In March, Premier Li Keqiang named semiconductors as the top priority of the 10 industries China wants to foster in its "Made in China 2025" initiative. But China's ambitions were already clear in 2014 when it launched the National Integrated Circuit Industry Investment Fund -- better known as the Big Fund -- in 2014 with 138 billion yuan ($21.9 billion) in seed capital, which it hoped would turbocharge investment from local governments and the private sector. The Big Fund is in its second phase of fundraising for at least 150 billion yuan. Credit Suisse estimates China's total investment to be around $140 billion.
China wants to end its reliance on foreign technology -- its annual imports of $260 billion worth of semiconductor-related products have recently risen above its spending on oil. It also wants to move its manufacturing sector to higher-value products.
But there are also national security concerns. Chips serve as the brains for every electronic device -- from smartphones and PCs to connected cars and data centers -- and therefore have strong implications for intelligence. China wants to defend against the types of national security breaches exposed by Edward Snowden's 2013 leaks, which revealed connections between American technology providers and the U.S. National Security Agency's vast surveillance program.
This position is a mirror-image of the increasingly hard-line U.S. stance toward China. American regulators have cited national security concerns when it has curbed chip and other deals with Chinese groups, and has recently fired the opening shots in a trade war to penalize China for stealing high-tech intellectual property. To Beijing, such moves point to an all-out U.S. effort to slow China's aggressive attempt to become a new semiconductor superpower.
"The U.S. is really feeling the threat," said Jerry Peng, an analyst at research unit IEK of Industrial Technology Research Institute in Taiwan.
There is no guarantee of success for China's chip push, however. The country's previous efforts to build a chip industry, including a major drive in the 1990s, were mostly unsuccessful. Its technology is far behind that of global giants such as Samsung Electronics and Intel, making China's goal of producing 75% of the chips it uses domestically by 2025 seem highly ambitious, analysts at Natixis say.
Unlike its previous efforts, when its investments were scattered and ill-placed, China is seeking to bring in expertise from the outside by luring foreign companies to set up advanced production facilities within its territories. This will help create a full supply chain and attract talent. The latest move by the U.S. to bar American companies from selling any components to ZTE, a Chinese telecom equipment provider and smartphone maker, has only strengthened China's determination to replace as many foreign suppliers as possible, according to multiple industry executives.
The recent U.S. move to bar American companies from selling components to ZTE has made China more determined to create its own chip ecosystem.
Analysts also say China has learned from its past mistakes.
"It's totally different from decades ago when China suffered through a frustrating experience to build semiconductors out of nowhere," Mark Li, an analyst at Bernstein Research said. "This time, it's a totally different story as the country has all the right ingredients, including a massive market and strong local makers of smartphones, TVs, PCs, and automobiles ... . It could be just a matter of time for them to bear fruit."