While China’s semiconductor capabilities in no way compare to those of Taiwan, the Netherlands or the U.S. at present, it is hardly starting from ground zero.
Since the start of Beijing’s Made in China 2025 initiative in 2015, Chinese companies have made varying degrees of headway across the semiconductor ecosystem. At this point, it seems likely that China will slip its U.S. chokehold in short order, with its chip industry eventually emerging little worse for wear.
Chinese companies today represent 20% of the world’s fabless chip design houses and 10% of the overall global chipmaking capacity, according to the Brookings Institution. China’s 9% share of 2020 global chip sales, according to Semiconductor Industry Association data, placed it ahead of Taiwan and just behind the 10% captured by both the EU and Japan.
The controls the administration of U.S. President Joe Biden announced last October would apply to technologies to make what are known as 14 nanometer or 16 nm chips, as well as more advanced chips, which are referenced by even shorter lengths. The intention is to restrain China’s advances in artificial intelligence, quantum computing and ballistic missile development.
But there are signs that China could already be well on its way to producing sub-14 nm chips. Semiconductor Manufacturing International Corp. (SMIC), China’s largest contract chip producer, last year appeared to successfully produce 7 nm chips although a lack of detail regarding the breakthrough has led to questions about whether the production is commercially sustainable.
SMIC is not the only Chinese company claiming such feats. Huawei Technologies, which has been subject to the most intense U.S. restrictions, late last year filed for a patent for lithographic technology, which is critical for producing advanced chips.
If budgets were the key measure of success, then China would probably be in first place. Under the CHIPS and Science Act, passed last year, the U.S. is funneling $52.7 billion into building, modernizing and expanding domestic chip production. The EU is mulling a plan to invest $46 billion.
But even combined, these amounts pale in comparison to the 1 trillion yuan ($146 billion) package that China is said to be preparing.
To get CHIPS Act aid, companies will need to meet a host of conditions, including, crucially, not expanding semiconductor capacity in “foreign countries of concern for 10 years” and also must not “knowingly engage in any joint research technology licensing effort with a foreign entity of concern that involves sensitive technologies or products.”
The key country of concern, of course, is China. The Biden administration, in effect, is asking companies to choose between the world’s two biggest economies.
Most chip producers have been heavily involved in China for many years. Taiwan Semiconductor Manufacturing Co. (TSMC) and Samsung Electronics, for instance, have been investing billions of dollars in their factories in China.
Despite support from U.S. President Joe Biden, in tie, Taiwan Semiconductor Manufacturing Co. will find it challenging to build a vertically integrated semiconductor ecosystem for its new factory in the state of Arizona. © Reuters
When Nancy Pelosi, then the speaker of the U.S. House of Representatives, visited Taiwan last year, Morris Chang, TSMC’s founder and former chairman, is said to have told her that Washington’s efforts to become a semiconductor powerhouse are naive and doomed to fail.
Chang may have been referring to the complexities of building a vertically integrated semiconductor ecosystem by 2024, when TSMC’s first factory in the state of Arizona is scheduled for completion. It has taken TSMC over 30 years to foster, nurture, and trust its 2,500-odd top-tier suppliers and more than 10,000 secondary suppliers, many of which are based in China.
The notoriously difficult supply chain for chipmaking may work in China’s favor.
Chipmaking entails coordinating myriad unrelated resources and advanced technologies including raw silicon ingots and rare earth metals from China and neon gas from Ukraine, along with specialty chemicals, processing and testing tools, lasers, vacuum sealers and power supplies from all corners of the world.
Combined, the logistical hoops make the Arizona plant’s planned 2024 start date a flat-out impossibility.
Moreover, export controls will not affect China’s 30-year head start in nurturing its stockpile of rare earth metals, skilled chip designers and engineers, and thousands of indigenous suppliers.
Though still behind the world leaders in chip technology, China has proved over time that it can turn fledging industries — whether in high-speed rail, telecommunications, electric vehicles or social media — into juggernauts.
If the U.S. sanctions on Huawei are an indication of the future, then Biden’s chip controls are doomed to fail. The Trump administration in 2020 banned companies from supplying Huawei with custom chips using American software or hardware.
This virtually wiped out Huawei’s once-dominant position in the world’s handset market. Many wrote Huawei off as dead, but it has hardly disappeared. It remains the world’s largest provider of telecommunications equipment while also developing new lines of business, such as creating artificial intelligence applications for governments, phone companies and other businesses.
Biden’s sanctions more than likely will follow a similar path toward obsolescence. The embargo, while seemingly onerous, gives an undeterred Beijing the impetus to garner homegrown technological know-how, muster hundreds of billions of dollars and cultivate a supply chain to catapult an underrated semiconductor ecosystem to new heights.
In the end, the new sanctions are just too little, too late to stop China’s momentum.