The Chinese government is going all out to achieve a breakthrough in semiconductor manufacturing as the nation faces U.S. sanctions on hi-tech goods. Over the past year, President Xi Jinping has on multiple occasions described China’s reliance on imported technology as “being strangled by an adversary”. China often boasts of having the world’s most extensive industrial value chain and is known as the global leader in assembling mobile handsets, but the country relies on foreign chips, most notably from the United States, the South China Morning Post reports.

China has spent more than about USD300 billion annually on imported chips over the past two years. But a rapidly deteriorating relationship with the U.S. is making it increasingly hard for Chinese technology companies to acquire components used in its devices. U.S. sanctions on companies like ZTE and Huawei have severely dented production, effectively cutting these companies off from American-made components without a special U.S. government waiver.

As it becomes increasingly clear that easy access to chips and the equipment used to make them is vanishing, China is doubling down on support for its domestic semiconductor industry. In late July, Beijing introduced a 10-year corporate tax break for established companies that could produce chips of 28 nanometers or smaller. It also expanded tax incentives for the entire semiconductor supply chain, from design to packaging. The semiconductor industry is set to become one of the most prominent features in China’s five-year plan for the period 2021-25. A new investment fever has emerged in the chip industry as Beijing rolls out preferential policies and cheap loans for projects. “There used to be difficulties for the semiconductor industry to obtain enough financing, but now it is a hotter area than property investment,” said Chang Junfeng, Secretary General of the Shenzhen Semiconductor Industry Association. Across the country, it is hard to find a province or major city that has not targeted semiconductor manufacturing as a key industry. China’s total investment in the chip industry, from both state and private sectors, could reach CNY9.5 trillion in the next five years, according to Guosen Securities. In the first eight months of this year, as many as 9,335 companies in China expanded into semiconductor production, a growth of 120% compared to the same period last year.

According to the South China Morning Post, China’s push to develop the semiconductor industry could signal a tolerance for inefficiency. “The current market is a bit overheated. There is no way for China to counter the U.S. on the chip market except investing more in the industry. A majority of the companies are just speculating, but there is nothing to worry about because that’s the way Chinese companies grow. Most newcomers entering the industry will fail, but China is hoping a handful will survive”, said Sheng Linghai, Analyst at research and advisory firm Gartner. “If none succeed, the whole industry in China will collapse. The central government’s supportive policies for the semiconductor industry will only keep increasing because the country is facing the possibility of being blocked from technology by the U.S.,” he added. Chang Junfeng of the Semiconductor Association said that because the semiconductor value chain was so globalized, no single country – be it the U.S., Japan, or South Korea – could be totally independent.

SMIC’s shares fell 7% on the Shanghai Stock Exchange and 4% on the Hong Kong Stock Exchange after news broke that the U.S. is considering imposing export controls on the company, banning U.S. suppliers from exporting to SMIC without obtaining export licenses from the U.S. government. Seen as a premium production base in China’s drive to be more self-sufficient in semiconductor manufacturing, SMIC’s shares jumped more than 200% on the first day of trading, after its secondary listing in Shanghai in July, lifted by broad enthusiasm among investors. Now investors are worried about SMIC’s future business, although it is unclear whether the sanctions will be as harsh as those imposed on companies on the Entity List. While many international IC manufacturers have been making 5-nanometer microchips for years, SMIC only started its 14 nm production last year. Most of SMIC’s products fall into the range between 28 nm to 90 nm, and chips of 28 nm or smaller accounted for less than 10% of SMIC’s total revenue in the second quarter this year. In the meantime, Taiwan Semiconductor Manufacturing Co (TSMC), the world’s largest contract chipmaker, is planning volume production of 5 nm chips this year, and it will begin manufacturing 3 nm processors around 2022. Samsung, another leading chipmaker, has also started mass production of 5 nm chipsets. China needs to make more effort to achieve independence in electronic design automation (EDA) software used for designing integrated circuits. Most of the best EDA companies are in the U.S., the Global Times reports.