China's chip industry awaits boom despite challenges

While China is known as the "world's factory", seemingly capable of making everything, semiconductor chips have been conspicuously absent on the "Made in China" list.

China's chip imports in 2013 grew 20.5 percent to reach $231.3 billion, exceeding imports of other goods including crude oil. In fact, they have consistently topped China's import list over the past decade.

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Considered "the heart" of all electronic devices, chips are vital for developing the broader information industry. Experts have called for more government support and industry innovation, as prolonged underdevelopment of China's chip sector could derail the country's economic upgrade.

Chips are widely used in computers, consumer electronic devices, automotive electronics and Internet communications. Though small in size - and getting smaller as technology advances - chips are high in value and represent an important link in the information industry chain.

Zou Xuecheng, a professor of semiconductor engineering at Wuhan-based Huazhong University of Science and Technology, says a semiconductor chip with production value of $1 translates into $10 in growth for the related information industry, and adds $100 to a country's gross domestic product, citing an IMF research.

"With China's consumption of chips exceeding $200 billion, it means $20 trillion in GDP growth for the world's economy," Zou says.

However, China has failed to make gains in the chip production process. Though China's semiconductor use accounts for more than half of the global market, the country is overly dependent on foreign chip suppliers.

The market share for chips made by domestic manufacturers is merely 10 percent in China, according to Li Ping, deputy general manager of XMC, a semiconductor manufacturer based in Wuhan.

Though 77 percent of cell phones sold on the global market are made in China, only 3 percent of chips in those phones are from Chinese suppliers, Li says.

According to a research report issued last year by the State Council, China's cabinet, China has the capacity to produce around 1.2 billion cell phones, 350 million computers and 130 million color TVs a year. Yet, Chinese companies have been reduced to worker bees for the international companies that take the lion's share of profits through patent fees on chips.

China's industry insiders lament being mired in a vicious circle: many Chinese companies cannot gain a competitive edge by owning key technologies, while meager profits limit their ability to invest in research and development.

Countries such as the United States and Japan have long attached great importance to the semiconductor industry, promoting it as a strategic sector with huge research expenditures funneled into the field.

The world's leading chip makers spend lavishly on research and expanding their production capacity. In 2012, South Korea's Samsung Electronics Co Ltd invested $14.2 billion and Intel Corporation of the US spent $12.5 billion.

Those amounts dwarfed what Chinese players can earmark for chip research. The fledgling industry is faced with scanty resources, even with government help. Semiconductor Manufacturing International Corporation, China's biggest chip maker, is able to spend only $100 million on research and production expansion a year.

Financial aid alone, however, cannot pull Chinese chip makers up, as the industry also calls for top talent.

"The key is an abundance of talented researchers, but we have seen an exodus of talent in recent years," said Yang Zhiyong, general manager of the electronics division of Wuhan-based FiberHome Technologies Group.

Yang Chunshi, a professor at Xiamen University, said research institutions should focus on developing technologies that are suitable for industrial applications instead of a blind pursuit of high-end technology.