Madness is doing the same thing over and expecting different results, and China is throwing money at semiconductors again.
China has launched a massive $47 billion fund, the largest in its history, to bolster its semiconductor industry and establish a local supply chain. This fund, equivalent to 344 billion yuan, is the third phase initiated by the China Integrated Circuit Industry Investment Fund [also known as the National Integrated Circuit Industry investment Fund Company (ICF), or just “Big Fund.”-LP]. It’s worth noting that this amount is twice the total funds raised in the previous phases in 2014 and 2019.
Do you remember the last time I covered where the money went to in those previous phases? The money went to companies like Wuhan Hongxin Semiconductor Manufacturing Co. Result? “Hongxin’s unfinished plant in the port city of Wuhan now stands abandoned. Its founders have vanished, despite owing contractors and investors billions of yuan.”
Or maybe Tsinghua Unigroup. Result? The arrested a whole lot of executives, a lot of money disappeared into various pockets, and “Tsinghua Unigroup abandoned its plan to build DRAM memory chip manufacturing plants in Chongqing and Chengdu in southwest China earlier this year.”
As I wrote before, China’s semiconductor industry is shell games all the way down.
At lot of times, loans and investments are siphoned through four or five different entities from the purposes for which they were originally obtained. Everyone’s trying to get rich, and they hope to survive on smoke and mirrors long enough to get profitable. Imagine if Kleiner Perkins invested $25 million in a software startup, only to find that money was spent on a noodle shop, a used car dealership and a golf club manufacturer.
Sometimes it works. You can build a company on margin, get profitable quickly, and be paying off investors and contractors before anyone realizes how shaky the entire enterprise is.
But you can’t do that with semiconductor manufacturing. The startup costs are simply too high, easily in the billions. Very, very few companies can afford to be in a game that expensive. China’s two biggest semiconductor manufacturing success stories, SMIC and Tsinghua Unigroup, all have have CCP direct government investment.
And bunches of Tsinghua Unigroup executive still got pinched for sticking their snouts into the trough.
And everything should theoretically be harder now that the U.S. has imposed sanctions on China’s semiconductor industry. But one wonders just how effective these sanctions are when Applied Materials reported that 43% of its total revenue came from China in the second quarter. That suggests a certain kayfabe quality to the sanction, with just the right loopholes for AMAT (and presumably other semiconductor equipment manufacturing giants like Lam Research and Tokyo Electron) to keep getting those conveyor belts of Chinese money.
My assumption is that, yet again, the funds earmarked for semiconductor companies will be siphoned off into a thousands unrelated pockets. (Though the rest of China’s business climate is sucking so badly that maybe some money will actually fund real semiconductor startups, if only through lack of other money-making opportunities to siphon funds off for.) Sanctions will continue to leak. A few years from now, China will announce the arrests of more executives using the Big Fund to play more investment shell games. And five years from now China will announce an even bigger set of subsidies…
