Integrated Circuit (JHICC) had suspended a plan, due to the sanctions imposed by the Trump administration, to manufacture DRAM ahead of Tsinghua Unigroup. In September of 2019, it was reported that “Tsinghua Unigroup of China recently announced that it would invest 800 billion RMB for the upcoming 10 years in order to accelerate mass production of DRAM chips. The company is going to build an R&D center in Wuhan and manufacturing facilities in Chongqing before mass production initiation scheduled for 202110.” But the current financial crisis has made the plan much more unfeasible.
(2) Failures of HSMC
Wuhan Hongxin Semiconductor Manufacturing Corporation (HSMC), which is located in Wuhan City, Hubei Province, had launched a project for the establishment of chip plants with investment of 100 billion RMB (15.5 billion USD), but it was revealed that the project was on the brink of halt due to capital shortages.
A Wuhan start-up chip maker, HSMC, which was established in November of 2017, was situated in an important project by the local government, with aim to invest 52 billion RMB in the first construction term, and 76 billion RMB in the second period.
A report of the Dongxihu District government in Wuhan has shown that, during the first construction term of chip plants from the beginning of 2018, main factories and research and development buildings have been almost completed, while over 300 sets of chipmaking equipment including advanced lithography machines produced by the Dutch company ASML Holding, have been introduced there.
HSMC's shareholding structure is 90% owned by a Beijing-based private firm, Glaer and 10% by a local government-owned firm. The management of Glaer is controlled by two unknown persons of company Chairwoman Li Xueyan and one of the company directors Mo Sen, whose backgrounds and funding source are still veiled11. HSMC, in July of 2019, had invited Jiang Shangyi, a former TSMC executive, as the president and COO, but he is rumored to have resigned from the Wuhan company12.
According to its website13, the company set a research and development project of 14 nm technology, saying “In March, 2019, the technical research and development plan was launched,” and “The first test of the chip tape-out and the first test of the function of the SRAM master disk will be started in the second half of 2020.” At the same time, it announced that “In 2020, we will start the research and development of 7nm independent technology.” As far as its current financial difficulties are concerned, the projects would result in unfinished business unless the company resolves the capital shortages.
(3) China calls for Cooling Down of Semiconductor Heat
On October 20 in 2020, Meng Wei, a spokesperson for the National Development and Reform Commission, said that “We have also noticed that the enthusiasm for domestic investment in the integrated circuit industry is constantly rising. Some companies with no experience, technology, and talents have joined the integrated circuit industry. Insufficient understanding of the laws of IC development and low-level repeated construction of chip projects are surfacing, with some projects stagnated and factory buildings vacant, resulting in waste of resources.14” It was reported that China had some 50 large-scale chip manufacturers across the country that took in 1.7 trillion RMB in funding, or an average investment of 30 billion RMB each15.
Japanese people with the sense of economic rationality can't understand why such a company with inadequate experience, technology or human resource, takes on a difficult challenge such as semiconductor industry, but this case is not rare in China, which has so far witnessed the excess investment by local governments and the increased emerging entrepreneurs in iron manufacturing and auto industry. The above China's affairs result from the bilateral character inherent in the country: a developing country, and an advanced science and technology country.
4. Japan's Economic Security
The U.S. aims to list up SMIC on the blacklist of U.S. national security. The company is the China's largest chip maker and the world's fifth largest foundry model, which means the factory to produce semiconductor devices. SMIC is also the only foundry model that can engage in the manufacturing using 14nm of tiny process. Although it had planned to buy manufacturing equipment for the process from ASML Holding, in order to get ahead of the competition with TSMC and Samsung Electronics, the Chinese company can't import the Dutch products after the Trump administration blocked the sales of ASML to China16. The bans being kept by the U.S., SMIC would be forced into suspended operations and Chinese high-tech products would not be manufactured as well.
The latest manufacturing systems require to be equipped into the advanced chip making process, in which a photoresist that its dissolubility is changed by something such as light and electron beam, is crucial for photolithography. In addition, it (‘resist') is named for the capability for protecting a surface from the following etching process, and it is also used for the lithography process in chip making operation. A photoresist, which is as important for miniaturization as exposure equipment, draws a sharp line in materials used in the semiconductor industry. Moreover, 90% of the world market share of photoresist products is dominated by only five Japanese companies: JSR Corporation, Tokyo Ohka Kōgyō , Shin-Etsu Chemical, Sumitomo Chemical, and Fujifilm Corporation.
Japanese photoresist products contain only a drop of impurities in volume of a 50-meter pool and Japanese technology has been over 10 years way ahead of Chinese. As the stable supply of Japanese photoresist products is crucial for the nationalization of Chinese semiconductor, Japan's export bans or limitations in cooperation with the U.S. will be effective for Japan's economic security policy.