Seoul mates

In the late nineteenth century a 15 year-old girl called Annie Oakley won a $100 bet with a much older man over which of them was the better sharpshooter. The competition was celebrated in the Irving Berlin song Anything You Can Do (I Can Do Better).

Fast forward to today and Joe Biden’s administration has just made its own big wager over which country will call the shots in the global semiconductor sector. Washington is raising the stakes in its game of one-upmanship with China after signing the $280 billion CHIPS and Science Act into law at the beginning of August.

For the past decade, the Chinese government has been the more closely associated of the two with state-directed industrial policy. Despite intense competition over semiconductors, it has taken Washington eight years to respond to China’s National Integrated Circuit Industry Investment Fund (also known as the ‘Big Fund’) with one of its own. But will America’s newfound industrial policy prove any more successful than the Chinese version?

The US government certainly won’t want to replicate the wastage and corruption that seems to have attached itself to the Rmb342.7 billion ($50.59 billion) Big Fund’s assets. Over the past month, Caixin has reported on the detention of one former high-flying Big Fund boss after another. They’re all suspected of corruption or “serious violations of the law”, as the government’s investigatory body the CCDI (China Central Commission for Discipline and Inspection) always puts it.

The latest headlines started in mid-July with an investigation into Lu Jun, the former head of Sino-IC Capital, which manages the Big Fund’s assets. By the end of the month, the fund’s current head Ding Wenwu had also been placed under investigation, as had Xiao Yaqing, China’s Minister for Industry and Information Technology.

This month, a further three Sino-IC executives have been arrested.

“This is the least surprising corruption investigation I’ve heard of for a while,” commented Matt Sheehan, a fellow at the US think-tank the Carnegie Endowment for International Peace. “When you have that amount of money sloshing around in an industry, it’d be way more surprising if there isn’t a major corruption scandal,” he told MIT Technology Review.

The article in the Review concludes that a fund founded on a political mission (to make China self-sufficient in semiconductors), rather than a financial one (generating an investment return) was a tempting target for misallocation of capital. Most notably, one of the Big Fund’s leading investments Tsinghua Unigroup (TU) ended up in the bankruptcy courts in 2021.

What differentiates the CHIPS and Science Act is how the subsidies are supposed to be made available to existing success stories: $52 billion has been allocated to entice the world’s semiconductor giants to forge an end-to-end supply chain on US soil.

The US Treasury Secretary calls this “friend-shoring”, softening former US President Donald Trump’s rallying cry of “Make America Great Again”. Local newspapers report that Samsung Electronics has already filed 11 applications for taxpayer-subsidised fabrication plants in Texas, costing between $12 billion and $21.5 billion each. The proposed investment comes on top of the $17 billion already earmarked for Samsung’s first US fab in the same state.

However, South Korean companies also have huge investments in China and the challenge is that the CHIPS act stipulates that companies applying for subsidies cannot – for the following 10 years – expand or upgrade their China operations for plants that make semiconductors below the 28nm manufacturing node.

The South Korean government is also under pressure to join Washington’s Chip 4 alliance, which already includes Taiwan and Japan. Beijing views this alliance and the CHIPS push as another attempt to “cut China out from the global chip supply chain,” as the Global Times puts it.

Seoul received its invitation to join Chip 4 in March but has been reluctant to formally accept. This August, its foreign ministry acknowledged that the Yoon Suk-yeol administration will attend a preliminary meeting on the grouping in September but has not gone beyond that. However, the tone of the South Korean newspapers has shifted from questioning whether the country should sign up for Chip 4 and turned to how China might retaliate, as it did in 2017 following Seoul’s decision to deploy America’s Terminal High-Altitude Area Defense (THAAD) system.

Some South Korean commentators believe the government can afford to risk Chinese wrath because it has more leverage than it did in that row five years ago: Beijing still needs a relationship with the more advanced South Korean semiconductor firms.

The Korea Times quotes an unnamed senior official who says that “China needs Samsung and SK Hynix as Chinese chipmakers are experiencing major troubles due to US sanctions. Therefore, it doesn’t make sense for it to hit back with economic retaliation against South Korea for joining the Chip 4.”

But this still leaves Samsung and SK Hynix with some difficult decisions. The former has invested a total of $26 billion in its two memory chip plants in Xi’an since 2014, for instance. Earlier this year it also began trialling the manufacturing of 3D NAND chips there, using its most advanced production process – 176 layers. However, Reuters says the US government is poised to impose a ban on the export of equipment to China that helps fabs to produce chips above 128 layers.

This would also impact SK Hynix, which had been proposing to repurpose its DRAM fabs in Wuxi to NAND, as it can no longer upgrade to the next generation of technology because of a previous American restriction on exports of lithography equipment.

In 2019 the US government persuaded its Dutch counterpart to forbid ASML from selling its cutting-edge EUV (extreme ultraviolet light) lithography machines to Chinese customers, slowing their progress to the most advanced manufacturing nodes. But it has yet to persuade the Dutch to do the same with the predecessor technology, DUV (deep ultraviolet light).

Samsung’s Xi’an fabs currently account for 40% of the company’s NAND production, while SK Hynix’s is responsible for an even higher 50% of DRAM output. However, both companies have been refocusing on South Korea, where the previous government encouraged the creation of an advanced semiconductor cluster spanning the cities of Hwaseong, Pyeongtaek and Yongin.

SK Hynix, for example, is now domestically producing its most advanced memory chips using EUV. This June it also announced a collaboration with ASML and American equipment supplier Lam Research to bring together the latter’s dry resist technology with ASML’s more advanced lithography equipment. The goal is to develop smaller and finer chip designs through an enhanced production process, allowing for improved performance and yield.

South Korean social media commentators aren’t known for their pro-China stance and this has been evident once again in some of the feedback on where Samsung and SK Hynix should be betting their futures. “A Chinese plant is a handshake you’ll always live to regret,” says the most-liked comment on an article in local newspaper Chosun. The second most-liked contribution concludes:“Even children know they can only survive on America’s side. The one thing which matters now is US compensation for losing the Chinese market after so much investment there.”

Kim Young-woo, head of research at SK Securities in Seoul and an adviser to the South Korean government on semiconductor policy, told the Financial Times that the CHIPS act would accelerate the shift of Korean chipmakers from China towards the American market. Fresh moves to impose export bans on semiconductor equipment sales to China will speed this further. In mid-August, for example, the US Department of Commerce announced bans on sales to Chinese customers of EDA (Electronic Design Automation) tools for gate-all-around field-effect transistors (GAAFET). This new generation of semiconductor technology is allowing logic chipmakers to manufacture below 4nm. The restrictions will primarily impact US suppliers Synopsys and Cadence, which hold a combined 62% market share in the automation tools.

Over the short-term, the embargo shouldn’t damage Chinese semiconductor firms too much. The country’s leading foundry SMIC has advanced to 14nm thresholds using FinFET technology, but it lacks access to EUV machines to upgrade to ‘cost-effective mass production’ of 7nm semiconductors. That said, earlier this month it was revealed that SMIC has been secretly shipping 7nm chips using repurposed DUV technology since 2021. Tech experts say the chips closely resemble TSMC’s 7nm process technology, prompting speculation that the Taiwanese giant may sue, as it has done twice in the past.

In an article this week in the Financial Times, Kathrin Hille noted that the news about SMIC’s 7nm chips had elicited a “gasp of surprise among observers” but said that the process would be tricky to scale up to match TSMC’s much lower production costs. “The furore over SMIC’s progress is quite overblown – they are using extra exposure to make up for the lack of EUV,” chip industry expert Douglas Fuller also told the newspaper. “It is understood that the yield is terrible.”

Hille added that SMIC’s co-CEOs have also differed over strategy: one wants to chase market share locally in lower-tech chips and increase profits (Zhao Haijun), while the other is thought to be happier to sacrifice returns over the short term to further the national policy goal of chip self-sufficiency (Liang Mong-song, a former TSMC veteran who joined SMIC in 2017).

Tensions in the sector have also forced Tudor Brown, the former president of British tech giant Arm, to resign from his directorship at SMIC. “Bitter sweet day today. After 9 years I resigned from SMIC board. The international divide has further widened,” he posted on LinkedIn. Brown is the latest of several people with UK or US nationality to depart from SMIC’s board, Bloomberg reports.

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