China’s SME Industrial Policy in 10 Charts

Subsidies: Smaller Than Expected and Falling

Discussions around China’s industrial policy regularly talk about “subsidies” without really knowing what that means. Absolutely, the PRC government has been offering immense support to its domestic chip sector, but how has it offered this support? Through subsidies? Through state equity investments? More importantly, what does the answer to that question mean politically?

This week’s Chip Capitols chart looks at subsidies. I define subsidies to comprise tax credits and direct financial grants that the Chinese central and local governments provide to semiconductor manufacturing equipment (SME) and chip manufacturing companies, while equity investments are purchases of firms’ newly issued stock to help them generate liquidity. Both are forms of industrial policy support for SME and chipmaking companies, but China’s choice between these policy tools suggests different levels of central government coordination over which companies get helped.

As we saw in Chip Capitols articles over the past few weeks, China’s equity investments into chip toolmakers are enormous but shrunk immensely during the pandemic. From a peak of $6.27 billion in central government, SOE, and private equity investments in SME firms in 2021, investment fell to a trough of $1.57 billion in 2022 during the height of China’s COVID-19 pandemic. By 2023, investment grew to $2.86 billion, which was less than half of its former height.

Furthermore, we learned that state-owned enterprises, which are absolutely political arms of the Chinese government, are not in lockstep with Beijing’s national goals. My statistics show that investments by the central government’s Big Fund have no consistent correlation with SOE investment decisions. This suggests that, despite perceptions of the PRC as a centrally planned communist monolith, Beijing has not well coordinated its industrial policies for catching up in the chip equipment sector with concurrent efforts by local governments and SOEs.

This week, we learn that the other major tool of China’s SME industrial policy, subsidies, is minuscule compared to equity investments. Additionally, Beijing is increasingly prioritizing support for the SME sector over support for chipmakers.

As a reminder about this article series, many studies over the past half-decade, including here on Chip Capitols, have tried to figure out how public funds flow from the various organs of the Chinese government to the semiconductor sector. However, the use of conservative methodologies has prevented scholars from bringing forth numbers for the entire ecosystem.

I set out to compile as comprehensive data as possible on Chinese equity investments, subsidy grants, and tax credits for the country's key SME companies — regardless of whether they are public or private. This challenge required estimation based on the limited public statistics available for private companies, but it has allowed me to amass a treasure trove of charts about the Chinese SME sector.

The world deserves a first (if fuzzy) glance at the totality of China’s industrial policy for chipmaking equipment. Every week, I am releasing a new chart about Chinese government support for SME firms through (1) equity investments, (2) subsidy grants, and (3) tax credits. Today, we dive for the first time into subsidies.

Subsidies are a Small Slice of the Industrial Policy Pie and Shrinking

At their height in 2021, upstream SME firms received $0.87 billion from PRC government actors in subsidies (tax credits and grants), while they received $3.26 billion from government actors in equity investments. The trend of SME subsidies being smaller than equity investments continued during the height of the COVID-pandemic at $0.28 billion and $0.89 billion respectively in 2022. Then, after the pandemic, both policy tools rebounded to $0.50 billion and $1.78 billion respectively in 2023, though they remained well below their 2021 highs.

Another look at the graph above tells a story about how upstream SME firms benefit differently from subsidies than downstream chipmakers. The smaller scale of SME firms’ subsidies (in orange) is not suprising due to their smaller size compared to China’s much more mature chipmaking sector. The PRC SME sector is largely comprised of small (often private) companies, with the largest among them, AMEC (中微公司) and SMEE (上海微电子), posting operating profits of only under $0.20 billion at their peak in 2022. In contrast, the downstream chipmaking sector boasts giants like SMIC (中芯国际), which posted an over $2 billion profit in the same year.

Given the firms’ differences in scale and the fact that the tax credit piece of subsidies is calculated proportionately to companies’ operating profits, it is no surprise that upstream SMEs would receive less overall in subsidies than their downstream counterparts. What is interesting, however, is that upstream subsidies fell precipitously from 2021 to 2022 during the COVID pandemic, while downstream subsidies fell only slightly. Then after the pandemic, upstream SME subsidies recovered about half their lost value, while upstream chipmaker subsidies continued to gradually fall.

At first glance, these trends suggest that in the context of overall financial belt tightening, SMEs are becoming a larger target of China’s subsidy efforts compared to downstream chipmakers. To confirm this political observation, however, we will need to dive deeper into the relative share of tax credits and grants within this week’s overall subsidy number. Tax credits are a relatively apolitical tool once passed because they apply mechanically to any company that satisfies certain statutory requirements, while grants are allocated on a case-by-case basis and so react very quickly to political trends.

Such will be the topic of next week’s chart in this series on China’s SME industrial policy. Stay tuned!

Methodology

*Different content than last week*

Getting subsidy data for SME companies posed similar challenges as equity investments in that many of these firms are small and not publicly listed. To that end, I relied on liberal estimation methods.

For upstream public companies, I sourced all my data from publicly available financial reports. For upstream private companies, I tried to find at least one publicly reported statistic in Chinese media, like revenue or operating profit for each company in each year. Then, I estimated all of each company’s other stats by assuming they were proportional with the average ratios from all public companies of the same year. (For example, Shanghai Microelectronics Equipment 上海微电子was not public in 2022, but I found a report of its operating profit, which was 1.2 billion yuan. Therefore, I estimated its "statutory tax obligation" as 1.2 billion/[the average operating profits of public companies in 2022]*[the average statutory tax obligations of public companies in 2022].) This method is not accurate at the individual company level (some estimates even resulted in negative tax credits); however, it results in a reliable estimate in aggregate. More importantly, it provides macro-level insights about China’s SME subsidies that, though imperfect, can help Western government policymakers get a grasp on how much China is spending to catch up in SMEs.

Additionally, it was not enough to look only at SME companies’ financials to get a grasp of China’s countrywide support for these firms because China also subsidizes demand for semiconductor tools when it gives subsidies to the purchasers of these tools, i.e. downstream chipmakers. To that end, I examined downstream companies to estimate the “subsidized demand” for SMEs—i.e., the portion of subsidies received by downstream chipmakers that is used to purchase SMEs. I estimated the subsidized demand for each downstream company as [sum of subsidies]x[capex]/[total expenditures]. I got the underlying numbers for this section similarly as for upstream SME companies, but since most downstream chipmakers are public, I only needed to use media statistics–based estimations for two firms.

Upstream SME companies surveyed:

• Advanced Micro-Fabrication Equipment Inc. China（中微公司）

• Naura（北方华创）

• Yitang Semiconductor（屹唐半导体）

• Piotech Inc.（沈阳拓荆）

• Skyverse Technology Co., Ltd.（中科飞测）

• Shanghai Precision Measurement Semiconductor Technology, Inc.（上海精测半导体技术有限公司）

• Shanghai Microelectronics Equipment（上海微电子）

• Cetc Electronics Equipment Group Co., Ltd.（中电科电子装备集团有限公司）

• Beijing Semicore Electronics Equipment Co., Ltd.（北京烁科中科信电子装备）

• Shanghai Kingstone Semiconductor Corp（上海凯世通半导体股份有限公司）

• RSIC Scientific Instrument (Shanghai) Co., Ltd.（睿励科学仪器（上海）有限公司）

Downstream chipmakers surveyed:

• SMIC（中芯国际）

• Guoxin Micro (紫光国芯)

• AllwinnerTechnology (全志科技)

• Changsha Jingjia Microelectronics (景嘉微)

• Nations Technologies (国民技术)

• Orbit (欧比特) (航宇微)

• Shenzhen Goodix Technology (汇顶科技)

• Datang Telecom Technology (大唐电信)

• Ingenic Semiconductor (北京君正)

• Hangzhou Silan Microelectronics (士兰微)

• Sino Wealth Electronic (中颖电子)

• Qingdao Eastsoft Communication Technology (东软载波)

• GigaDevice Semiconductor (兆易创新)

• Beijing Philisense Technology (飞利信)

• Ninestar (纳思达)

• Shenzhen Kaifa Technology (深科技)

• Hua Hong Semiconductor (华虹半导体)