How does China respond to US chip threats? With a $30 billion factory

Tsinghua Unigroup is investing $30 billion in a factory that will make DRAM and flash storage, striking at the heart of a chip battle between the US and China

For China, actions speak louder than words, especially in the escalating chip battle with the U.S., which has been hurling out verbal threats in recent months.

The Chinese chip infrastructure is getting a serious boost from Tsinghua Unigroup, which is investing US$30 billion in a new foundry to make chips. The state-owned Tsinghua Holdings is a majority shareholder in Tsinghua Unigroup.

This news comes just two weeks after U.S. accused China of rigging the chip market and artificially reducing the prices of semiconductors. The tough talk came from the administration of former President Barack Obama but will continue under Donald Trump, who was sworn in as president Friday.

The factory in Nanjing will primarily make 3D NAND flash and DRAM chips to bulk up the country's semiconductor and storage markets. The first stage of investment will be $10 billion and produce 100,000 chips per month. The manufacturing facilities will stretch over 1,500 acres, or 2.34 square miles.

Beyond the investment in the chip factory, Tsinghua Unigroup will also invest about $4.3 billion to build a complimentary IC (integrated circuit) international city that will include a science technology park, a school, commercial facilities, and apartments.

China has a poor chip-manufacturing infrastructure, and this investment should fill a hole in the country's long-term effort to be self-reliant with technology products.

Companies like Intel, Samsung, TSMC (Taiwan Semiconductor Manufacturing Co.) and GlobalFoundries, which invest billions in fabs, will feel the pinch. Intel and GlobalFoundries operate factories in the U.S., and those companies also spend billions to upgrade manufacturing facilities.

But the U.S. will certainly take notice. Earlier this month, a White House working group said China was not playing fair in the semiconductor market, by artificially reducing the prices of chips through government assistance. The working group, called the President's Council of Advisors on Science and Technology or PCAST, recommended the U.S. respond to the Chinese chip threat by investing more in innovation and education and creating new types of quantum and neuromorphic computers.

The U.S. and China have conflicting technology agendas. China has made it difficult for U.S. technology companies to do business in the country. Most hardware companies have turned to partnerships or joint ventures to operate, with the Chinese government having some level of ownership.

Security and intellectual property theft have also been major U.S. concerns. The U.S. has been placing more emphasis on China's semiconductor market in recent months.

China today hosts the world's fastest supercomputer called TaihuLight. Fast supercomputers are used in weapons development, economic forecasts, and scientific research, making them central to a country's security and economic strategies. The U.S. in the past has banned the export of supercomputing chips to China, citing concerns that it could be against U.S. national interests.

In 2014, China said it would invest $150 billion to subsidize chip development over a 10-year period. That's partly because China wants 70 percent of devices in the country to use homegrown chips by 2025. That investment helped spur the development of low-cost semiconductors, which are also shipping outside China.

But the U.S. charges that Chinese semiconductors are inferior and have affected the quality of devices. The flood of Chinese chips has slowed down demand for chips and hurt the bottom line of U.S. companies, giving them less money to spend on the research and development of new chip technologies.

Products like the iPhone and iPad are assembled in Chinese factories, helping to keep down the price of those devices. The cheap Chinese chips have also reduced the cost related to building electronics, appliances, and cars.

U.S. companies are also moving factories to China, which offers a cheaper way to make chips. Intel is making its memory chips at a factory in Dalian, China.

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