Chinese demand for semiconductors is the global chip industry’s biggest single demand driver by far and promises to remain so unless or until China can become self-sufficient in semiconductor technologies – the subject of our next blog which will show that some key semiconductor trends are working China’s way in a ‘’more than Moore’’ world.
IC Insights calculated that in 2020, only $8.9bn of the $143bn chips sold in China were made onshore at the fabs of Chinese headquartered companies, while the country imported over $300bn of chips.
The US semiconductor industry has typically derived over a third of its revenues from China sales. According to Boston Consulting Group the scale provided by China’s large and growing market has been a key enabler of the US industry’s ‘’virtuous innovation cycle fuelled by R&D intensity.’’
That could now be under mid-term threat. There are new uncertainties as trust is undermined and the supply chain reshaped.
Global Supply chain twisted out of shape by US sanctions
Semiconductor companies across the world are nervous. The US export ban has already impacted leading US and European companies such as Qualcomm, ASML and ST Micro, as well as the world’s predominant contract manufacturer TSMC. At the same time, over 260 Chinese companies and research centers are on the US Commerce Department Entity List. They are threatened with sudden export bans, due to arbitrary decisions made in Washington. Finally, there is no sign that the Biden administration and the new Democrat Congress are going to soften the previous Trump stance on China.
The volatile nature of Washington decision making was shown recently when Xiaomi was put on the entity list but then removed in short order. And then Qualcomm was allowed to begin exporting 4G chips to Huawei, relaxing a total ban on Qualcomm exports to the company. However, it is still banned from selling it 5G chips. As time goes on, matters will get ever more complex and tangled for Washington and semiconductor companies alike.
Meanwhile, the global industry and its customers face a long period of uncertainty accentuated by the extent to which the global supply chain has been further disrupted by the pandemic, wild weather and factory fires that quickly followed the shock to the system of the US chip embargo on China. The result is a protracted global chip shortage, which is likely to run until 2023 amid rising geopolitical tensions.
The trusted, intricately threaded global supply chain that served the word so well for over 30 years in terms of innovation and a steep secular decline in prices is to be partially replaced by 2024/25. This is the result of a series of prudential policy decisions to build out new manufacturing capacity to come on stream by 2024/25 and ‘reshore’ manufacturing in the US, Europe, Japan and Korea and of course China itself. The aim being in an increasingly ‘VUCA’ world – volatile, uncertain, complex and ambiguous – to secure and protect supplies to defence establishments and home industries down the line. This will mean increased politicization and mercantilism around chip supplies, and the prospect of rising prices amid rising mistrust if geopolitical tensions continue to heat up.
Global chip industry moves into uncharted territory
Inevitably, within the global semiconductor industry itself, including the US industry, ways are being sought to protect their revenues and future growth prospects against Washington sanctions and geopolitical volatility.
For the first time the top US and Chinese trade bodies, the Semiconductor Industry Association (SIA) and the China Semiconductor Industry Association (CSIA), have formed a joint working party involving the top ten semiconductor operations in each country to raise and discuss issues around IP, encryption and trade policy. It is quite clear to leaders in both the US and Chinese semiconductor industries that the emergence of a ‘two chip world’, where nothing is interoperable or where there are global no standards, would be a disaster.
Europe, especially Germany, has strong and extensive ties with China going back to the early 1980s and there is considerable resentment in Brussels over US ‘trans-territorial’ control over EU technology exports to China.
Dutch based ASML, which is keen to export its EUV lithographic circuit printing technology to China, has so far yielded to US pressure not to do so, and it even cancelled a signed order with SMIC. The US’s real concern is that the availability of EUV in China would hasten its drive to catch up in leading edge chips—7nm. ASML is now showing signs of reinstating the SMIC order. Infineon, the world leader in auto chips, is beefing up its Wuxi fab for the first time since 2014 despite sanctions.
The question that arises is whether the US made a strategic blunder, given the efforts by numerous parties to continue to trade with China. In addition, many regions are looking to increase domestic manufacturing capabilities, including China itself.
China finding its own way out of a challenging situation
The US has unleashed in China, in a way internal forces alone could not, a high octane, whole nation, everything it takes campaign to create a ‘de-Americanized’ domestic semiconductor supply chain able to supply 75% of its needs—the vast bulk of which will be for mid and low-range chips – by 2025 and the target of full self-sufficiency by 2035. At least $160bn is earmarked to enable it and thousands of Chinese and foreign engineers are being deployed to deliver it.
In the process, the US semiconductor industry’s China market will progressively shrink. China, as we will explore in the next blog, has already made significant progress on the 28nm and 14nm technology. China aims to achieve parity with the US in these mid-range and low-end semiconductors, that will power the ‘more than Moore’ world of the ‘Internet of Everything’, by later this decade.