China imports more integrated circuits than crude oil
How a university is key to realising China’s semiconductor dream.
Yes, China really spends more money on buying integrated circuits (ICs, or ‘chips’) abroad than it does on crude oil. This is not because they don’t import a lot of oil, in fact they are the largest net importer of crude oil, nor because the oil price is low now (China also spent more money on ICs in previous years). China needs these chips to produce smartphones, tablets, computers, etc. However before we get to the reasons of this IC-trade deficit and its consequences, it is important to jump back in time.
I arrived at the Dutch Embassy in China in October 2005; a period what later turned out to be a pivoting one for the country. In that first month the Central Committee of the Communist Party of China (CPC) elevated ‘indigenous innovation’ to a national strategy similar to Deng Xiaoping’s ‘reform and opening’ policy. A few months later, in February 2006, the State Council announced “The National Medium- and Long-Term Plan for the Development of Science and Technology for 2006–2020” (MLP).
Indigenous innovation became as important to China as Deng Xiaoping’s reform and opening policy.
Few diplomats and executives understood the importance of this policy change, nor did they comprehend the immense attention for science and technology by the Chinese government. Partially the skeptics were supported by the colossal loss of face the Chinese government suffered in December 2005 following the exposed fraud by professor Chen Jin of Jiaotong University who had supposedly created China’s first microprocessor. The chip he developed in 2003, as well as the updated versions, turned out to be rebranded Motorola chips.
But this unfortunate experience did not deter the Chinese government, if anything it taught them that their efforts needed to be intensified. And so they did. In the MLP several goals and sectors were identified in which the government considered innovation of strategic importance. Moreover, in the subsequent “Five-Year Plan for High-Technology Industries (2006 -2010)” 16 National Science & Technology Megaprojects (Chinese: 国家科技重大专项) were identified, aiming to decrease reliance on foreign technology and to develop key equipment and products of which China owns the intellectual property rights. The first three of these Megaprojects are all related to the semiconductor industry:
- Core electronic components, high-end general use chips and basic software products
- Large-scale integrated circuit manufacturing equipment and techniques
- New generation broadband wireless mobile communication networks
To put this in perspective, know that for example ‘manned spaceflight and moon exploration’, a topic with obvious political importance, is only mentioned as one Megaproject.
The importance of the semiconductor industry to China is crystal clear when looking at the 16 Megaprojects, where this sector receives three times more attention than for instance manned space exploration.
The emphasis on the semiconductor industry is certainly explicable. This industry is an enabling one, a platform on top of which other industries can be build. Moreover, it is an industry in which China was missing several strategic technologies. To make matters worse there were (and still are) various trade restrictions with China, making it impossible for the country to buy the latest and most advanced machines. This knowledge and technology gap is a key reason why China imports substantially more integrated circuits (ICs or ‘chips’) than it is producing (in volume and value).
According to customs statistics IC import amounted to $104 billion in the first half of 2015, while the export value of ICs was only $29 billion. Since the introduction of the MLP China hasn’t been able to break this trend. This export/import gap means China is missing out on profit opportunities, but more important it is dependent on foreign manufacturers, and this is a situation China is trying to get away from. The MLP specifically mentioned that China should decrease its reliance on foreign technology from 60 percent in 2006 to below 30 percent (by 2020, the end date of the current MLP).
So what to do if indigenous innovation and the decreasing of this gap takes too long?
Well one option would be to buy yourself into the semiconductor market. And for better or worse, this is what China is doing with various merger and acquisitions (M&A). State-controlled funds and companies are acquiring domestic and foreign companies. The former is for consolidation, the latter for market entry and technology.
Given the subtitle of this article, you are probably wondering: “What has the acquisition of semiconductor companies to do with a university?” Well in the case of China as it turns out, a lot.
A few years ago you might have read about the acquisition of Spreadtrum by Tsinghua Unigroup. Spreadtrum is one of China’s leading fabless semiconductor companies and was listed on the NASDAQ. “Was listed”, because with money from Tsinghua Unigroup they executed a buyout and delisted themselves. To most people Tsinghua Unigroup did not ring a bell, but it does sound a lot like the China’s top university Tsinghua University. Could there be a link? Yes, there is. Spreadtrum’s website: ‘Tsinghua Unigroup, is an operating subsidiary of Tsinghua Holdings, a solely state-owned limited liability corporation funded by Tsinghua University in China.’
What happened here would be comparable to the Massachusetts Institute of Technology (MIT) investing in AMD to acquire all outstanding ordinary shares and delisting the company from NASDAQ.
This acquisition of Spreadtrum by Tsinghua Unigroup was not an fluke, it is more likely part of a well coordination plan. Take a look at the following infographic we made to get a better impression of this university-linked fund.
As you can see Tsinghua Unigroup has been involved in several substantial deals, and acquiring companies and technologies over the past years at an unprecedented scale. Last year they were also a founding partner of the National Integrated Circuit Industry Investment Fund with assets over $19 billion. Interestingly this year several billions flowed back into Unigroup from that same fund.
More recently, in July a report appeared in the news that Unigroup was preparing an offer to takeover Micron Technology. With $23 billion this has the potential to be the largest Chinese M&A deal in the US, not only in the IC market. And it is also worth noting that the chairman of Unigroup’s parent company Tsinghua Holdings announced this month that they would invest at least 30 billion RMB in mobile phone chip R&D in order to be able to compete with Qualcomm.
We’ve spend some time reviewing past events, let’s complete this article by initiating a discussion on the future of China’s IC industry and especially its demand for foreign know-how. Two months ago the Chinese State Council issued the ‘Made in China 2025’ roadmap, and just a few weeks ago the Ministry of Industry and Information Technology (MIIT) published their interpretation of that roadmap for the IC industry. In this interesting piece they mention several shortcomings of the Chinese IC industry. To use their own words:
“China still lacks leading talent and suffers from management team instability; resulting in small, scattered and weak companies.”
MIIT ends the document with five points that they will work on to reach the 2025 IC goals:
- Encourage consolidation, and ‘guide rational distribution of the industry’
- Guide the National Integrated Circuit Industry Investment Fund
- Accelerate independent innovation and the relevant Megaprojects
- Continue implementing and supporting measures of existing policies
- Guide M&As and encourage companies to look abroad for funds, technology and staff
In case you’re wondering whether or not the mentioned fund in point 2 is the same fund that Unigroup is both investor in and investee of, the answer is ‘yes’.
Based on the described cases and the goals from MIIT, I think it’s save to draw the following conclusion:
Expect Unigroup (and its parent company/university) to continue to play a pivotal role in China’s semiconductor dream, expect a lot of government involvement, and expect more Chinese acquisitions abroad.
A question open for debate: “Will China’s current economic slowdown also slow down the availability of funding for this dream?” If we look at last week’s announcement that the province of Hubei will setup a $4.8 billion investment fund for the IC industry, it would appear that the investment-driven part of the Chinese economy is still up and running.
While this article is somewhat geared towards a ‘follow the money’ story, it is a story that explains why it is crucial to look at Chinese government funding as well as Chinese universities when one needs to have a complete picture of the industrial competitive arena in China. This is exactly what we are doing at Datenna.
>> Update 22 Aug 2015: v1.2 of infographic with added ISSI deal.
Header image by Windell Oskay
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