These are the core concerns that drive our newsroom-defining topics that are of great significance to the global economy.

These are our most ambitious editing projects. enjoy!

Our emails will shine in your inbox, and there will be something new every morning, afternoon and weekend.

Long before the current chip supply chain is tightening, Beijing has been working hard to establish a local supply chain for its largest imported product, semiconductors.

After tens of billions of dollars in government support (pdf, p. 9), China's chip processing capabilities are still at least ten years behind the most advanced players. Some of its emerging semiconductor champions have faltered. On Friday, Tsinghua Unigroup, which began defaulting on bonds a year ago, said that it had accepted an offer from a consortium of state-backed investors to become its strategic investor, which may mean giving up control of key assets.

China has found that spending a lot of cash cannot quickly establish semiconductor self-reliance, especially when the United States has doubled its export blacklist and other measures. These measures have created bottlenecks in the upstream and downstream of the chip manufacturing chain. Last year, the United States included China’s largest chip manufacturer SMIC on the Ministry of Commerce’s “entity” list, which restricted its access to American components, including design and software. Previously, the United States had adopted an approach to smartphone and telecommunications equipment manufacturer Huawei. The same measures were taken, causing its chipset design department to be paralyzed.

"The Trump administration’s two rounds of export control measures in 2019 and 2020 prevented Chinese chip manufacturers and global foundries working with Chinese companies from obtaining U.S.-made semiconductor production equipment and software," Australia’s Lowy Institute think tank Write. July. "These blockades severely limit China's ability to pursue technological advancement in this industry."

The goal set by the Made in China 2025 industrial strategy is that by that year, 70% of domestic chip demand can be self-sufficient. In order to accelerate the development of the chip industry, China established a state-backed integrated circuit investment fund of US$22 billion in 2014. In addition, many provincial governments have established funds focused on chips. According to TechNode reports, in 2020 alone, Chinese chip companies have received approximately US$35 billion in investment.

Tsinghua Unigroup, controlled by the famous Tsinghua University, should have explained how generous subsidies and the country's determination will help China achieve self-reliance in the semiconductor field. But its efforts to use strong funds to acquire and invest in existing chip companies — which is how it first entered the industry — have been hampered by US national security concerns, partly due to the Made in China 2025 plan.

For example, in 2015, due to news that the United States intends to review the transaction for national security risks, a plan to acquire a 15% stake in Western Digital was shelved. Similarly, the $23 billion proposal made to the US chip giant Micron in the same year also faced such concerns. Although it continues to make other acquisitions, such as the acquisition of French smart chip component manufacturer Linxens for US$2.6 billion in 2018, the US move has slowed its support for leading companies with well-developed businesses. Then I started to run out of money.

In November last year, it defaulted on US$450 million in bonds. By January, it had defaulted or cross-defaulted on US$3.6 billion in bonds. According to its documents and Reuters, as of June 2020, the company has 200 billion yuan (31 billion U.S. dollars) in debt, but its cash and cash equivalents were only 8 billion U.S. dollars during this period.

"The group has overutilized its prestigious name and generous government support... [its] rapid growth driven by subsidies and failure to deliver on high promises of technological advancement are a symbol of major problems in China's semiconductor industry," said Lu Xiaomeng, director of geography- Venture technology consulting firm Eurasian Group told Quartz in September. At the request of a creditor, the court-led bankruptcy reorganization process began in July.

On Friday, Tsinghua Unigroup announced that a consortium led by state-backed investor Jianghuai Capital and sister fund Zhidao Capital will become Tsinghua Unigroup’s strategic investors, but did not provide other details. The plan still needs court approval.

Tsinghua Unigroup, Jianghuai Capital and Zhidao Capital did not respond to requests for comment.

Tsinghua Unigroup is not the only chip manufacturer facing financial difficulties. According to the Chinese business publication Caixin, in February this year, Wuhan-based Hongxin Semiconductor began to lay off employees, only four years after the company's planned investment of US$19 billion was established.

At the same time, according to the "Wall Street Journal" report, the United States is considering imposing stricter trade restrictions on SMIC to make up for the loopholes that some US chip manufacturing components can still be sold to SMIC. As a result of the actions of the United States, the company has gained strategic importance and last year received $2.2 billion in investment from two national chip funds (pdf).

Despite these warning stories, money will still flow into the industry, which has been attracting new players. After all, high subsidies and policy determination have brought good results to the popularization of electric vehicles in China. China's policy lender, the China Development Bank, said in March that it had raised approximately US$30 billion for a new fund focused on semiconductors.

Of course, the huge investment has contributed to the US's leading position in the semiconductor field—in 2018, it accounted for 60% of the US$65 billion in global semiconductor research and development (pdf, p. 13).

In fact, due to stricter government regulation, investors are cautious about Internet companies. Although large investments are required and the probability of failure is high, the industry may look more attractive.

"With the recent tightening of government supervision of platform companies, some investors are shifting their bets to areas of political security, such as semiconductors, electric vehicles, and biotechnology. Overcrowding in the chip industry is a major risk," said Eurasian Group. Lu said.

📬 Start drinking coffee and daily briefing (BYO coffee) every morning.

By providing your email, you agree to the Quartz privacy policy.

© 2021 Quartz Media, Inc. All rights reserved.