Chips are found in many electric appliances and from smartphones to missiles. 

At present, China still has to buy many outside source chips. It also relies on other countries for the equipment it needs to manufacture them. 

Chinese leaders want to become self-sufficient in this area. But despite decades of investment and hundreds of billions pouring in, China’s chip industry has not done as expected. As a result, self-sufficiency might be a long way off.

The situation has gotten worse lately, the dream seems to be slipping through China’s fingers.

Unfavorable business environment leads to chip companies going bankrupt 

Quillion Technology was established in November 2021. The official website states it gathered its workforce from mainstream chip companies in China and the United States. The firm has extensive mass manufacturing expertise and cutting-edge CPU technology. 

The computer processor startup received generous funding in May. After its angel round and Series A round funding, the company raised just over $88.98 million or 600 million yuan. The Series A funding is the company’s first round of venture capital investor funding after the angel round. The angel round is a smaller investment intended to get a start-up off the ground. Some of the investors were brought to Quillion by Arm China, a subsidiary of UK semiconductor behemoth Arm.

According to an internal letter viewed and reported by Late Post, the chip company is suspending operations as partners have not cooperated with financing. Sources disclosed that the partners could not agree on control rights, which led to insufficient financing.

But it’s not the only case. In the first eight months of this year, 3,470 semiconductor chip companies in China went bankrupt. 

China’s lockdowns to fight COVID-19, the lack of electricity, and internal weaknesses have made it difficult for Chinese chip companies.

Besides, tense relations between the CCP and Washington make it even harder for China’s chip industry.

The second reason, corruption hits China’s chip dream

A chip invention scandal in 2002 shows how ridiculous the corruption is. Chen Jin, dean of the microelectronics School of Shanghai Jiaotong University, became a national hero in 2003 when he invented China’s first digital signal processing computer chips. They are sophisticated microchips that can process digitized data for mobile phones, cameras, and other electronic devices. 

But what he actually did was buy a Motorola chip, hire some cheap labor to remove the logo and then he paid a small company to put a “Hanxin One ” trademark on the chip. With all his connections he was able to obtain various certifications, claiming that the Motorola chip was China’s first high-end DSP chip with independent intellectual property rights.

He deceived the General Armament Department of China’s military into filing a Weapons and Equipment Technology Innovation Project and succeeded in defrauding over 100 million yuan of scientific research funds.

China is still conducting semiconductor chip sector corruption probes.

According to Central Commission for Discipline Inspection or CCDI releases and local media reports, in the last three months, at least 12 people with strong ties to the semiconductor chip business have been investigated or have gone missing.

Gao Songtao is the former vice president of the government fund manager Sino IC Capital—an investment firm in the chip industry. He went missing in July, a sign that a storm was brewing.

Gao was one of the first CEOs accused of corruption in a crackdown by CCDI—China’s top anti-graft body. 

China’s top anti corruption attacks on key people have confused and scared the industry. That’s according to another regime official who works on semiconductor projects in Jiangsu, north of Shanghai.

An official from Jiangsu told the Financial Times that Big Fund investments have reached a “standstill.”

ITjuzi, a corporate data provider, said that the fund had spent almost $125 million in 2022. Much less than the $1.94 billion it spent in 2021.

Corruption investigation caused talent to leave

According to Nikkei Asia, four of China’s Semiconductor Manufacturing International Co. ( or SMIC) directors abruptly resigned last November. They included Vice Chairman Chiang Shang-Yi, a former executive at Taiwan Semiconductor Manufacturing Corp. 

Chiang’s hiring was considered a success for SMIC and China’s chip ambitions. 

Chiang later admitted in an interview with the Computer History Museum in March that he regretted joining the Chinese firm, saying the move was “one of the foolish things” he had done.

SMIC in August, announced the resignation of two of its board members; co-CEO Zhao Haijun and independent director William Tudor Brown.

Zhao resigned as executive director and remained the company’s co-CEO. 

Brown was co-founder and former president of UK chip designer Arm. ​​Brown, who has served on SMIC’s board for nine years, announced his resignation on his LinkedIn.

Nikkei Asia reported that with the departure of Brown, SMIC’s board of directors now has no international people. Many of its board members are former Chinese government officials, senior executives of state-backed tech firms, and local scholars.

The third reason, the US ended China’s dream of global chip dominance

The U.S. Department of Commerce recently issued rules to prevent the CCP from buying or making chips and components critical to supercomputers. Under new U.S. regulations, companies need a license to export high-performance chips to China. 

In addition, American companies will be heavily restricted from exporting machinery to Chinese companies producing chips of a certain level. For example, companies will need permits to ship machines to Chinese chip foundries.

Nikkei Asia citing sources, reported on October 11 that for the first time, new U.S. regulations do not allow “U.S. persons,” including both citizens and permanent residents, to assist in the “development” or “production” of specific advanced chips in China-based chipmaking facilities. 

Over the last decade, the CCP has spent billions investing in a recruitment program called the “Thousand Talents Plan,” which started in 2008. 

The CCP wants to encourage “sea turtles” (hagui), a Chinese nickname for returnees who studied and worked abroad, to return home to teach at top universities, start-up businesses, and help improve the country’s industries.

Founding Chairman and CEO Gerald Yin of Advanced Micro-Fabrication Equipment Inc. China (AMEC), China’s leading equipment producer, is a U.S. citizen.

Yin worked in the U.S. for 20 years before founding AMEC in 2004. In addition, many senior executives of the firm, including Chief Operating Officer Du Zhiyou, are also Americans and spent long years working and studying in the United States.

Another key figure is David H. Wang, CEO and president of ACM Research, China’s leading producer of wafer-cleaning machines.

Other examples include Chen Lu, the founding chairman and CEO of Skyverse Technology, a major supplier of test machines. And Wang Sumin, founding chair and CEO of chipmaking chemical producer Anji Microelectronics.

Shanghai-listed chip equipment producer Tuojing Technology, also known as Piotech, has at least four senior executives with American citizenship.

However, the latest export controls will prohibit these “sea turtles” from helping develop China’s chip sector.

All chip-related development activities of such Chinese American individuals must stop until they obtain a license.

A human resources executive at a Chinese state-owned chip firm told Da Ji Yuan, “Our company does have (U.S. citizens) in some top positions. We must find a way to keep these people for our company. But it’s difficult as most of them don’t want to give up their U.S. passports.” 

An industry insider said, “The new regulation caught many of these Chinese American executives off guard. … Many of them have family overseas in the U.S. and have assets and properties in the U.S. It will be very tough for them if the U.S. can really enforce and execute this new regulation.”

In addition, If export restrictions are imposed and Washington pressures other countries not to sell to Chinese companies, it could hamper Chinese chipmakers.

SMIC and other Chinese companies will need to have a Dutch kit on hand to make the sophisticated chips.

Abishur Prakash, the founder of a consulting firm, said that with the latest U.S. action, the deep gap between the U.S. and China is now too far to go back.

The chip sector is constantly receiving bad news 

In its August filing, SMIC’s profit dropped 25% for the second quarter due to COVID lockdowns. Despite a 42% increase in revenue, its profit fell 25%, to nearly $538 million.

Also, China’s integrated circuit (IC) output in August fell 24.7% year-on-year, the most significant monthly decline on record.

China’s microcomputer output also fell 18.6%, the most significant drop since December 2015. In July, China’s chip output fell 16.6% year-on-year.

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