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China’s Semiconductor Industry: A Race to Catch Up with the Global Chip Making Leaders

China’s semiconductor industry is experiencing rapid development in recent years, as the country aims to become a global leader in the production of computer chips. The country has made significant investments and advancements in chip-making technology, as it seeks to catch up with other major players in the industry.

 

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.

 

China’s chip-making industry has come a long way since its inception in the 1980s. However, it still lags behind countries like the United States, South Korea, and Taiwan in terms of technology, manufacturing capability, and intellectual property rights. This is primarily due to China’s late entry into the semiconductor industry and its dependence on foreign technology and equipment.

 

Chinese economy depends on the rest of the world in semiconductors. 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.

 

Here are some of the challenges that China’s semiconductor industry faces:

  • A lack of skilled workers. The semiconductor industry is a highly technical industry, and China faces a shortage of skilled workers. The country needs to invest in education and training to develop a workforce that can meet the needs of the semiconductor industry.
  • A dependence on foreign technology. China currently relies on foreign companies for many of the key technologies used in semiconductor manufacturing. This makes the country vulnerable to disruptions in the global supply chain. China needs to invest in research and development to develop its own technologies.
  • Intellectual property theft. China has a long history of intellectual property theft. This has made it difficult for foreign companies to invest in China’s semiconductor industry. China needs to do more to protect intellectual property rights.

 

Another major challenge for China’s semiconductor industry is its reliance on foreign technology and intellectual property. China has been accused of stealing intellectual property from foreign companies, which has led to trade disputes with the United States and other countries. To address this issue, China has been investing in the development of its own technology and has implemented stricter intellectual property laws.

 

However, in recent years, China has been making significant strides in the semiconductor industry. The government has made large investments to develop the industry, including the creation of the National Integrated Circuit Industry Investment Fund in 2014, which aims to raise up to $31.6 billion to support local chip makers.

 

Moreover, China has been recruiting top talent from around the world, as it seeks to boost its research and development capabilities. The country has also been investing in the development of new technologies, such as artificial intelligence and 5G, which are expected to drive demand for high-end chips.

 

 

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.

 

In 2021, China’s semiconductor industry grew by 18.2%, making it the world’s largest semiconductor market. The country also accounted for 18% of global semiconductor sales.

 

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 [3]. 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.

One of the major players in China’s semiconductor industry is SMIC (Semiconductor Manufacturing International Corporation), the country’s largest and most advanced chip maker. SMIC has made significant investments in research and development and has developed its own proprietary technology. However, the company still faces significant challenges, including restrictions on the purchase of equipment and technology from foreign companies.

 

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.

 

SMIC is not operating under standard business conditions however. It is critical to China’s ability to produce chips domestically as the US tries to undercut the country’s tech advancements. Beijing may be willing to subsidize losses at domestic competitors like SMIC — out of fear its companies won’t have access to key components.
The Trump administration blacklisted SMIC about two years ago on national security concerns, citing the company’s ties with the Chinese military, an allegation the chipmaker has denied. Following Washington’s move, American equipment suppliers have been banned from providing the Chinese company with gear “uniquely required” to produce 10nm or more advanced chips without licenses, although it is not clear exactly what the US Department of Commerce has allowed domestic firms to sell to SMIC since.
US Senator Marco Rubio and US Congressman Michael McCaul have repeatedly urged the department to tighten export control restrictions pertaining to SMIC to strengthen US security and ensure China is not transferring technology to Russia and helping Moscow evade sanctions.

Huawei, the Chinese technology giant, has announced a breakthrough in the design of 14nm chips using its self-developed EDA (Electronic Design Automation) tool.

The new tool is said to reduce the design time for 14nm chips by up to 30%, making the design process more efficient and cost-effective. This development is expected to help Huawei reduce its dependence on foreign technology and maintain its competitiveness in the global semiconductor market despite US sanctions.

Huawei’s EDA tool is a suite of software that automates the design of integrated circuits, including the layout of transistors and the routing of interconnects. The tool is specifically designed for the development of chips using 14nm process technology, which refers to the size of the transistors on the chip.

The design of chips using 14nm process technology is complex and time-consuming, as it requires the integration of billions of transistors on a single chip. Huawei’s new EDA tool is said to reduce the design time for these chips by up to 30%, making the process more efficient and cost-effective.

The tool achieves this by optimizing the design process and reducing the number of design iterations required to create a working chip. It also provides designers with a more user-friendly interface and a wider range of design options.

Huawei’s breakthrough in EDA tool development is significant because it reduces the company’s dependence on foreign technology, particularly from US companies. The US government has placed Huawei on its entity list, which restricts the company’s access to US technology and equipment. This has led Huawei to seek self-sufficiency in the development of key technologies, including semiconductors.

In addition to reducing dependence on foreign technology, Huawei’s new EDA tool is also expected to help the company maintain its competitiveness in the global semiconductor market. The semiconductor industry is highly competitive, and companies that can develop and produce chips more efficiently and cost-effectively have an advantage in the market.

Overall, Huawei’s breakthrough in EDA tool development is a significant step towards self-sufficiency in the semiconductor industry and maintaining competitiveness despite US sanctions.

 

In conclusion, China’s semiconductor industry is a race to catch up with the global chip-making leaders. While the country still faces significant challenges, such as its reliance on foreign technology and intellectual property, it has made significant investments in research and development and has recruited top talent from around the world. With continued investments and advancements, China is well-positioned to become a major player in the global semiconductor industry in the years to come.

 

 

References and Resources also include:

https://www.brookings.edu/techstream/lagging-but-motivated-the-state-of-chinas-semiconductor-industry/

https://www.cnbctv18.com/technology/china-top-chipmaker-smic-achieves-breakthrough-despite-us-curbs-14214522.htm

https://www.semiconductors.org/chinas-share-of-global-chip-sales-now-surpasses-taiwan-closing-in-on-europe-and-japan/

About Rajesh Uppal

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