In the landscape of China's semiconductor industry, the National Integrated Circuit Industry Investment Fund, commonly known as the "Big Fund," has emerged as a pivotal player since its inception. Established to bolster the entire semiconductor supply chain, this fund focuses on a variety of sectors, including design, wafer manufacturing, packaging, testing, equipment, and materials. As we look ahead, the third phase of this ambitious initiative, which commenced in May 2024, is poised to have significant implications for the industry.

The third phase of the Big Fund has a registered capital of 344 billion yuan, and it marks an evolution in the fund's structure, with six major state-owned banks joining as shareholders. This change reflects the commitment at a national level to solve pressing issues within the semiconductor sector—set against the backdrop of escalating global competition and supply chain challenges exacerbated by geopolitical tensions. The focus of this new phase will gravitate towards advanced manufacturing processes, especially in the areas of core equipment, Electronic Design Automation (EDA) software, and materials, which are foundational for expanding production capabilities.

The strategic prioritization of advancing semiconductor processes has not gone unnoticed. Estimates indicate significant shortfalls in advanced manufacturing capacity within mainland China, making this initiative all the more critical. Big Fund Phase III aims to not only support but also enhance the market share of domestic companies in the equipment and materials sectors as they expand capacity—a move crucial for fostering self-sufficiency in a landscape increasingly dominated by technological advancements.

However, specific sub-sectors still lag in local production capabilities. For example, CPU and GPU manufacturing, high-performance storage chip production, and key equipment like photolithography machines are areas where domestic companies still face significant hurdles. As the market hopes for increased support in these fields, it is imperative to note that the demand for local chipmakers is on the rise—driven by artificial intelligence and an ever-growing need for increased storage capabilities.

Since its first round of funding in 2014, the Big Fund has consistently invested in projects across the semiconductor landscape. The first phase established its footing with a capital of 98.72 billion yuan, while phase two saw this figure rise significantly to 204.15 billion yuan in 2019. The continuity in funding reflects not only the progressive escalation of resources allocated but also a strategic focus on guiding the semiconductor industry toward a path of self-reliance and strength in the face of foreign competition.

From 2014 to 2024, the Big Fund has spurred remarkable growth in various startups and established businesses. For instance, companies such as Northern Huachuang, an equipment manufacturer, have thrived under the fund's backing, witnessing dramatic increases in revenue and market performance. This positive trajectory illustrates the fundamental role that patient investment capital plays in solidifying the industry’s foundations, especially during critical times when external financing may waver.

As we delve into the operational history of the Big Fund, it’s crucial to recognize its dual approach to investment—blend of strategic investments alongside financial backing. The historical performance of investments showcases an emphasis on the semiconductor supply chain’s core components; however, the trajectory has shifted towards higher stakes in maintaining autonomy throughout the supply chain. In response to the changing landscape, the third phase is predicted to focus more heavily on strategic investments aimed at high-positioned players within the market.

The semiconductor landscape is notoriously challenging, characterized by high capital intensity and the long-term nature of returns on investment. Many companies, particularly startups in chip manufacturing, grapple with the arduous task of competing against established international firms. Consequently, the infusion of funds from the Big Fund serves not only as a lifeline but also as a bridge to sustained growth, enabling these companies to scale their operations gradually without the immediate pressure of controlling interests from investors.

A prime illustration is Northern Huachuang's collaboration with the Big Fund. Initially, when it embarked on developing advanced atomic layer deposition systems, the funding secured from the first phase of the fund catapulted the company onto a growth trajectory that increased its revenue significantly. Today, Northern Huachuang is not just a participant in this space but is rapidly establishing itself as a significant player, benefiting from both localized production escalation and rising domestic demand.

The collaboration does not end there; another notable example is the fund’s engagement with the Shanghai Silicon Industry. Through substantial stakes, the Big Fund has played a critical role in optimizing production processes, allowing this company to reach profitability after traversing early financial difficulties. Such partnerships emphasize the necessity of state-backed capital in navigating the volatile semiconductor landscape and further underline the commitment to achieving self-sufficiency in critical sectors.

When evaluating the overall results of the Big Fund's initiatives, it's evident that wafer fabrication and equipment manufacturing consistently emerge as primary targets for investment. The focus on these areas underscores the significance of chip safety, particularly amid increasing technological demands globally. Enhanced investment will trigger substantial growth, ensuring that domestic capabilities continue to progress apace with international advancements.

Looking ahead into 2023, projections for China’s wafer fabrication market indicate that companies like SMIC and Hua Hong account for nearly 9.56% of the global wafer foundry market share. With an expected increase in the domestic semiconductor equipment market surpassing 210 billion yuan in 2024, the implications for local industries are vast, particularly as players from the advanced process sector revitalize and expand their market shares.

Moreover, an increasing number of leading companies in the semiconductor equipment sector have begun fostering collaborations with the Big Fund. This trend indicates a heightened focus on extending the industry chain and strengthening foundational capacities. As we transition from conventional to advanced process technologies, the Big Fund is likely to align its investments with enterprises positioned within these technological advancements.

Nevertheless, challenges remain. Despite progress, the semiconductor design, production of advanced materials, and EDA realms still present significant vulnerabilities, particularly in light of the stringent export controls imposed by countries such as the United States and their allies. With categories like photolithography and essential components remaining underdeveloped domestically, these supply chain choke points must be addressed urgently and innovatively to safeguard China's sovereignty in semiconductor technology.

In this evolving landscape, the influence of artificial intelligence is becoming increasingly evident. Demand for chips designed for AI applications is surging, prompting a wave of investments directed at enhancing capabilities in this critical sector. The projection for growth in the AI chip market could reach 230.2 billion yuan by 2024, which reflects the urgency and importance of developing robust indigenous capabilities in high-performance, processing-efficient chip technology.

Importantly, emerging local companies such as Anlu Technology, supported by the Big Fund, are advancing innovations in the field of FPGA development, paving new avenues for chip application within high-bandwidth, low-latency scenarios that align exceedingly well with growing demands in data processing and storage realms.

In summary, the third phase of the Big Fund represents a notable step forward in financing and supporting China’s semiconductor ambitions. As the global demand for chips continues to evolve amid rapid technological changes and geopolitical challenges, this initiative is set to play a fundamental role in shaping a more self-reliant and competitive semiconductor landscape within China. The implications of these investments will reverberate through numerous sectors, allowing for sustainable growth and long-term innovation for domestic entities going forward.