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Dreams for GBA chip industry seem unrealistic

Local media in Guangdong have been poring over the province’s latest Five-Year Plan for industrial upgrading, which has unveiled the goal of becoming a “semiconductor manufacturing powerhouse”, according to Trivium, a Beijing-based consultancy.

This covers every aspect of the supply chain, naturally:

  • Key semiconductor materials
  • Design software for high-end chips
  • Advanced fabrication technologies
  • Advanced packaging and testing 
  • High-end chip manufacturing equipment

The challenge for the province, and indeed for the entire Greater Bay Area, is how to do this when its historical strengths have not been deployed in anything remotely like what is now being expected of it.

The GBA has been, for most of its long existence, a trading and services powerhouse. More recently, light manufacturing evolved naturally in Hong Kong, and then Guangdong, from the injection of foreign capital. This morphed quickly from assembly services, whereby components were brought in from elsewhere, put together by cheap and abundant labor, and shipped out again, into full industrial chains, where all manufacturing was done in one place by a group of suppliers located within an hour or two’s drive of each other.

But these were for products that didn’t require a lot of R&D. Even the province’s tech hardware giants, such as Huawei, Oppo and Vivo, made things that didn’t require world-class universities on their doorsteps. Ditto for DJI, the world’s No. 1 maker of drones, which is impressive but hasn’t exactly set the patent-watching community on fire.

The lack of world-class research institutes here is one of the main reasons why the Science and Technology Corridor has seen more success building its railway network than birthing the next Apple or Samsung. This is even with the increased cooperation between Hong Kong’s universities, which have evolved to suit a services-oriented city, and Guangdong’s leading tech firms.

There has been a concerted effort in recent years to move further up the value chain by spurring the development of more advanced products. This has led to the establishment of so-called “Science Cities”, (covered here) where advanced R&D facilities are supposed to seed new, higher-value, innovative business activities. Perhaps the most advanced is the Dongguan Neutron Science City, which is being built around the Songshan Lake Materials Laboratory and China Spallation Neutron Source. Both have made use of high-level support and resources from the Chinese Academy of Sciences, as part of a strategic plan to turn Dongguan, once a low-cost manufacturing hub, into one of the top clusters for comprehensive material science research in China.   

These projects have decades to go. Their progress can only have been hampered by the onset of Covid-19, which has made it impossible for foreign talent to get into Guangdong. Even without that, however, it is hard to imagine how a region famed for the ability of its entrepreneurs, but not its scientists, is now going to create a world-class semiconductor industry out of thin air. If Huawei couldn’t do it, will the creation of many others in its image make a difference?

Huawei is undoubtedly going to have to be at the center of this plan. It is the only company based here that could have a crack at building an advanced semiconductor supply chain. It has apparently been instrumental in setting standards for 5G wireless networks. Yet as has been made clear already, Huawei’s Hisilicon subsidiary is nowhere near up to the task in its present state, and Ren Zhengfei would likely be the first to admit that.

Another cause of head-scratching over why the central government approved this plan is that there are surely other provinces better suited to the endeavor. Guangdong’s success has been built on flexible “southern style” policymaking that largely involved the government getting out of the way of its people’s natural entrepreneurial drive. The province has had little experience of, and no discernible success with, the creation of cutting-edge industrial behemoths. Governments in this region have been great at city planning, infrastructure buildout, and digitization of services. Picking industrial winners? Not so much.

Tencent has been the best example of this. Its founder, Pony Ma, the son of a harbor manager, got his break thanks to Israeli technology and foreign investors. He was able to grow Tencent into what it became because he was based in a place where it is – or at least, was – better to ask for forgiveness than permission. Regulators pretty much left him alone. At least, they did.

Having said that, perhaps Guangdong won’t be expected to carry this burden alone. Zhejiang, Jiangsu, Sichuan, Chongqing and others which have grabbing at Guangdong’s coattails in recent years are probably about to launch their own Five-Year Plans for Semiconductors, too.

The obvious advantage Guangdong enjoys over the rest of the country is its close proximity to international capital markets. When the borders are open, that is. There is probably an abundance of global capital available here to step in once the initial government-funded sparks have been lit.

That would be to assume, however, that the US government doesn’t first take a good look through the plan, and decide to widen its sanctions net beyond Huawei, cutting off the exit route for semiconductor venture capitalists and private equity financiers in global capital markets. That would make this Five-Year Plan a whole lot harder.

Still, there is a first time for everything, and the government does appear determined to pour heavy resources into getting this initiative going. Time will tell soon enough whether it is realistic.

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