Pictured here is a chip factory in Suqian City, east China’s Jiangsu Province, April 1, 2022.
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BEIJING – China has lagged so far behind the United States in semiconductor technology that some investors are betting on startups to fill the gap.
The United States this month imposed new restrictions to maintain the lead over China in advanced chip technology. Analysts noted that while the rules immediately reduce business revenue in the United States and China, they only affect companies that sell the most advanced semiconductor technology.
The bulk of Chinese demand is for chips with much simpler technology, they said, and Chinese companies are still small players for now.
This gap leaves a significant market opportunity further insulated from US restrictions – and one that Chinese startups can take advantage of, some venture capitalists said.
Benefits from mutual funds
Vertex Ventures China is one of the companies that has raised money from foreign investors to buy the idea.
The company has raised nearly $500 million for a new Chinese tech fund set to close by early next year — more than previous plans of $400 million, said Tai Chun-chung, managing partner and president of Vertex Ventures China.
“In China now, what is the turmoil?” He said. “The biggest disruption is that the West will not give technology to China. We see this as our best opportunity.”
Tai said Chinese chip companies could see double-digit growth annually because the market is worth tens of billions of dollars, noting that China imports $400 billion worth of chips annually.
Specific areas of opportunity, he said, include chips that amplify telephone signals, or car control screens.
Another company putting international money into the Chinese chip industry is WestSummit Capital Management, which says its strategy did not change when the new US rules were issued.
That’s because WestSummit only invests in chips made with mature technologies — for mass market and civilian use, said Bo Du, the company’s managing director.
Mature class chips use older technology and are generally less complex than more advanced chips, which are used in consumer products today mostly in smartphones and high-end PCs.
He said that 79% of the global chip market falls under the mature technology category — a share that increases to 94% if we look only at automotive chips. Doe was a senior engineer at US chip maker AMD, among other previous roles in the industry.
He claimed that WestSummit-backed GigaDevice Semiconductor is one of the Chinese companies well positioned to capture the mature market.
The stock is down about 50% in 2022, but is up more than 2% so far this week despite the broad market downturn.
US restricts China chips
China accounts for about 40% of global chip demand each year, according to a Natixis report.
However, Chinese companies only have a 5.2% share of the global supply – most of them at the lower end of the industry, the report said.
“The [new U.S.] Alex Liang, a partner at the Beijing law firm Broad & Bright, said the rules make non-US chip-making technology more lucrative because they mean fewer policy constraints and uncertainty.
“However, chipmaking is a mature technology that has been developed for many years. It is difficult to separate US and non-US technology after all those years of intertwined development.”
The United States has taken several steps this year to limit China’s technological capabilities.
The Biden administration chose China as a strategic competitor, after the Trump administration blacklisted certain companies such as China’s largest chip maker, International Semiconductor Manufacturing Corporation.
“To develop everything from scratch, I would say the last step would have probably set China back more than 5 years,” said Patrick Chen, head of research at CLSA in Taiwan.
He said some products, such as cars, may have to sacrifice some non-core AI features for now, even though manufacturers can keep basic sensors or microcontrollers since they don’t use the most advanced chips.
Despite the significant market opportunity, early-stage investment in emerging Chinese chip companies still faces risks from potential lawsuits and the complexity of the technology itself, said Tai at Vertex. He said the company needed to make sure it had enough experience and money for its products to reach the market at the right time.
Others are more skeptical.
The complex and extensive chip supply chain has become a hot – and speculative – area for investment in China since Beijing began emphasizing self-reliance in technology.
On top of the perceived bubble in the market last year, it’s hard to say which startups might succeed, said Hongji Wang, a partner at China-based venture capital firm Antler. He described the odds as about 10 in 1,000 – or about 1%.
Wang said that like most venture capital in China this year, he has not made any investments this year, in part because Covid restrictions have limited in-person meetings with entrepreneurs.
“I think the high-tech startup market will be even better than the year before Covid-19, because this market holds a lot of money for those tech startups,” he said.
For many Chinese companies trying to survive today, the consequences of the US actions are still being settled. The sweeping new US rules target everything from US employees of Chinese chip makers to foreign companies selling to China.
Chen Ding, partner at Hylands Law Firm, said one of the sub-sectors that is paying more attention is so-called fabless Chinese chip companies that rely on outsourcing manufacturing for work. She said these companies now have to look beyond the simple revenue exposure model to assess compliance risk.
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