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China has long pushed the development of top-end semiconductors as a key strategic objective.
Now, as a trade war with the United States looms, a government decision to accelerate the development of the domestic chip industry underlines how far those goals have fallen short.
Senior Chinese officials are increasingly concerned about stalling efforts to improve domestic chip design, seen as critical after a series of failed outbound deals, according to two industry insiders familiar with the matter.
Closing the quality gap with U.S. chipmakers has become a matter of urgency in Beijing.
Senior government officials met this week to discuss how to speed up chip development in light of brewing trade tensions with the United States, Reuters reported on Thursday.
China has made chip development a key plank of its Made in China 2025 drive to bolster its strength in technology against more developed rivals in the United States, Japan, and Europe. The government wants local chips to make up at least 40 percent of China's semiconductor needs by the middle of the next decade.
However, Chinese chipmakers are struggling to hit key targets, industry insiders say.
Domestic chipmakers have been stymied by the blocking of a series of chip-related deals overseas, and are having trouble attracting talent and overcoming technical hurdles in developing higher-end domestic chips.
A Chinese deal for the U.S. semiconductor testing company Xcerra was shot down by a U.S. national security panel in February, while the $1.3 billion acquisition of the U.S. chipmaker Lattice Semiconductor was blocked last year.
"There was earlier a belief that the technology would be easier to develop, or that it could be acquired from overseas," said a supplier to one of China's top state-backed integrated circuit chip firms. "Now we're seeing that it's not the case."
"The projects are efficient and there is a lot of funding support," the person added, but "there are more problems to solve than they initially thought."
These delays came into sharp relief this week after the United States imposed a seven-year ban on sales by American companies to the Chinese phone maker ZTE Corp — a move that threatens to cut off its supply chain.
ZTE, which relies heavily on U.S. chips, said on Friday the ban was unfair and threatened its survival.
Interviews with half a dozen China chip suppliers, business groups, investors, and analysts suggest that despite heavy investment and rhetoric, China is behind schedule in developing high-end chips, or integrated circuits. China has made more progress on lower-end chips, people said.
"The reason why chip technology has experienced such limited progress despite years of advocacy is that the Chinese system has not yet formed a key driving force for it," China's Global Times newspaper said in an editorial on Friday.
The country's leaders, rattled by the trade frictions with the United States and the ZTE case, are now looking to double down on investment into research and development of domestically-designed chips, the two people said.
The state-backed National Integrated Circuit Investment Fund will step up spending on domestic chip design versus other areas such as financing overseas deals, the people added.
The "Big Fund", which closed a new round of funding worth an estimated $32 billion last month, will dedicate around a quarter of the new funds to integrated circuit design, they added.
One design challenge faced by Chinese companies is catching up in a short timeframe with rivals who have been developing increasingly complex technology for decades.
China's Ministry of Industry and Information Technology and the National Integrated Circuit Investment Fund did not respond to faxed requests for comment on Friday.
U.S. regulators have cracked down on acquisitions of overseas semiconductor assets by Chinese state-backed companies - an effort spanning the Obama and Trump administrations — over fears that Beijing's state-subsidized efforts would undermine U.S. supremacy in semiconductor technology.
China says the aggressive policy is needed to reduce dependence on foreign-made chips. China imported $227 billion worth of integrated circuits in 2016, more than for imports of crude oil, iron ore, and primary plastics combined.
These chips go into smartphones, computers and other electronic devices, as well as high-end industrial and military products.
Beijing is now seeking to relieve pressure on priority chip products by cutting corporate taxes for up to five years, officials said this month. Companies are also spending heavily to tap foreign resources as well as engineers from overseas competitors, analysts say.
"It's not uncommon for engineers to get a salary that is five times what they are paid in Korea or Taiwan if they work in China," said a Korean chip engineer who now works in China with the domestic semiconductor industry.
"The bonuses are large" and if you can recruit others "there are very big incentives," the person said. He declined to be named because of the sensitivity of the matter.
Jeter Teo, Taipei-based research director at the tech analytics consultancy Trendforce, said China was aggressively looking to attract talent, though still had less than half the 700,000 semiconductor experts it needed to really compete.
While China has managed to attract many experts in the semiconductor field, analysts say, others are deterred by clauses in some contracts limiting job mobility and the challenges of moving families to China.
"There is no doubt companies will catch up eventually," the Chinese chip supplier source said, referring to Chinese firms.
But "they must develop at double the speed of overseas companies, otherwise they will always be a generation behind," the source said.