The Shanghai municipal government has newly released a package of generous incentives to encourage investments in the development and production of semiconductor materials and equipment, as well as chip design software solutions, as part of its efforts to speed up domestic chip industry progress.

Under the package, the government will subsidize up to 30% of new investment--up to a total of CNY100 million (US$15.7 million)--in semiconductor materials and equipment projects in the city.

It will also subsidize 30% of investment in chip software projects, such as electronic design automation (EDA) tools, also up to the ceiling of CNY100 million.

The same 30% subsidy policy also applies to expenditures on tape-outs, where semiconductors are tested for flaws before they are delivered for mass fabrication, for chips with nodes under 28nm.

Also, Shanghai offers CNY500,000 in allowances, in addition to housing support, to highly-skilled semiconductor professionals who choose to work in the city.

Industry observers said the new policy incentive is stronger than those in the past, signaling the Shanghai government's determination to help counter US sanctions targeting China's semiconductor industry and to cement the city's leading position in the industry.

Shanghai is home to China's largest foundry house, Semiconductor Manufacturing International Corp (SMIC). The city owns the most complete IC supply chain in China, which turned out CNY207.13 billion in semiconductor output in 2020, accounting for 22% of the country's total IC production value and including CNY95.415 billion for the IC design sector and CNY46.718 billion for foundry and backend sectors. In the city's 14^th five-year plan, announced in March 2021, semiconductor and AI are listed as the two pillars underpinning its future technology development in the next five years.

Tallies from China's National Bureau of Statistics indicated that China produced 359.4 billion chips in 2021, including those manufactured by foreign-invested plants in the country, representing an annual increase of 33.3%. Despite the sharp production expansion and its status as the world's largest consumer of semiconductors, China still relies heavily on foreign technology support for semiconductor fabrication.

China continues to stagnate in the development of advanced process technology, and its IC design capability has yet to reach international first-class levels despite its repeated claims of breakthroughs in the sector. This has been a major headache for the country, further compounded by the intensifying tech war between the US and China. Apparently under pressure from the US government, for instance, the Dutch government reportedly has withheld granting a license for ASML to export EUV lithography equipment to China.

ASML CEO Peter Wennik has said recently that his company has still not received permission to ship to China any of its most cutting-edge lithography systems, which are needed to make advanced computing chips. He also noted that China would not be able to replicate top lithography technology independently because ASML relies on relentless innovation and integrating components that are only available from non-China suppliers.

China's semiconductor equipment segment has seen lower development momentum than other segments. For example, Shanghai's production of semiconductor materials and equipment stayed flat in 2020 relative to a year earlier; that flat performance contrasted with over 20% annual increases registered by its IC design, foundry and packaging segments. This is despite the fact that the city hosts a cluster of the country's leading semiconductor equipment makers, including Advanced Micro-Fabrication Equipment (AMEC), Shanghai Micro Electronics Equipment, and ACM Research.

China's IC design segment also depends heavily on foreign technology support. Statistics show that China commands less than 1% in the global supply of design IPs and EDA tools. This has prompted the Shanghai city government to also incentivize investment in IC design software development.

By DIGITIMES