China’s $100 Billion Chip Supremacy Bid Deemed Unrealistic
Red flags flutter in the wind near the Chinese national emblem outside the Great Hall of the People in Beijing, China. (Photo by Feng Li/Getty Images)

China’s $100 Billion Chip Supremacy Bid Deemed Unrealistic

Faces uphill battle because of a lack of technological know-how and talent, according to an analysis by Bain & Co

(Bloomberg) -- China faces an uphill battle in its push to become the global leader in computer chips because of a lack of technological know-how and talent, according to an analysis by Bain & Co.

China is one of the world’s largest consumers of semiconductor devices thanks to its manufacturing might, and is planning to spend more than $100 billion to become also a premier supplier to the planet. The global consultancy estimates that by 2020, almost 55 percent of the world’s memory, logic and analog chips will flow to or through the country. But the vast majority of the microchips that act as the brains of products like Apple’s iPhone are largely imported from companies like Intel and Samsung.

The government in 2014 moved to change this with plans to invest more than $100 billion and become a leading global player. It’s also driven consolidation among domestic suppliers to maximize its investments, including the $2.8 billion merger of Tsinghua Unigroup and Wuhan Xinxin Semiconductor Manufacturing announced last month.

See also: China's Kingsoft Aims to Take On Alibaba in Cloud Computing

China’s effort to build a world-leading semiconductor industry is part of a broader effort to wean itself off foreign technology. But financial investment will not be enough to buy leadership of the semiconductor sector, which is worth around $1 trillion according to Singapore-based Bain partner Kevin Meehan.

The country currently makes just 15 percent of the semiconductors it consumes, Bain said in a report. And by 2020, the consultancy expects Chinese-based plants to produce just 7 percent of the world’s microchips, barely up from current levels.

“China is coming at it in a pretty smart and intelligent way,” he said. “But I don’t see a path for them to own leading-edge processor technology and that is the foundation of Intel, the foundation of Samsung’s success.”

Efforts by Chinese companies to buy rivals with intellectual property in the processor and memory markets have run afoul of regulators around the world. Plans for a $3.8 billion investment in Western Digital were scrapped amid a U.S. security review and investments in Taiwanese chip companies face regulatory obstacles and have stoked political tension.

See also: Intel Rolls Out First Silicon Photonics Products for Data Centers

“Assuming they can spend it all, the biggest risk is that they end up with a whole bunch of fragmented and weak follower positions,” Meehan said. “There’s ways for them to have influence over greater than 10 percent if they’re partnering well, but otherwise I think you’re essentially capped there.”

Meehan said China’s semiconductor makers could eventually learn from partnerships with global giants and become one of the larger suppliers of key components like computer memory. Both Intel and Qualcomm Inc. have agreed to build semiconductor fabrication plants there in partnership with local providers.

“If you take a long view -- not five years but decades -- then certainly you’d have to believe there’s some absorption,” he said. "But people are careful not to put their leading edge IP in China.”

“I don’t see a way to get there without licensing or buying.”

TAGS: Asia-Pacific
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