Over the last 20 years, China has struggled to find a way to boost its semiconductor industry. Despite many years of different attempts and colossal government funding, the country’s semiconductor industry has struggled to rise to a dominant position.

Now, China is seeking to raise a $40 billion fund to bankroll investments in domestic chipmaking and research. The new investment would be the biggest of the China Integrated Circuit Industry Investment Fund, also known as the Big Fund.

A long history of government funding failures

History is one of the big problems of this new Chinese “Chip Act.” Government funding for semiconductor manufacturing has been available and spent many times, but the industry never took off.

Over the years, the Big Fund has provided financing to China’s two biggest chip foundries, Semiconductor Manufacturing International Corporation (SMIC), Hua Hong Semiconductor, and to Yangtze Memory Technologies Corporation (YMTC), a maker of flash memory, and several smaller companies and funds. Many industry experts think that of all types of chips, China’s best chance at achieving world-class manufacturing capability is in NAND production.

Despite those investments, China’s chip industry has struggled to play a leading role in the global supply chain, especially for advanced chips.

Many of those failures are caused by culture and a vast government sector. The tight control of the Chinese government over the private sector and the lack of international collaboration make it difficult for entrepreneurs to choose to invest in semiconductor production.

“Government entities have an even harder time adapting than companies because they lack the three most powerful tools for success: control over their own mission and budgets, leeway to make rapid changes in the workforce, and market imperative to adapt or die,” writes Ami Zegart, director of Stanford’s Center for International Security and Cooperation in her bestselling book Spies, Lies, and Algorithms.

China is buying as many lithography machines as they can get

Because of this year’s agreement between the U.S., the Netherlands, and Japan to limit the sale of advanced semiconductor manufacturing equipment to China, Chinese companies have been buying as many advanced tools as possible before the ban took effect. Japan started enforcing its restrictions on July 23, and the Netherlands on September 1.

According to data from China’s General Administration of Customs, semiconductor production tools imports in June and July were nearly $5 billion, up 70 percent from the $2.9 billion in the same period last year.

One of the essential products is the ultraviolet lithography machines from the Dutch vendor ASML. Unfortunately for the Chinese semiconductor companies, all the high-end ASML machines for producing 5 nm chips and below are already spoken for by Taiwanese TSMC for the next few years.

In July, in ASML’s Q2 earnings report, CEO Peter Wennink, disclosed that the company has a backlog of around €38 billion ($41 billion) of pending orders.

Chinese manufacturers, desperate for lithography machines for other chips, are buying other ASML machines to ramp up production of higher transistor nodes. This is especially critical for their automotive and other industries. China has recently become the world’s largest automaker and car exporter, and its industry needs to control the supply chain of the massive amount of chips required for it.

Furthermore, some Chinese companies started buying etching equipment and wafer-coating machines from Japanese companies.

China is also hoarding AI chipsets

Chinese firms such as Huawei, Alibaba, and Tencent have been stockpiling chips for several years, preparing for potential export bans from abroad.

Last month, it was disclosed that Baidu, ByteDance, Tencent, and Alibaba are rushing to acquire GPUs before some new U.S. sanctions take effect. The Chinese internet giants placed orders for about 100,000 Nvidia A800 processors worth over $1 billion for immediate delivery and additional orders worth $4 billion for 2024.

The Chinese government wants a clear road to self-sufficiency

China’s President Xi Jinping has long stressed the need for China to achieve self-sufficiency in semiconductors.

“For complete independence, China would need to acquire cutting-edge design software, design capabilities, advanced materials, and fabrication know-how,” writes Chris Miller, author of Chip War. “This is why, despite the rhetoric, China is not pursuing an all-domestic supply chain.”

Furthermore, quality is a crucial factor. While China is still considered the world’s biggest factory, sophisticated high-end electronics is not their forte, and companies such as Huawei, ZTE, Alibaba, and others are used to the high quality of leading-edge chips from fabs located in Taiwan, South Korea, the U.S., and Japan. Even with the right equipment, achieving the level of quality of companies such as TSMC would take years of investment and training.

China Seeks Supply Might via $40 Billion Chip Act