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Foreign investment funds rely on a US-compatible Chinese chip industry

Foreign investment funds rely on a US-compatible Chinese chip industry
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Pictured here is a chip manufacturing plant in Suqian city, east China’s Jiangsu province, April 1, 2022.

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BEIJING — China is so far behind the US in semiconductor technology that some investors are looking to startups to fill the gap.

That The US imposed new restrictions this month to keep an edge over China in advanced chip technology. While the rules will immediately hit U.S. and Chinese business revenues, they will only affect companies selling the most advanced semiconductor technology, analysts pointed out.

Most of Chinese demand is for chips with much simpler technology, they said, and Chinese companies are still small players at this point.

That gap leaves a major market opportunity that’s far better insulated from U.S. restrictions — and one that Chinese startups can tap into, some venture capitalists have said.

Interest from mutual funds

Vertex Ventures China is a company that raised money from foreign investors to participate in the idea.

The company has raised nearly $500 million for a new Chinese tech fund to close early next year — up from previous $400 million plans, said Tay Choon Chong, managing partner and head of Vertex Ventures China.

What is the disorder currently in China? The biggest disruption is that the West will not give China any technology. We see it as the best opportunity for us.

Tay Choon Chong

Managing Partner, Vertex Ventures China

“What’s just in China the fault?” he said. “The biggest disruption is that the West will not give China any technology. We see it as the best opportunity for us.”

Chinese chip companies are seeing double-digit growth annually as the market is worth tens of billions of dollars, Tay said, noting that China imports about $400 billion worth of chips a year.

He said certain areas of possibility include chips that amplify phone signals or control screens in cars.

Another firm investing international money in China’s chip industry is WestSummit Capital Management, which says its strategy hasn’t changed when the new US rules came out.

That’s because WestSummit invests only in chips made with mature technologies — for mass-market and civilian use, said Bo Du, the company’s chief executive.

Mature category chips use older technology and are generally less mature than the most advanced chips, whose consumer use today is primarily in high-end smartphones and PCs.

There are

The US restricts China chips

According to a report by Natixis, China accounts for about 40% of global chip demand each year.

However, Chinese companies only account for 5.2% of global supply – mostly at the lower end of the industry, the report said.

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“That [new U.S.] Regulations make it more lucrative to develop chip manufacturing technology outside the US as it means less political restrictions and uncertainty,” said Alex Liang, a partner at law firm Broad and Bright in Beijing.

“However, chip manufacturing is a mature technology that has been developed for many years. After all these years of intertwined development, it is difficult to separate US and non-US technology.”

The US has taken several steps this year to limit China’s technological capabilities.

That The Biden administration has identified China as a strategic competitorafter the Trump administration blacklisted certain companies including China’s largest chipmaker, Semiconductor Manufacturing International Corporation.

To “develop everything from scratch, I’d say the latest move would have probably set China back more than 5 years,” said Patrick Chen, head of research for CLSA in Taiwan.

Some products, like cars, would have to ditch some non-essential artificial intelligence functions for now, he said, although manufacturers could keep basic sensors or microcontrollers because they don’t use the most advanced chips.

impending risks

Despite the huge market opportunity, early-stage investments in Chinese chip startups still face risks from potential lawsuits and the complexity of the technology itself, Vertex’s Tay said. He said a company needs to make sure it has enough know-how and money to get its products to market on time.

Others are more skeptical.

The complex and wide-ranging chip supply chain has become a hot — and speculative — area of ​​investment in China since Beijing began to emphasize tech autonomy.

Adding to a perceived bubble in the market over the past year, it’s difficult to see which startups could thrive, said Hongye Wang, China-based partner at venture capital firm Antler. He described the odds as about 10 in 1,000 – or about 1%.

Wang said that like most VCs in China this year, he did not make any investments this year, partly because Covid restrictions restricted face-to-face meetings with entrepreneurs.

“I think the market for high-tech startups would be even better than the year before Covid-19 because that market has too much money for these tech startups,” he said.

For many Chinese companies trying to survive today, the fallout from the US measures is still being clarified. The sweeping new US rules target everything from the American employees of Chinese chipmakers to foreign companies selling to China.

One sub-sector that’s getting more attention is China’s so-called fabless chip companies, which rely on manufacturing outsourcing to operate, said Chen Deng, partner at Hylands law firm. She said these companies now need to look beyond a simple revenue risk model to assess compliance risk.

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