China Intensifies Its Own Semiconductor Industry In The Middle Of The Trade War

China is continuing to develop its own chip industry as large companies like Huawei risk losing access to US technology.

According to experts, the world's second largest economy could wait at least a decade before it can catch up on US technology. Nevertheless, if China successfully develops its own semiconductor sector, US companies that make big profits could suffer.

Last month, China's information technology giant, Huawei, was placed on a US blacklist, forcing US companies to obtain government permission to sell to the company. The telecom equipment manufacturer uses key components of US companies and software from Google and Microsoft. Washington has granted a 90-day reprieve for now, but the threat remains a major problem for society.

Other companies, including HikVision, a Chinese watchdog, would also be targeted. Huawei's rival, ZTE, was faced with a similar situation last year, which severely damaged the company.

Although China has not concealed its intention to develop its own semiconductor industry over the past two years, experts said recent events have given new priority to this dynamic.

"The Huawei incident has indeed boosted the development of the Chinese flea industry," CNBC Gu Wenjun, an analyst at ICWise, a China-based semiconductor research firm, told CNBC. He wrote in Mandarin and his comments have been translated by CNBC.

Beijing highlighted semiconductors as a key area of ​​Made in China 2025, a government initiative to boost the production of higher value-added products. China aims to produce 40% of the semiconductors that it uses by 2020 and 70% by 2025. This is supported by tens of billions of dollars in Beijing investment. in the country's chip industry.

Last month, the Chinese government also announced tax breaks for semiconductor companies and local software developers.

Currently, only 16% of the semiconductors used in China are produced in the country and only half of them are manufactured by Chinese companies, according to a report by the Center for Strategic and International Studies. In other words, the country still depends on foreign technologies, mainly American.

This fact, with the support of Beijing, has helped Chinese technology companies to move into action. Huawei has its own series of processors "Kirin" for its smartphones and even a 5G modem that allows devices to connect to the latest version of the mobile Internet. Huawei's chips are designed by its subsidiary HiSilicon, which said it was ready for such an initiative from the United States and could weather the storm.

Other Chinese technology giants are considering their own silicon. Smartphone builder Xiaomi told CNBC last year that he was considering developing a chip that could power artificial intelligence products and Alibaba started working on its own processor. artificial intelligence.

Design is part of the puzzle of creating chips. The other is the good workmanship. For example, the Huawei chips are designed by HiSilicon – the largest semiconductor company in China, according to market research firm International Data Corporation – but they are then manufactured by a separate company in Taiwan. It seems, however, that China is accelerating the manufacture of semiconductors.

"I think the current tension between the United States and China will only boost Chinese spending on technology, including software, over the next five years," said Mario Morales, vice president of technology and technology. semiconductors at IDC.

The development of the Chinese chip industry could hurt American companies, according to Gu. D & # 39; ICWise. He added that the world's second-largest economy could forge closer ties with other countries like Japan and South Korea and create its own "ecosystem" of semiconductors – in which the United States would only play A minor role.

"At the present time, the global industrial system is dominated by the United States, and there may exist a parallel ecosystem … where the United States is not dominant.It is very unfavorable to development long-term US industry, "Gu said. said CNBC.

"If the US blocks China's industry for a long time, it will prompt China to lead another ecosystem, which will be a long-term disadvantage for the US semiconductor industry," she said. -he adds.

Already, some US companies have worried about the potential consequences of Huawei's listing on the US blacklist. Qorvo, a manufacturer of radio frequency products, said that sales to Huawei and its subsidiaries amounted to $ 469 million, or 15% of its total revenues, during the fiscal year ended March 30, 2019. It lowered its revenue outlook for the fiscal year, citing Washington's actions against Huawei.

Lumentum, another supplier to Huawei, said that sales to the Chinese company accounted for 18% of total business turnover for the three months ended March 30. Lumentum also downgraded its revenue forecast for the next quarter.

Despite all its advances, the Chinese semiconductor industry will not surpass its competitors any time soon.

One of the biggest challenges for China will be finding and developing new suppliers if US companies remain inaccessible.

For its part, Huawei's HiSilicon system is still based on the basic design of Arm chips, owned by Softbank. Although HiSilicon manufactures processors for its peripherals, the architecture is that of the British firm. The chip designer recently suspended its activities with Huawei to comply with the US blacklist of the Chinese company. Huawei will have to find an alternative to Arm, which is the biggest chip design company in terms of market share.

The following companies are Synopsys and Cadence, but both are American and therefore may also be banned for the Huawei unit.

For Gu, all this adds to the fact that China only closes the gap with the United States on semiconductors "in a decade or two".

Other analysts have forecast that more investment and an expanded talent pool could develop the semiconductor industry in China.

"It will not be easy, it will be a long journey, but I do not underestimate the Chinese ecosystem, given the talent that continues to return to the region to stimulate innovation and size," said Morales of IDC.

And, eventually, China may be able to wean itself off the American technology.

"If China as a whole succeeds in acquiring talent, companies and appropriate human resources partnerships, it should still be able to create a local semiconductor industry without access to US technologies in the next decade" said Neil Shah, research director looking for counterpoint.

–CNBC's Hilary Pan contributed to this report.