Decoding the Chinese Big Fund and its future trajectory
While India doesn't need to learn much from China—as both systems are different—the viability of a big fund for technology could be looked at by a public-private partnership as well
Image: Shutterstock
China is supposedly changing the rules of the game by augmenting its National Integrated Circuit Industry Investment Fund, more commonly called the Big Fund.
The fund is now in its third phase after several pitfalls in the first two editions. The initial investment began as early as 2014 with an investment of 139 billion Yuan spread across varied sectors. The second phase was launched half a decade later in 2019 with an outlay of 204 billion Yuan, primarily looking at specialised segments of the overall value chain including testing equipment and lithographic machines. Both of these phases did not accrue the desired end results.
Big Fund 3.0 as it is called, looks at a unique public-private partnership with the state-controlled backing of banking institutions. A bulk of impetus in this colossal outlay of 340 billion Yuan, applicable for the next 15 years is on semiconductors, advanced chip technologies for AI, friendshoring, and focusing on cutting down technological dependencies.
As per reports, the Chinese Finance Ministry is the biggest shareholder in this tranche of big money, followed closely by the China Development Bank. The corresponding objectives logically could also be to create more tech jobs and address the ever-burgeoning government debt. The plan also includes preferential tax policies as well as R&D in tune with Xi Jinping’s call in October 2022 “to win the tech race”.
While Big Fund 3.0 essentially looks at enabling large capital investments and promoting intrinsic linkages in the overall industry value chain, a bulk of this outlay may be aligned to the production of legacy chips. While there may be tighter export controls in the offing for the West, some markets and geographies devoid of any home-grown semiconductor companies are likely to be more affected by the intended overproduction of legacy chips by China to cater to their demand and associated ease of imports.
This is an important facet to be considered in the overall mosaic of technology, policy, and geopolitics. The mainstream legacy chips, also referred to as foundational chips, in terms of transistors etched on them, are the mainstay of many industries. These include, consumer products, select military hardware, machinery, industrial automation equipment, automobile applications, and more.
It is also pertinent to acknowledge that post-pandemic, the much-debated chip shortage was a function of inadequate availability of these legacy chips. While the interpretation of legacy chips transgresses various dimensions, the US CHIPS and Science Act of 2022 defines these ever-evolving devices at 28-nanometre technology or larger. These legacy chips have a central role to play in manufacturing economies with myriad utilisation in consumer and industrial applications, as well as being the bedrock of innovations.
While the advanced chips are undoubtedly the prima donna of all cutting-edge technologies, these legacy chips are often viewed through a prism of conflicting demand, public investment, and manufacturing capacities which is likely making their production spiral worldwide.
China looks to circumvent the embargo on advanced chip technologies from the West with state-backed investment. This old playbook could lead to the overproduction of legacy chips in the next four or five years. This would envisage price advantage accrued due to the sheer volumes of scale and elbowing out of established entities from various market segments thereby affecting their revenues.
The other argument in light of this endeavour is that large tranches of public investment do not guarantee anticipated growth. They need to follow a phased trajectory with significant waypoints. While there are varied opinions, linking an exponential growth trajectory of this sector to the big fund may not be entirely correct. Earmarking a fund for a particular domain is one aspect but its deployment, transparency, and value addition in terms of innovation, development of newer technologies, and fostering economies of scale need to be looked at as well.
While India doesn't need to learn much from China—as both systems are different—the viability of a big fund for technology by means of a public-private partnership could be considered.
This fund should have a long-term focus with a clear directive to incentivise innovation, incubate future disruptive technologies, and be managed professionally with transparency. The fund could have a higher private sector contribution every year and a bulk could be allocated towards R&D as well as workforce development in the semiconductor space.
Either way, the idea is not to be an alternative to China. The strategic thought is to combine the aspects of the availability of a large skilled pool of professionals, the existing demographic dividend, and the capability of taking risks. Now that large entities in semiconductors are factoring India as a preferred destination, using a combination of guardrails and rewards for high-value tech production could be the key.