China buys more than half the semiconductors sold each year, and its share is growing. Yet the nation doesn’t have one domestic manufacturer among the 10 biggest chipmakers, a list stacked with U.S. companies. Homegrown chips account for less than one-tenth of local demand, and in 2013 China spent more money importing chips than it did importing oil, according to researcher Sanford C. Bernstein.
As President Xi Jinping’s government trades allegations of cyber espionage with U.S. officials, China is stepping up its support of domestic chip production to lessen its dependence on foreign technology. The government is telling local companies and Chinese news media that it plans to invest as much as 1 trillion yuan ($161 billion) over 10 years to develop chips, about as much as Intel spends per decade on facilities and research and development.
With so much money going to local producers, foreign chipmakers can either help China’s industry improve or try to get along without the market, says Rick Clemmer, chief executive officer of Dutch chipmaker NXP. “Over the next few years, it’s not going to be the same as it is today, where we just ship semiconductors into China,” says Clemmer, whose company got 49 percent of its sales from the country last year. “You’re going to have to do joint ventures and licenses.”
South Korea and Taiwan used a similar strategy in the 1980s to accelerate the rise of Samsung Electronics and Taiwan Semiconductor Manufacturing. Neither of those companies, however, gets more than 12 percent of sales from its home market. No company in the business can afford to walk away from China, says Mark Li, an analyst at Sanford C. Bernstein. “Don’t underestimate the impact of scale,” he says.
Even the most advanced companies in the $300 billion chip business are spending more cash and sharing more technology so they can keep hawking their wares in China. Qualcomm, the world’s biggest maker of mobile processors and modems, paid a $975 million fine in February to settle a Chinese antitrust investigation; it also reduced the fees it charges Chinese phone makers to use its chips. Qualcomm has announced a $150 million China investment fund, promised to set up a joint venture to design server chips in the mountainous southwestern province of Guizhou, and teamed with Chinese companies. It has agreed to outsource some production to Shanghai-based Semiconductor Manufacturing International.
Not to be outdone, Intel, which gets one-fifth of its $56 billion annual revenue from China, has committed more than $3 billion since September to upgrade its Chinese plants and to invest in state-run mobile chipmakers. It’s managed to avoid roadblocks from Chinese regulators, as has NXP, which through a joint venture with Datang Telecom Technology has become China’s biggest supplier of chips used in cars and trucks. Qualcomm and Intel declined to comment for this story.
The foreign chipmakers’ advantage is experience in building and operating the factories that drive the business. A state-of-the-art plant costs more than $5 billion to build and equip and can become obsolete in as little as five years. Until Chinese companies can match the technology and designs of foreign partners, they’ll need help, says Rajiv Ramaswami, head of networking chips at Broadcom. “They use us not because they love us, but because they need us,” he says. “The minute that stops, we’re out.”
For now, major chipmakers can mostly count on China needing them as much as they need China, says Betsy Van Hees, an analyst at Wedbush Securities. But given the nation’s deep pockets, “It’s a very real threat to the semiconductor industry,” she says. “Just think where they’ll be in 10 years.”
The bottom line: Foreign chipmakers are working to avoid getting shut out of China as it boosts its homegrown industry.