The Chinese government is spending almost $5 billion on a new fund to support the country's microchip industry, as China moves to bolster what it has long considered a strategically important segment of its economy.
The fund, which China's Ministry of Industry and Information Technology announced late Wednesday, will focus on investment in Beijing to increase chip production and enhance facilities for chip design and testing. It will also support mergers and acquisitions to create bigger players, the ministry said.
The announcement comes just a month after Ma Xianghui, vice bureau chief of MIIT's financial affairs, said China was exploring spending around 100 billion yuan ($16.3 billion) over an unspecified time period to create a national fund to support the chip industry.
The new fund is worrying some in the industry, who say that a new push by the Chinese government to support chip production could lead to difficulty for foreign companies, which currently dominate the industry.
"While we haven't seen all the details, there are concerns these government funds may favor local Chinese firms, giving them a leg up in the market," said Jimmy Goodrich, director of global policy for the Information Technology Industry Council, an advocacy and policy group that represents chip companies like Qualcomm Inc., QCOM -1.02% Texas Instruments Inc. TXN -1.48% and Samsung Electronics Co. 005930.SE -0.28%
Such national industrial policies often are "unsuccessful and market distorting," he added.
Home to a massive chunk of the world's electronics supply chain, China has long been a net importer of semiconductor materials, which are used to create the microchips in everything from tablets to televisions. In 2012, China consumed $101.6 billion more in semiconductor materials than it produced domestically, according to a report from research group PricewaterhouseCoopers.
This gap has led to repeated calls from Chinese officials to increase domestic semiconductor output. In September, Chinese Vice Premier Ma Kai called for Chinese technology companies to make greater efforts to improve the country's microchip industry, which he said was important for Chinese economic growth and for the expansion of its national security, according to China's official Xinhua news agency.
The call comes as some U.S. computer and software companies have reported a chill in sales in China. Cisco Systems Inc. CSCO +0.33% executives have suggested Chinese customers, particularly those with government ties, may be cutting purchases of U.S. tech gear in response to U.S. restrictions on Chinese companies and revelations about surveillance by the U.S. National Security Agency.
When asked on Cisco's earnings conference call last month whether the revelations around NSA surveillance are hampering China business, Chief Executive John Chambers said "it is an impact in China."
Last month Qualcomm Inc. said a Chinese government agency was investigating the chip maker under the country's antimonopoly law. The company said it wasn't aware of any activity that violates the law and would continue to cooperate. The disclosure followed statements from Qualcomm's chief executive saying U.S. restrictions on Chinese companies and NSA surveillance were impacting the company's business in the market. Qualcomm maintained a 53% share of the global market for smartphone processors in the second quarter of 2013, according to Strategy Analytics.
Despite more than a decade of official support for China's semiconductor industry, Chinese production has lagged international competitors in both sophistication and quantity. This is in part due to the nature of the industry, which is investment and technology intensive. Semiconductor companies have also been careful not to build their most advanced production facilities, called fabs, in China. That makes it more difficult to find experienced engineers and has also helped the industry avoid direct technology transfer that has occurred in other sectors within China.
