Australia-Behind China's "Chip Fever": Investment Bubbles, Unfinished Projects (Photos) | Australia Chinatown

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Before realizing where the real gold rush was happening in China, Liu Fengfeng worked for more than a dozen in one of the world’s most famous technology companies

This article is reproduced from the New York Times Chinese website. It only represents the original source and the original author’s views. It is for reference only and does not represent the attitude and position of this website.

Before realizing where the real gold rush was happening in China, Liu Fengfeng worked for one of the world's most famous technology companies for more than ten years.

Computer chips are the brain and soul of all electronic products produced in Chinese factories.

However, most of them are designed and manufactured overseas.

The Chinese government is providing a lot of money to anyone who can help change this situation.

A production line of Qinghong, a start-up that manufactures high-end films and adhesives for chip products.The company has grown to 36 employees.
A production line of Qinghong, a start-up that manufactures high-end films and adhesives for chip products.The company has grown to 36 employees. GILLES SABRIÉ FOR THE NEW YORK TIMES 

So last year, 40-year-old Liu Fengfeng quit his job at Foxconn, a Taiwanese giant that assembles iPhones for Apple in China.He found a profitable market-high-end films and adhesives for chip products-and quickly raised $500 million.Today, his start-up company has 36 employees, most of them in Shenzhen, the technology center, and plans to start mass production next year.

"In the past, you might have asked grandpa to tell grandma, beg others, and give money," Liu Fengfeng said. "Now, you can just chat. Everyone takes the initiative and hopes that the target will land as soon as possible."

China is mobilizing on a large scale for its sovereignty over chips, and its goal may seem as rash and difficult to achieve as launching a probe to the moon or winning an Olympic gold medal—at least until it is achieved.In every corner of the country, investors, entrepreneurs, and local officials are enthusiastically building semiconductor capabilities in response to the call of the national leader Xi Jinping to reduce dependence on the outside world in key technologies.

Their efforts are beginning to pay off.China is far from being a real competitor to US chip giants such as Intel and Nvidia, and its semiconductor manufacturers are still at least four years behind Taiwan’s lead.Despite this, Chinese companies are still expanding their capabilities to meet domestic demand, especially in smart home appliances and electric vehicles, whose manufacturing requirements are lower than those of supercomputers and high-end smart phones.

The vigorous promotion of chips may be one of the most lasting legacy left by President Trump's iron fist policy on trade with China.The Trump administration has turned China’s dependence on foreign chips into a big stick to attack companies such as Huawei, and made the Chinese business community and leaders determined that they will never get into trouble in this way again.

Liu Fengfeng, CEO and founder of Qinghong. "In the past, you might have asked your grandpa to tell your grandma to beg someone to give you money," he said.Today, investors are eager to participate.
Liu Fengfeng, CEO and founder of Qinghong. "In the past, you might have asked your grandpa to tell your grandma to beg someone to give you money," he said.Today, investors are eager to participate. GILLES SABRIÉ FOR THE NEW YORK TIMES

But as Beijing expands its ambitions in the semiconductor field, it is also preparing for more serious potential failures and extracting funds that may be lost in the process.Due to the freezing of funds and poor management, several chip projects have recently been shelved.State-owned chip group Tsinghua Unigroup warned this month that it might default on nearly $25 billion in international bonds.

To a certain extent, China hopes to achieve the same leap forward from the production of plastic toys to the manufacture of solar panels.

But in the semiconductor field, “this model is starting to have some problems,” said Jay Goldberg, a technology industry consultant and former Qualcomm executive.The research and development cost of semiconductor technology is extremely high, and established manufacturers have spent decades accumulating technical know-how.Goldberg pointed out that Europe once had many "excellent" chip companies.Japanese chip makers are leading in certain special products, but few people would say that they are bold innovators.

"I mean, on this ladder-China is climbing up," Goldberg said.But it is still "unclear what results they will achieve."

Beijing’s recent fascination with chips began when a huge investment fund focused on chips was established in 2014.The government has set an ambitious goal: by 2020, China will produce 40% of the chips it consumes.This goal was not achieved.Morgan Stanley analysts estimate that Chinese brands bought $1030 billion worth of semiconductors last year, of which 17% came from domestic suppliers.They predict that by 2025, this proportion will rise to 40%, which is far below the 70% target set by the government.

Because of the US attack on China’s technological leader Huawei—Huawei was banned from buying American chips, or even from using chips made by American software and tools—China pressed on with a new sense of urgency.The US Department of Commerce this month imposed similar restrictions on exports to China’s most advanced chip maker SMIC, citing concerns about military ties.SMIC denies that its products have any military uses.

Therefore, China has introduced new tax relief measures for chips this year, including exemption from corporate income tax and material import duties for 10 years.State-backed funds have invested in start-ups and listed companies, including when SMIC went public in Shanghai in July.

At the high-level economic meeting held last week, the leaders of the Communist Party listed scientific and technological self-reliance as one of the "five fundamentals" of the country's economic development.

However, being fully self-sufficient in chips will mean re-establishing every link in a lengthy supply chain for some of the most complex technologies in the world-which seems like a crazy task, at least leading to waste.

Qinghong laboratory is conducting adhesive testing.President Trump's trade policies have forced China to step up the production of domestic chips.
Qinghong laboratory is conducting adhesive testing.President Trump's trade policies have forced China to step up the production of domestic chips. GILLES SABRIÉ FOR THE NEW YORK TIMES 

According to the analysis of China Economic Weekly, a magazine under the state-owned People's Daily, between January and October this year, the number of chip-related companies in China increased by 1, which is equivalent to an increase of about 10 per day.The magazine pointed out that some of them are in Tibet, a place that has not historically been associated with cutting-edge technology.

Jimmy Goodrich, vice president of global policy at the Semiconductor Industry Association, which represents American chip companies, said: "Until recently—this year—China’s goal has been: with the support of the state, to value Move upstream in the chain and conduct specialized production in places where China has a comparative advantage, but don't really try and fall into the bottomless pit of making everything yourself."

Now, "it is clear that what Xi Jinping is calling for is a redundant domestic supply chain," Goodrich said. "As a result, economic rules, comparative advantages and supply chain efficiency have basically been left behind."

The government is aware of this danger.The state-owned news media has fully reported the recent semiconductor flameout incident.This is telling other latecomers: don't mess up.

When the State Broadcasting Corporation CCTV recently visited a stalled project in the eastern city of Huai'an, it found dozens of giant machines idled in the factory floor, many of which had not been removed from plastic packaging.

A laboratory in Qinghong.Due to intellectual property issues, it may be difficult for Chinese chip companies to sell chips outside of China.
A laboratory in Qinghong.Due to intellectual property issues, it may be difficult for Chinese chip companies to sell chips outside of China. GILLES SABRIÉ FOR THE NEW YORK TIMES

"China Economic Weekly" said: "Some absurdities that violate laws and common sense are staggering."

However, there is progress.Two companies, Yangtze River Storage Technology and Changxin Storage Technology, are stepping up preparations to include China in the layout of memory chips that store data.Local manufacturers of logic chips that run computing are expanding production, mainly for Chinese customers.

Those manufacturers may not have much choice but to provide services to domestic customers.Credit Suisse (Credit Suisse) technical analyst Randy Abrams (Randy Abrams) said that out of concerns about intellectual property theft, some multinational chip manufacturers have begun to carefully consider cooperation with Chinese suppliers and partners.

He said: "International companies are becoming more and more vigilant about China's intellectual property leakage."

Liu Fengfeng, the founder of a Shenzhen-based startup, does not deny that he was motivated by some patriotic purpose.His company, Qinghongguangke’s website cites language praising the science and technology project of the Mao Zedong era, which produced China’s first atomic bomb, ballistic missile, and satellite:

Inherit the spirit of "two bombs and one star"

Self-reliance and courage to climb

Fengfeng Liu said that the sense of national mission does not conflict with his work of serving customers and launching competitive products.When he looked at the sky-high valuations of some chip startups, he also admitted that irrational factors have quietly entered the market.

"I think it looks like there must be a bubble in the country now," he said. "But don't do everything in one size fits all."

He said the government is trying to make local authorities more responsible for bad investments.And a large amount of funds can at least persuade more capable engineers in China to work on chips instead of making games and food delivery applications.

"You will always deposit something, you mean equipment, talents, and factory buildings, right?" Liu Fengfeng said. "You don't have to use it, there will always be a family. I think the government may be based on this logic."

This article is reproduced from the New York Times Chinese website. It only represents the original source and the original author’s views. It is for reference only and does not represent the attitude and position of this website.

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