Chinese Govt Asks Contract Chipmakers to Prioritize Local Clients

(Image credit: SMIC)

Apparently it isn't enough for the Chinese government to support local high-tech companies in one way or another and oppress international companies that have invested in China: A new report from Bloomberg says that the Chinese government has created a new committee that maintains a whitelist of China-based companies that build hardware or software so it can replace foreign technology in sensitive sectors.

Hua Hong Semiconductor, the second-largest contract chipmaker in China, has notified its foreign customers that it now has to prioritize Chinese clients. That means it will no longer be able to provide them a similar allocation of chips to what they've had in the past, and the company even has to cancel some orders due to a new national policy. That policy spreads well beyond chips. 

Hua Hong recently notified Holtek, a Taiwan-based microcontroller supplier, that it may not be able to offer it more production capacity in 2022 than it had in 2021 because it had to prioritize customers from mainland China, reports Nikkei. The foundry warned that it might have to drop some orders from foreign clients, citing China's national policy to prioritize demand from homegrown chip designers amid supply constraints. China reportedly implemented the policy to improve local supply chain resilience. 

Chinese contract chipmakers Hua Hong and SMIC produce the majority of their ICs using mature process technologies. The most advanced node is its 90nm fabrication process for low power logic and mixed-signal applications. By contrast, SMIC has its 14nm and 28nm technologies in its portfolio, yet ~82% of SMIC's revenue comes from thicker nodes.  

While neither company produces complex high-end processors for foreign customers, they make loads of small and cheap microcontrollers required for almost everything these days. If they cut supply to foreign customers to prioritize demands from local chip designers, the global chip supply constraints could worsen and undermine global electronics supply chains. 

Formally, both Hua Hong and SMIC are private companies, but having received massive investments from local and central governments, these companies cannot refuse to follow certain policies even if they harm client relations and their reputation. 

But it looks like China does not stop at chips when it comes to prioritizing local companies. For example, when Jiangsu, Zhejiang, and Guangdong provinces (where many high-tech producers are located) initiated mandated power shutdowns at the request of the central government of China, they cut energy supply to foreign companies but never disrupted operations of large China-based companies, according to executives from companies which operations were harmed. 

"Our power supply has been stabilized, but we were scrambling to negotiate with government officials over our power supplies around the end of September," an executive from a foreign manufacturer with capacities in China told Nikkei. "On the other hand, some large Chinese suppliers like Luxshare were spared from the power cuts from Day One."

Anton Shilov
Freelance News Writer

Anton Shilov is a Freelance News Writer at Tom’s Hardware US. Over the past couple of decades, he has covered everything from CPUs and GPUs to supercomputers and from modern process technologies and latest fab tools to high-tech industry trends.

  • jkflipflop98
    Reading between the lines here, the deal from the Chinese government appears to be "make the chips I tell you or I'll shut off the electricity to your factory".

    Not a subtle negotiation point, but effective nonetheless.
  • Endymio
    There's really no such thing as a "private company" in China. The PRC finds it beneficial to maintain a certain illusion of private ownership, but that's all it is.