China has launched its third state-backed investment fund aimed at strengthening its semiconductor industry and reducing dependency on foreign nations for wafer usage and production—an initiative known as chip sovereignty. The National Integrated Circuit Industry Investment Fund, commonly referred to as “the Big Fund,” follows two previous iterations: Big Fund I (2014-2019) and Big Fund II (2019-2024). Notably, Big Fund III has a budget of 344 billion yuan (approximately $47.5 billion), surpassing both earlier funds significantly.
This substantial investment comes in response to Huawei's increasing reliance on domestic suppliers, underlining China’s commitment to achieving self-sufficiency in semiconductor production. It serves as a reminder that the ongoing chip struggle between China and Western nations is reciprocal.
Both the U.S. and Europe are seeking to lessen their reliance on China as a tech competitor, and China similarly recognizes vulnerabilities in its supply chain. The primary concern for China lies with Taiwan, which holds crucial semiconductor manufacturing capabilities. Control over Taiwan would greatly disadvantage the U.S. and its allies, as Taiwan Semiconductor Manufacturing Company (TSMC) produces approximately 90% of the world’s most advanced chips. In response, insiders have revealed that ASML and TSMC have mechanisms to disable chipmaking equipment in the event of a Chinese invasion of Taiwan.
Currently, China accounts for about 60% of legacy chip production—those essential for automobiles and household appliances, according to U.S. Commerce Secretary Gina Raimondo. The semiconductor conflict encompasses both legacy and advanced chips, yielding mixed results.
Chinese officials claim that U.S. policies are backfiring, as exports from leading American chip manufacturers decline. This situation creates challenges for companies like Nvidia, which must balance maintaining access to the Chinese market while navigating U.S.-China tensions. Nvidia has tailored three chip models for the Chinese market following U.S. sanctions that restricted its ability to export its most advanced semiconductors. However, the competitive landscape has compelled it to price these chips lower than initially intended.
Nonetheless, some experts argue that the commercial hardships facing Western semiconductor firms may be a worthwhile trade-off if it inhibits China's ability to develop advanced chips as quickly as its rivals.
As the U.S.-China chip war intensifies, global chipmakers are bracing for further restrictions. Potential impacts could arise if Chinese artificial intelligence companies lose access to cutting-edge Nvidia chips or if the Semiconductor Manufacturing International Corporation (SMIC) faces hurdles in enhancing its production capabilities.
The establishment of Big Fund III itself signifies China’s urgency to respond to external pressures. Reports indicate that this funding will be directed toward large-scale wafer manufacturing similar to past funds, as well as the production of High Bandwidth Memory (HBM) chips, which are integral to AI, 5G, and the Internet of Things (IoT).
With backing from six major state-owned banks, Big Fund III surpasses the $39 billion in direct incentives allocated by the U.S. government under the CHIPS Act for semiconductor manufacturing. However, the total federal funding for chip initiatives reaches $280 billion. In comparison, the European Union's €43 billion Chips Act and South Korea’s $19 billion support package seem modest.
The announcement of Big Fund III sparked a rally in stocks of Chinese semiconductor companies poised to benefit from this influx of capital, although past investments by Beijing have not always yielded success. Indeed, frustrations arose over previous failures to develop semiconductors capable of substituting U.S. circuits. Notably, the former head of the Big Fund faced removal and investigation for corruption.
Transforming semiconductor manufacturing is inherently time-consuming, a challenge also seen in Europe and the U.S. However, exciting developments are emerging. For example, French deep tech startup Diamfab is innovating diamond-based semiconductors that could contribute to a greener automotive industry, though such advancements are still a few years away. Tracking these innovations in the West provides a fascinating counterpoint to the developments taking place among Chinese semiconductor players.
Additional reporting by Rita Liao.
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