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Craig Addison

After reading a report last week that said China was stockpiling chip-making equipment to protect against future US trade sanctions, I was reminded of two old proverbs: “There’s a sucker born every minute” and “laughing all the way to the bank”.
Last year, Chinese companies spent almost US$32 billion buying such equipment from suppliers in Japan, South Korea, Taiwan and elsewhere, a 20 per cent jump from 2019, according to a Bloomberg analysis of official trade data.
Separately, trade group SEMI forecast that total chip equipment sales by original equipment manufacturers (OEMs) to China reached US$18.1 billion last year, up from US$13.4 billion in 2019.
Stockpiling semiconductors is one thing, but stockpiling the complex, high-priced machinery that makes them, is another – and comes with risks.
This can only end badly for both sides.
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While it might make sense to stockpile machinery used to manufacture, say, smartphones or laptops, the approach won’t work for wafer fabrication gear that can cost several tens of millions of dollars apiece.
It’s like trying to secure the supply of Coca-Cola by acquiring the bottling plants, but without the “secret” ingredients needed for its signature taste.
Chips, unlike Coke, not only require secret ingredients – chemicals, gases, and even lightwaves – but also highly skilled people who know and understand the complex “recipes” to achieve the finished product. And different recipes are needed depending on the type of chip being made.
While in-house technical personnel can be trained in the basic operation of the machines, a chip maker will always need on-site support from the OEM that designed and built the machine in the first place.
To illustrate why having the machines alone won’t help, look at the case of Fujian Jinhua Integrated Circuit Co, a Chinese DRAM start up. It had US$5.65 billion in state funding to build a new wafer fab and fit it out with the latest chip making tools – including gear from US suppliers like Applied Materials and Lam Research. But after Jinhua was indicted by the US Justice Department in November 2018 for alleged economic espionage against US-based Micron Technology, Jinhua was blacklisted and US companies were not allowed to do business with it.
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Within days of the announcement, Applied, Lam and other foreign equipment suppliers recalled their on-site engineers, leaving the machines sitting idle on the wafer fab floor. Jinhua never produced a single DRAM and is now out of business.
Laughing all the way to the bank
Semiconductor equipment vendors have been posting record quarterly results that have propelled their share prices upwards – and much of that is driven by China’s chip-equipment buying binge.
Applied Materials, the largest US maker of chip tools, reported that 34 per cent of its fourth quarter sales went to China, up from 29 per cent for the full year of 2019
Lam Research, one of the biggest suppliers to Chinese foundry Semiconductor Manufacturing International Corp, is even more dependent on China sales. As a proportion of its total revenue, China has grown from 16 percent in fiscal 2018 to 31 per cent in fiscal 2020 – and that figure was 35 per cent in the fourth quarter last year.
Japan’s biggest chip equipment maker, Tokyo Electron, now sells more gear to China than to its home market. For the nine months ending December 31, its sales to China amounted to 223,622 million yen (US$2.1 billion).

But this party won’t last forever. The semiconductor capital equipment business is prone to boom and bust cycles, which have laid waste to many companies in the past. While the survivors have learned to live with the feast and famine of the market, China’s binge on equipment is inflating the boom part of the cycle even more. That means the bust, when it comes, will be even more painful for the vendors.
To be sure, Chinese chip makers are in a tough spot. While they are primarily producing chips for commercial applications, their products could end up in weapons used by the People’s Liberation Army in a future conflict, making them national security threats to the US. So they may have little choice but to stockpile some foreign equipment for fear of losing access to it due to geopolitical factors.
However, if China truly wants to achieve the goal of becoming independent from foreign semiconductor technology, some of that money might be better spent on research and development. But that will take more than a decade – and it will be a chaotic and expensive process with many failures along the way.
No pain, no gain.
Craig Addison is a production editor on the Post’s tech desk in Hong Kong. From 2002 to 2009 he worked for SEMI, the Silicon Valley-based trade group representing semiconductor equipment and materials companies.


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Tech War


Stockpiling semiconductors is one thing, but stockpiling the complex, high-priced machinery that makes them, is another – and comes with risks
Chips not only require secret ingredients – chemicals, gases, and even lightwaves – but also highly skilled people who understand how to make the ‘recipes’



Last year, Chinese companies spent almost US$32 billion buying chip-making gear from foreign suppliers. Some of that money might have been better spent on R&D.


Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


Opinion