Semiconductors are the fourth most traded product worldwide, an industry worth $400bn in 2020. China is making attempt at becoming a self-sufficient country in semiconductor supply, announcing plans to invest $1.4tn between 2020 and 2025 on advanced technologies including semiconductors, however self-sufficiency has yet to be achieved.
In 2021, Semiconductor Device exports increased by $2.04bn (97.1%) from $2.1bnto $4.14bn, whilst imports increased by $455m (20.4%) from $2.23bn to $2.69bn. A report issued by Semiconductor Industry Association (SIA) forecast that China’s semiconductor industry could account for 17.4% of global sales by 2024, up from 9% in 2020, if its current momentum is maintained. The semiconductor trade is seen as vital by the Chinese government, due to the reliance the world has on the industry, with increased investments, as well as government subsidies, procurement preferences, and other preferential policies encouraging Chinese innovation in the market.
For example, a 2019 study by the Organisation for Economic Co-operation and Development (OECD) found China’s four state-backed semiconductor companies received a total of $4.85bn in below-market loans from China’s financial institutions between 2014-2018, accounting for 98% of below-market borrowing among the 21 companies identified in the report. These incentives provide a significant cost advantage for firms in China. This advantage is emphasised in a 2020 report by the Boston Consulting Group, finding the cost of building and operating a semiconductor fabrication plant in China is 37% lower than doing so in the U.S.
However, there are obstacles in the way before China can become truly self-sufficient in the semiconductor supply chain. An example being, China is unable to manufacture chips more advanced than 14-nm node, with more advanced nodes, such as 5-nm, being used to power the latest smartphone models. Semiconductor production requires advanced technology to keep up with the increasingly smaller chip production found in modern electronics. Currently the Dutch company ASML is the only firm in the world capable of making the complex machines that are needed to manufacture the most advanced chips. These EUV machines, cost approximately $140m each, and are only sold to a handful chipmakers giants, including Taiwan Semiconductor Manufacturing (TSMC), Samsung and Intel. This means that China can more easily become self-sufficient in the production of less advanced chips, however there is still a need for innovation from Chinese manufacturers for more advanced chips.
Similarly, US increasing sanctions on Chinese semiconductor exports and imports have also seen an effect on the market. For example, Reuters states that the Trump administration mounted an extensive campaign to block the sale of Dutch chip manufacturing technology from ASML to China. These sanctions didn’t end with the Trump administration, with Biden continuing sanctions on Semiconductor Manufacturing International Corp (SMIC), first introduced in the Trump administration, blocking US based companies from exporting advanced technologies to China, over fears that SMIC used the technology for military needs. Without access to these technologies, China will be unable to become fully self-sufficient in the immediate future, as access to the technology needs to be made available to Chinese manufacturers. Taiwan’s TSMC ability to create advanced chips emphasises its importance through the fact it supplies over half of all the chips globally.
Coinciding with this push for self-efficiency from China, there has been and continues to be a worldwide shortage of chips. The shortage started during the COVID pandemic, where supply chains across many sectors were affected, whilst also seeing an increase in consumer demand for electronic devices. This means that orders have been backdated since then, with manufacturers needing to catch up with their orders and any new ones made. For China, this has meant global supply lines of semiconductors has been cut short, with China unable to make certain advanced chips without outsourcing. This has led to the lead time for chip-making equipment, referring to the time between when an order is placed and when the equipment reaches the factory floor, has extended to 12 months according to Shanghai-based research company ICWise. Intel CEO Pat Gelsinger believes this shortage could continue for several more years before supply lines can match consumer demand.
Overall, China is making strides in self-sufficiency in the semiconductor market, with government encouragement being seen in the forms of capital investment and other preferential policy. However, China can only rely on domestic supply for certain semiconductor production, more advanced technology is still out of reach, relying on other countries and companies to supply the technology needed in advanced production.
Source: Transport Intelligence, February 10, 2022
Author: Michael Sinclair