China’s push to boost local chip industry could backfire by creating excess capacity
- China is trying to be self-sufficient as it prepares for a long-term economic, technological and geopolitical rivalry with the United States
- But a similar plan adopted a decade ago to grow seven key industries, including electrical vehicles, was not entirely successful
The Chinese government last week published a long list of incentives to encourage domestic semiconductor development and production, including a maximum 10-year tax holiday for some manufacturers.
However, like many of Beijing’s well-intentioned industrial policies, support for the semiconductor industry could also lead to wasteful spending and excess capacity.
The message to potential suitors is that Beijing will bless and encourage any investments that relate to chips. Apart from tax holidays, it also promised government funding support, fast tracks to initial public offerings, as well as easy access to bank credit.
The semiconductor support plan is similar, and in some respects identical, to the policies China adopted a decade ago to grow seven “strategic emerging industries”, including electrical vehicles.
The result is that China now has over 600 electric vehicle makers, with many stuck in “zombie” status. Ironically, Tesla, a US manufacturer with a wholly owned factory in Shanghai, is by every measure the dominant player in the Chinese market.
A close look at China’s chip industry plan shows that Beijing is not even aiming high. A chip plant employing 28-nanometre technology will qualify for the top government reward even though the technology is at least two generations behind the current state-of-the-art 7-nanometre chips, which can only be made by overseas factories.