29 Dec The great US-China tech decoupling: Where are we now?
TAIPEI — For Toshio Nakama, the battle between China and the U.S. for global tech supremacy has been a boon.
Last year S2C, the chip design tools company that he co-founded 16 years ago in Silicon Valley and later moved to Shanghai, was bought by SMIT Holding, a Chinese group backed by Beijing’s China Integrated Circuit Industry Investment Fund, nicknamed the “Big Fund.”
“Previously I had to spend a lot of time caring about operations and finding new investors,” Nakama, the CEO of S2C, told the Nikkei Asian Review. “Now I can dedicate most of my time and effort to research and development.”
Nakama’s good fortune — he has nearly doubled S2C’s team of sales and engineering staff to 100, and plans to double it again next year — is due to Beijing’s aggressive quest for technological self-sufficiency, in which companies like his play a crucial if little-known role.
S2C provides electronic design automation — otherwise known as chip design tools — to Intel, Samsung and some 400 other semiconductor companies. These tools produce the software and hardware that in turn design the integrated circuits that actually make computer chips work.
Without them, China will never be able to develop its own tech supply chains. Moreover, as the chip design tools industry is dominated by just four U.S.-based companies — Synopsys, Cadence Design System, Mentor Graphics, and Ansys control 90% of the world market — it has extra strategic significance to Beijing.
“It’s the first time in my career that chip design tools have been getting so much attention, and it is due to these [geopolitical] uncertainties,” Nakama said. “The number of chip design companies in China has soared to over 1,600, but they rely almost entirely on foreign tools. With the escalating global tech war, many Chinese companies are in need of alternative tools from local providers. The golden age of Chinese homegrown [chip design tools] is coming.”
Nakama’s company is a prime example of China’s nationwide campaign to cut dependence on U.S. technology in the wake of Washington’s crackdown on flagship companies such as Huawei, the world’s biggest telecom provider and second-largest smartphone company, and Hikvision, the world’s biggest surveillance camera manufacturer.
Faced with U.S. export bans on key technological inputs, Beijing’s goal is now no less than to create national champions in every segment of its tech supply chains — from electronics assembly, to chipmaking, and to chip design as well.
Empyrean Software, another Beijing-sponsored chip design toolmaker, has even said that its goal is “to help the country get rid of its dependence on foreign companies” by 2030.
The scope of Beijing’s drive is wide-ranging, and well-funded. Beijing has launched a $204 billion yuan ($29.1 billion) second phase of the Big Fund to develop China’s national semiconductor industry, as well as a new 147.2 billion yuan program to upgrade national manufacturing capability. The government introduced its first chip industry seed fund of 138.7 billion yuan back in 2014.
Even local capital markets have been recruited. Last year, China introduced the Star Market tech board, a local version of Nasdaq, to provide easier access to capital to homegrown tech startups. This year alone, companies have raised around 64.3 billion yuan on Star, according to research agency Wind.
Each of these moves are part of an ongoing trend that will see the world’s two biggest economies increasingly decouple — especially in technology — despite any interim wins such as the first-phase trade deal that Beijing and Washington agreed to this month.
“China’s urgency to build a competitive semiconductor industry as well as tech subsectors is not because it wants to fight the U.S., but because offense is the best defense,” said Wang Lin, a partner in Walden International, a leading venture capital outfit that has investments in China’s top drone-maker DJI as well as the country’s biggest contract chipmaker, Semiconductor Manufacturing International Co.
The great decoupling began with the election of Donald Trump to the U.S. presidency in 2016. Throughout his campaign, Trump repeatedly criticized China for taking American jobs, causing trade deficits and conducting unfair trade practices such as stealing intellectual property.
The decoupling got fully underway in 2018 after the Trump administration slapped billions of dollars of tariffs on Chinese goods. Foreign companies that relied on Chinese manufacturing were suddenly forced to shift production elsewhere.
But the real hammer blow came shortly afterward, when Washington also cracked down on Huawei, alleging national security concerns. For many, it was this attack on a Chinese national champion that forced everyone to accept that decoupling was a reality here to stay.
“The core of the U.S.-China trade war is Washington’s all-out efforts to stop China from rising quickly in advanced technologies,” said Y. W. Sun, CEO of China Fortune-Tech Capital, an investment arm of SMIC. “Never harbor any illusion that things will go back to the good old days.”
Tech executives — in the U.S., in China, and in places such as Taiwan, Japan and South Korea — say they have never before encountered so much geopolitical-generated uncertainty. The examples are legion, and encompass every aspect and subsector of tech supply chains.
Start with the first-round effects of the tech rift.
In May, U.S. chipmaker Advanced Micro Devices told Nikkei that it had stopped issuing technology licenses to its Chinese state-controlled joint venture partner, Tianjin Haiguang Advanced Technology Investment Co. The next month, it was added to Washington’s blacklist that banned the Chinese company from receiving key U.S. technology.
Google, meanwhile, was banned by Washington from supplying Huawei’s smartphones with its popular Google Mobile Services — including Gmail, YouTube, and Google Maps. Huawei said the ban would cause it to fall short of its sales goal by $10 billion, mainly due to the impact on its smartphone business.
European companies have been drawn into…