China’s focus is on the semiconductors industry 

• The "Made in China" strategic plan targets to increase self-sufficiency in integrated circuits’ (IC) production to 40% in 2020 and 70% by 2025.
• Chinese government established the China Integrated Circuit Industry Investment Fund (CICIIF, or "Big Fund") to promote developments in semiconductor design and manufacturing.
• Beijing envisioned spending more than $150bn over ten years.
• In the first round, the Big Fund invested in more than 70 projects and companies, including Tongfu Microelectronics (002156 CH), a maker of ICs, JCET (600584:CH), a world leader in packaging and testing, and SMIC (981 HK), mainland China's largest foundry.
• New investments will likely be more focused on applications in the downstream supply chain of the semiconductor industry, such as chip design, advanced materials, and tools and equipment.
• The Chinese Big Fund is not targeting R&D as such, but rather expanding fab capacity, and aiming at increasing sales volumes and thus potential future R&D expenses.
• Huawei has already responded to the trade war by pumping up its 2019 R&D budget to nearly $18bn, a 20% increase over 2018.
• Despite all this, the total R&D spending of Chinese companies still lags significantly behind that of the U.S. ones.

Semiconductor and semiconductor equipment top 5 investments by private equity firms

Industry and Government Spending on Semiconductor R&D

Plenty to catch up with!

• Domestic chip production in China is still lagging behind the long-term target.
• In 2018, according to IC Insight, total chip production in China by Chinese headquartered companies accounted for only 4.2% of domestic demand.
• China needs fabs of foreign companies to reach its target of domestic production.
• Including foreign companies’ units manufactured in China, total domestic chip production rises to 15.5%.
• On the other hand, these companies need their revenues from China to be able to invest in R&D and keep innovating.
• Combined revenues made in China by the leading semiconductor in 2018 has been 2.3x those from the U.S.

Catalysts:

• Increased cooperation with other advanced economies. Huawei has already begun developing relationships with suppliers in Japan, South Korea, and Europe to offset the fallout from losing U.S. suppliers.
• Attracting foreign talents. China is establishing itself as the place to be for young talent in AI and advanced tech, taking over Silicon Valley. This is likely to spur innovation growth.

Risks:

• Investment management. The Chinese semiconductor industrial plans lacked a clear implementation strategy and have been hampered by bureaucratic red-tape. Despite the announcements by the government, the underlying bureaucratic structure is still well in place.
• Persistent lack of highly skilled labor. China's ability to take advantage of foreign acquisitions, joint ventures with leading manufacturers and large R&D budgets have been hampered by the shortcomings of its labor force. Education has improved, but it may take longer for the effects to spread wide enough.