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Asia is the world’s biggest source of integrated circuits, micro assemblies and mobile phones. China’s manufacturing capacity is largely the reason for this market domination, and the country alone produces 36% of the world’s electronics, as per data from the Semiconductor Industry Association (SIA). While the country’s electronics manufacturing capability is unmatchable, China semiconductor industry is still nascent compared to the US or Taiwan. With an ongoing semiconductor shortage, as well as the technology decoupling from the US, can China become a segment leader?
In 2015, Beijing announced the ‘Made in China 2025’ plan to reduce dependence on foreign technology. Later in 2020, the country highlighted its ambition to achieve ‘technological independence’ from the US in its 14th Five Year Plan, which attributes tech development as a matter of national security and not merely economic development.
China semiconductor self-sufficiency
China has been exploring the semiconductors space even before the pandemic or the semiconductor shortage began. The US sanctions imposed on Huawei and other tech firms, along with export restrictions on Chinese chip maker Semiconductor Manufacturing International Corporation (SMIC), have pushed China to bypass restrictions by developing its own supply chains.
China has committed to invest $1.4 tn between 2020 and 2025 in advanced technologies including semiconductors, said President Xi Jinping in 2020. More specifically, Beijing has said it was investing well over $150 bn from 2014 through 2030 for developing semiconductor manufacturing.
In 2020, the country imported over $300 bn of semiconductors, and a Brookings report says American chipmakers sell 25% of their inventory to China. The country is also a big market for consumption, and SIA said that in 2020 China consumed a quarter of all semiconductor-enabled electronics in the world.
However, it is important to understand that while US chips lead among global semiconductors when it comes to sales, the country itself does not manufacture these chips and contracts with Asian foundries. “No country has true independence in the semiconductor value chain,” says the Brookings report.
China’s chip industry is highly nascent and has a mere 9% share in total global semiconductor sales, as per SIA. Beijing mainly sells discrete semiconductors, lower-end logic chips, and analogue chips, with hardly any presence in the high-end chips market. According to the industry organization, China’s indigenous semiconductor supply chain lags significantly in advanced logic foundry production, EDA tools, chip design IP, semiconductor manufacturing equipment, and semiconductor materials.
As of now, the country is unable to produce chips more advanced than a 14-nm node (a specific generation of chips), whereas current smartphones use chips with a 5-nm node, the most advanced chip commercially available as of today. This shows that China is years away from competing with giants like IBM, Taiwan Semiconductor Manufacturing Company (TSMC) or Samsung.
Taiwan’s TSMC is working on launching a 3-nm chip process in 2023, while IBM introduced the world’s first 2nm chip in 2021.
“As the world’s largest manufacturing hub, China is the biggest semiconductor consumer in the world, yet it only accounts for 7.6% of global chip sales (as per 2020 data). Meanwhile, 95% of China’s installed chip capacity is for chips with nodes of 28nm or above, lagging behind industry leaders that are planning to roll out 3nm processes in the near future,” said Greg Kyung Mo Kang, Research Team Head, Equities, Eastspring Investments.
However, all is not gloomy for China, as it produced 33.3% more chips in 2021, a significant jump over 2020 when output had increased by 16.2%.
What’s next for China’s chip makers?
“China’s competitive edge lies in its huge domestic market and its rich supply of talent,” Dr. Joseph Xie, one of the founders of SMIC, tells Credit Suisse. “I think Chinese IC design companies may overtake US IC design companies in the future.”
US sanctions are hurting China’s tech industry, and semiconductor imports and exports have taken a hit. Former US President Donald Trump as well as the incumbent leader Joe Biden have sought to stop chip technology transfer to China, as seen by the efforts to block Dutch chipmaker ASML from selling its lithography machines, the key to manufacturing high-end chips, to China.
These geopolitical hurdles have slowed prospects of Chinese firms partnering up with foreign firms to co-develop technology, build ecosystems, and pursue global customers, writes Brookings.
Earlier this year, SIA said that new firms were cropping up in China for fabless manufacturing and sales of Chinese high-end logic devices were also accelerating. The combined revenue of China’s processor, graphic card, and field-programmable gate array (FPGA) sectors grew at an annual rate of 128% to nearly $1 bn in revenue in 2020, up from a meagre $60 mn in 2015, said SIA. The country saw a rapid increase in revenues from the following sectors in the semiconductor supply chain — fabless (36%), integrated device manufacturer (23%), foundry (32%) and outsourced semiconductor assembly and test (23%).
Huawei’s semiconductor arm HiSilicon, China’s largest chip designer, generated nearly $10 bn in revenues in 2020 despite export restrictions. China’s fabless firms, such as GigaDevice, Goodix, Galaxycore and OmniVision, all reported a 20-40% annual growth.
In 2021, China announced 28 additional fab construction projects amounting to $26 bn in new planned funding. Wafer manufacturers in the country have scaled production capacities, with a 26% share in the total global capacity increase, said SIA. The memory industry is in its early stages but is expected to achieve a compound annual growth rate of 40-50% in output over the next five years, as per research by French firm Yole Development.
“All indications are that China’s rapid growth in semiconductor chip sales is likely to continue due in large part to the unwavering commitment from the central government and robust policy support in the face of deteriorating U.S-China relations,” writes SIA.
