12-08-2022 | | By Robin Mitchell
What do you get when you mix government money and communism? Answer, corruption and incompetence. Recently investments from the Chinese government into home-grown semiconductors have already seen multiple corruption charges filed against fund managers due to poor performance and potential illicit actions. What exactly has happened in China, why does this show that communist governments fail, and could this also be problematic for the US and its CHIPs act?
Recently, it has been reported that Chinese authorities have detained and charged multiple fund managers with serious violations involving corruption. The four executives who have been detained are all involved with a government-owned semiconductor fund whose purpose is to help China become self-sufficient when it comes to semiconductors.
China’s need for self-sufficiency has stemmed from multiple factors, including the COVID pandemic of 2020 and the numerous attempts by the US to prevent China’s access to the latest semiconductor technologies. While most nations on the planet are dependent on semiconductors for financial services and technology, China is in a tough spot as it relies on its “adversaries” for the very components needed to defend against them. As such, there is a great deal of urgency for China to be able to manufacture its own advanced semiconductors and remove this dependency. Furthermore, being able to manufacture custom semiconductors allows China to develop next-generation military systems in secret and thus gives China a defensive edge.
So, to address this situation, the Chinese government created a fund called “China Integrated Circuit Industry Investment Fund”, which is also known as “The Big Fund”. By investing in key semiconductor technologies, China would be able to develop its own manufacturing techniques and thus remove its dependence on foreign nations. But the companies being funded were not typical startups that benefit from venture capitalism and instead targeted companies that were not receiving such opportunities (equality of investment, anyone?).
Fast forward to 2022, and the fund (which started with $30bn) has seen a mixture of successes and failures. While the exact reason for the corruption charges hasn’t been revealed, it is suspected that the executive managers threw money at various businesses to see what would work instead of making sound financial decisions. Additionally, the lack of understanding of how the semiconductor operates from key players in the fund resulted in poor financial decisions that later would see numerous large businesses claim bankruptcy.
If there is anything that can be said about governments is that they are great at spending other people’s money while making none for themselves. Furthermore, you can always be sure that governments make poor decisions that do not truly reflect the will of the population or the desires of markets.
But communist governments have a certain habit of making decisions based on belief and certainty in their superiority. A classic example is the soviet “scientist” Trofim Lysenko, who believed that identical crops should be planted extremely close together because plants in the same social class won’t compete with each other. The result of this socialist theory was the deaths of millions of people through mass starvation from poor crop yields (for perspective, during this time, the US was getting fat on bacon and pancakes).
In the case of The Big Fund, the biggest mistake by far was choosing to invest in companies based on political belief instead of those that demonstrated commercial potential. This can clearly be seen by the fact that the fund was designed to invest in companies that don’t typically get investment opportunities; there is a reason why they are not invested in!
It is very easy to bash communist governments for their gross incompetencies, but in truth, most governments are utterly dismal, and the US/UK/EU is no exception. In fact, while many are celebrating the CHIPS act that will supposedly help the US obtain self-sufficiency in semiconductors, it also has the power to do serious harm.
One major problem that the CHIPS act suffers from is that it provides subsidies to companies that manufacture in the US, but many major semiconductor companies are fabless. As the subsidies will be unavailable to them, the few chips that are made in the US may have an unfair advantage (for example, Intel would benefit, but AMD would not).
What the CHIPs act should have targeted is easing environmental restrictions on new sites, funding foundries that manufacture custom designs (such as TSMC), and providing tax subsidies on American-made products that mostly use American-made ICs. Instead, the CHIPS act just provides tax incentives for the companies that already exist, and this will undoubtedly be abused by the politicians who can make financial decisions that will only benefit them in the long run.