Semiconductors are materials that have a conductivity between conductors and insulators. They can be pure elements, silicon or germanium or compounds; gallium, arsenide or cadmium selenide. Semiconductor Chips are the basic building blocks that serve as the heart and brain of all modern electronics and information and communications technology products.
Semiconductors are essential to almost all sectors of the economy including aerospace, automobiles, communications, clean energy, information technology and medical devices etc. The semiconductor industry is the aggregate of companies engaged in the design and fabrication of semiconductors and semiconductor devices, such as transistors and integrated circuits. These semiconductor chips are the drivers for ICT (Information and Communication Technologies) and are used in critical infrastructures such as communication, power transmission, etc., that have implications for national security.
With advanced semiconductors key to powering a wide range of potentially transformative technologies, cutting edge computer chips have become a heated area of geopolitical competition for the 21st century. Despite their importance, semiconductors represent a rare area in which the Chinese economy is dependent on the rest of the world—rather than the other way around. Every year, China imports more than $300 billion of semiconductors, and most, though not all, major American semiconductor companies pull in at least 25% of their sales from the Chinese market.
This mutual dependence has benefitted the technology sectors in both countries. Every major Chinese technology company relies on U.S. chips: Tencent or Alibaba would not be the powerhouses they are today if they had relied on Chinese microprocessors during their formative years or had developed and manufactured their own. Many U.S. companies, meanwhile, have benefited from Chinese customers, markets, and innovations. The scale and cost reductions enabled by system and device manufacturing based in China and Asia more broadly has helped make information technology ubiquitous. Despite the harsh rhetoric on both sides of the Pacific, American semiconductor companies and their Chinese counterparts today are working together on hundreds, if not thousands, of product designs and joint technology development efforts.
Yet these collaborations have not prevented semiconductors from becoming a central faultline in tensions between the United States and China. In a post-COVID, post-Trump world, many in Washington would like to see the American economy less dependent on China and are exploring new restrictions on imports of Chinese hardware and exports of both cutting-edge semiconductors and the equipment required to manufacture them. Meanwhile in Beijing, Chinese officials are pursuing a clearly stated, though ambiguously defined, goal of “technology independence,” as articulated in the 14th five-year plan outlined last year.
Since late 2020, the US has barred the unlicensed sale to the Chinese firm of equipment that can be used to fabricate semiconductors of 10nm and beyond, infuriating Beijing. The restrictions effectively derailed Huawei Technologies Co.’s smartphone business by cutting it off from the tools to compete at the cutting edge — but that company is now quietly staffing up a renewed effort to develop its in-house chipmaking acumen.
To counter its dependence on foreign suppliers of semiconductors, China announced a major new semiconductor policy in 2014. The “Made in China” policy, which launched the following year, included core technologies to semiconductors. The new semiconductor national policy contained two major innovations to previous industrial policy efforts: The first was to acquire technology from overseas via M&A; the second was to bring in “smart money” via private investors, such as private equity funds, to take the lead on investments. Over time, that policy has shifted toward a more traditional industrial policy model, with large manufacturing and R&D subsidies delivered to designated national champions. But with more than 50,000 Chinese entities registered as “semiconductor companies,” that investment is at risk of fragmentation.
Global chip sales from Chinese companies are on the rise, largely due to increasing U.S.-China tensions and a whole-of-nation effort to advance China’s chip sector, including government subsidies, procurement preferences, and other preferential policies.
Just five years ago, China’s semiconductor device sales were $13 billion, accounting for only 3.8% of global chip sales. In 2020, however, the Chinese semiconductor industry registered an unprecedented annual growth rate of 30.6% to reach $39.8 billion in total annual sales, according to an SIA analysis. The jump in growth helped China capture 9% of the global semiconductor market in 2020, surpassing Taiwan for two consecutive years and closely following Japan and the EU, which each took 10% of market share. Sales data for 2021 are not yet available.
If China’s semiconductor development continues its strong momentum – maintaining 30% CAGR over the next three years – and assuming growth rates of industries in other countries stay the same, the Chinese semiconductor industry could generate $116 billion in annual revenue by 2024, capturing upwards of 17.4% of global market share. This would place China behind only the United States and South Korea in global market share.
Equally startling is the number of new firms in China rushing into the semiconductor industry. Nearly 15,000 Chinese firms registered as semiconductor enterprises in 2020 . A large number of these new firms are fabless start-ups specializing in GPU, EDA, FPGA, AI computing, and other higher-end chip design. Many of these firms are developing advanced chips, designing and taping out devices on bleeding-edge process nodes . Sales of Chinese high-end logic devices are also accelerating, with the combined revenue of China’s CPU, GPU, and FPGA sectors growing at an annual rate of 128% to nearly $1 billion in revenue in 2020, up from a meager $60 million in 2015
Chinese Semiconductor Firms Post Impressive Growth
Across all four subsegments of the Chinese semiconductor supply chain – fabless, IDM, foundry, and OSAT – Chinese firms recorded rapid increases in revenue last year, representing annual growth rates of 36%, 23%, 32%, 23%, respectively, based on an SIA analysis. Leading Chinese semiconductor firms are on track to expand domestically, and even globally, in several submarkets.
SIA analysis further shows that in 2020, China held an impressive 16% market share in the global fabless semiconductor segment, ranking third after the U.S. and Taiwan, and up from 10% in 2015 . Benefiting from China’s massive consumer and 5G market, Huawei’s HiSilicon, China’s largest chip designer, generated nearly $10 billion in revenue in 2020, despite tightened export control restrictions (largely due to significant stockpiling suggested by official Chinese trade data). Other Chinese fabless firms, such as communications chip supplier UNISOC, MCU and NOR flash designer GigaDevice, fingerprint chip firm Goodix, and image sensor designers Galaxycore and OmniVision (a U.S.-headquartered corporation acquired by China), have all reported a 20-40% annual growth rate to become China’s top fabless firms. Moreover, in addition to supplying Chinese OMEs, GigaDevice, OmniVision, and Goodix have entered top 3 global smartphone vendors’ supply chains
Semiconductor Manufacturing International Corp. has likely advanced its production technology by two generations, defying US sanctions intended to halt the rise of China’s largest chipmaker.
Shanghai-based manufacturer SMIC is shipping Bitcoin-mining semiconductors built using 7-nanometer technology, industry watcher TechInsights wrote in a blog post in July 2022. That’s well ahead of SMIC’s established 14nm technology, a measure of fabrication complexity in which narrower transistor widths help produce faster and more efficient chips.
Previously, SMIC has said that its core capabilities stand at 14nm, two generations behind 7nm, which in turn is roughly four years behind the most advanced technology available now from Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. The company has worked with clients on technologies more advanced than 14nm as early as 2020, it said on an earnings call that year.
And while the ability to produce a small number of chips using the next level of production technique signals that a company is making technological progress, what determines economic viability — under normal circumstances — is yield, or the percentage of every production run that’s successful. Intel Corp, once the leader in production technology, stalled on one type of production for five years because it couldn’t get enough viable chips to make it profitable to introduce that node into mainstream production.