Employees at Semiconductor Manufacturing International in Shanghai, China
China will no longer tie funding for leading chipmakers such as SMIC to performance goals and will give them greater say in state-funded research © Qilai Shen/Bloomberg

China is giving a handful of its most successful chip companies easier access to subsidies and more control over state-backed research, as tightening US controls on access to advanced technology force a major rethink in Beijing’s approach to supporting the sector.

The nurturing of closer co-operation with a select group of companies comes after the government shook up its tech strategy this month with the creation of a new Communist party science commission and a reinvigorated Ministry of Science and Technology.

Chipmakers Semiconductor Manufacturing International (SMIC), Hua Hong Semiconductor and Huawei, as well as equipment suppliers Naura and Advanced Micro-Fabrication Equipment Inc China, will be among those benefiting from the policy shift, according to people familiar with the matter.

The chosen few will have access to additional government funding without having to achieve performance goals that were previously necessary. They will also be able to play a bigger role in state-backed research projects, reducing the influence of state-owned companies and academic institutes.

“The Chinese government will subsidise these companies to produce and deploy localised chipmaking tools without any funding cap, just in order to overcome US restrictions,” said one person with direct knowledge of the policy shift.

The move is a tacit admission that previous policies of massive and often ill-targeted subsidisation of the semiconductor industry to build up domestic capabilities have been unsuccessful and are no longer an option, with China needing a different response to tough US restrictions on its industry’s development.

“China has wasted too much money on non-functional research to bypass the sanctions without harvest,” said a government official working closely with Chinese chipmakers. “It is time to ditch the delusions and channel all possible resources into the companies, with the capability to guide the industry out of misery.”

This liberalisation for a few comes as China is seeing its industry crippled by the Biden administration’s restrictions on the export of advanced chips, while a trilateral agreement among the US, Japan and the Netherlands is set to prevent it from acquiring the latest chipmaking equipment.

China needed to accelerate the development of homegrown replacements, analysts said, but it would not be an easy task. “There are bound to be bouts of pain in replacing equipment with domestic alternatives, but it is unavoidable,” said Lucy Chen, vice-president of Taipei-based Isaiah Research.

Beijing’s direct intervention with big investments has failed to produce much of a technological edge, according to industry executives. One manager at a domestic chipmaker cited as an example attempts to make lithography equipment for chipmaking, in which research has been under way since 2006.

“Homegrown lithography was examined and verified by academics, not industrial engineers,” said the executive, who requested anonymity owing to the sensitivity of the matter. “This equipment is only theoretically usable, and no chip manufacturer has ever dared to activate such a machine in their fabs.”

Industry experts are still cautious about how receptive the Chinese government would be to the industry’s concerns.

“The first step may be the most difficult, which is to explain the real plight of the industry and our needs to the officials,” said an executive from a Chinese chip-tool maker. “The officials and investors only listen to the good news.”

SMIC, Hua Hong, Huawei, Naura and Advanced Micro-Fabrication Equipment Inc China did not respond to requests for comment.

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