Introduction
The device you use to read this article, be it a smartphone or a laptop, the car you drive, the ATM you withdraw money from, and hundreds of other devices all require chips. Recent policies taken on by the Biden Administration on behalf of the United States ban the export of semiconductors to China, which not only builds on to the already existing shortage but also challenges the functionality of economies globally due to the dependence of many high-tech industries on these chips. These restrictions come in addition to the lasting geopolitical tensions between China and the US, that have led to the well-known trade war between the two nations, and in recent years, to a “semiconductor war”, that starts to reshape the global chipmaking industry. This new wave of regulations has been perceived by some as a “massive escalation” of this already alarming landscape. As stated by Abishur Prakash, expert on geopolitics and technology: “With the latest action, the chasm between the US and China has now expanded to the point of no return”.
Pre-existing conditions: Chip shortage
Many causes contribute to the chip shortage even before Biden took action, including but not limited to the COVID-19 pandemic, the US-China trade war, the rise of cryptocurrency mining, weather conditions, and the Russia-Ukraine war.
In early 2020, when the COVID-19 pandemic hit, many chip supply chains were disrupted due to the hectic shift towards a stay-at-home economy. While mainly South Korea’s and Taiwan’s suppliers were referred to as the causes of the shortage, many other Asian countries have chip production factories, including China and Japan. Besides the pandemic, severe droughts in Taiwan at the end of Q1 of 2021 were another major contributing factor to the shortage due to the lack of ultrapure water needed to clean the factories and wafers. At the same time, cryptocurrencies were on a rise, with an increased amount of mining, which requires specialized computers, and hence chips. Increasing demand for said computers couldn’t be matched by sufficient supply and further worsened the already existing shortage. Other hazards that contribute to the scarcity of chips include facility fires, which have been quite prominent in the last three years. Examples of incidents include the Japanese company’s Asahi Kasei semiconductor plant, and another Japanese factory, Renesas Electronics, both of which were set on fire. Lastly, the Ukraine-Russia war caused a shortage of neon, a noble gas needed in the production of semiconductors. Chip manufacturers have searched for alternatives, such as noble-gas manufacturers in China, but any changes in quantity produced would take at least nine months to implement, which is a significant time delay. However, all of these challenges are not as significant as the new ones, arising due to the implementation of Biden’s new export ban on Chinese semiconductors.
US’ export regulations on Chinese semiconductor industry
On October 7th, the Biden Administration imposed a comprehensive set of export regulations, which include ways to cut off China's access to advanced semiconductor chips and the equipment needed to produce them. Regarding this topic, the US department of commerce has stated that the export controls “restrict [China’s] ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors”. The implemented export curbs include high-end computing chips, such as A100/H100 from NVIDIA and GPU from Intel. These rules, a lot of which go into effect immediately, are an addition to the restrictions set for high-tech companies earlier, including KLA, Lam Research, and Applied Materials, which obligated them to halt shipments of equipment to China. Hence, it is a form of national security with the intention of the policy to protect American intellectual property and attempt to shift producers away from China, incentivizing domestic production. In other words, Biden hopes to decrease the dependence that the US economy has on China, aiming to regain economic sovereignty. Moreover, since China’s economy is growing so fast, challenging the American hegemony, it is then in Biden’s interest to slow down Chinese economic development and prevent the shift of power and global dominance.
Another way that Biden’s policy looks to domesticize the production of chips has been by forbidding US citizens and green card holders from working for certain Chinese entities or companies within the high-tech industry. Indeed, according to Bloomberg, the new regulations prohibit US citizens from “supporting the development or manufacture of chips covered by restrictions”. It is clear how this rule is aimed at regulating the flow of US expertise to China affecting both its ability to produce semiconductors and its plans of self-sufficiency, that are dependent on international talent, as it will be further explained in the article.
As confirmation of the dependency of China on overseas supply, the data indicate that the country uses more than three-quarters of the global quantity of semiconductors, but currently produces only 15% of the output. Some analysts have stated that China’s equipment is four to five years behind the US, making domestic production for them quite challenging, and overall high-tech production heavily affected by this shortage of a primary input factor - the chip.
As we have seen the new regulations in the US concerning the semiconductor decoupling from China, placed on top of the already-existing harmful effects of the COVID-19 pandemic on the world’s supply chains, are painting an uncertain picture for the future of the chip industry. This is already reflected in markets and in the performance of top manufacturers of tech-related items.
The effects of the chipmaking crisis on Asian economies, markets, and companies
China and the US are being advocates for a shift towards domestic production of chips and technological innovation pursued on a national scale, as opposed to the specialized and cost-efficient international supply chain including Taiwan, South Korea, China and the US. This scenario covers with a layer of unpredictability the future of the current largest players in the chip industry; but what exactly does this mean for the leading Asian nations?
China – geopolitical tensions leading to strict decisions
Back in 2019, Huawei, the famous Chinese tech company that held one of the top positions among phone manufacturers worldwide, was deeply hit by US sanctions and has seen sharp declines in revenues and performance, leading to the end of a flourishing period. It now seems that the US with the implementation of these export controls is set to apply the same strategy to Chinese chipmaking companies. Analysts’ expectations about China’s ability to recover do not look bright. The fears and decrease in confidence regarding Chinese companies were reflected by the stock market at the beginning of October, when China’s largest chipmaker, Semiconductor Manufacturing International Corporation (SMIC), fell by 3% in a day. Other Chinese chipmakers followed this trend and saw considerable falls in stock prices, as for instance Hua Hong Semiconductors (down by 9% in a day), and Shanghai Fudan Microelectronics, which traded over 20% lower. It is estimated that following the US export control announcement, on Monday October 10th, over $8.6 billion was lost by Chinese chipmaking companies.
“The US has been abusing export control measures to wantonly block and hobble Chinese enterprises,” and “such practice runs counter to the principle of fair competition and international trade rules”; this is China’s view on the actions taken by the United States, highlighted in a speech given by the Chinese Ministry of Foreign Affairs Spokesperson Mao Ning.
Even though Chinese tech and chipmaking companies are highly affected by the US regulations on exports, the Chinese government also works towards the domestication of chip production and the development of artificial intelligence capabilities. China’s focus on making YMTC the leading chipmaking company in the country is one of the most notable interventions on the matter and consists of funding towards YTMC amounting to approximately $30 billion.
Although China is the only nation subject to direct sanctions or regulations, this didn’t prevent the restrictions from affecting other Asian countries. The most striking example is South Korea’s chipmaking industry that is set to see losses and difficulties in maintaining its position in the sector.
South Korea – the situation of SK Hynix and Samsung Electronics
The South Korean companies Samsung Electronics and SK Hynix are some of the most important players in the chipmaking industry, with relevant market shares and ties with both the US and China. This places the companies and the country in a delicate position within this alarming scenario characterized by the ongoing conflict and tight regulations.
Both Samsung and SK Hynix have an important number of factories and plants in China, therefore the issues of certain technologies and equipment’s restricted access in the country led to a fall in their expected revenues in the following year. Following the US’ new and tighter regulations for China announced in early October, the stock prices of Samsung Electronics and SK Hynix fell by 3% and 1% respectively, highlighting the dependence of the South Korean chipmakers on China.
In the case of SK Hynix, around half of the production of the company’s DRam chips used in computers, smartphones and servers is now conducted on Chinese territory, in Wuxi, making it hard for the chipmaker to project future performance due to the numerous new obstacles standing in the way of innovation. Samsung Electronics is faced with a similar situation, being unable to bring chipmaking equipment to its factories in China. The company is currently searching for a “common denominator” to navigate through the semiconductor war, namely building a $17 billion facility in Texas, US, while also maintaining its operations in China.
It is important to note that the US has granted a one-year exemption to SK Hynix from the regulations imposed on China, therefore allowing the company to bring machinery into its Chinese factories. However, the effects of the rules are still expected to hit the South Korean chipmaking companies’ performance in the near future.
Alongside South Korea, another country that has been indirectly affected by these new restrictions is Taiwan, a key player in the global semiconductor industry and at the heart of the geopolitical tensions between China and the US.
Taiwan – will TSMC continue to lead the chipmaking industry?
Taiwan Semiconductor Manufacturing Company (TSMC) is currently the world’s leading chipmaker, providing 54% of semiconductor chips in 2021. Many of the well-known tech companies around the world, and specifically in the US, rely on the advanced chips produced in the country, and for this reason its delicate position in the US-China semiconductor war brings threats to numerous industries, from car manufacturers to mobile phone producers. The leading role of Taiwan in the chipmaking sector brought security and protection against a potential attack from China, given the high dependency of the US on Taiwanese semiconductor chips. However, the new trajectory that the US is taking involves not only cutting the nation’s dependency on China, but also on Taiwan, and shifting towards US-based semiconductor manufacturers. This could potentially lead to a radical change in US’ attitude towards China’s plans on annexing the island. In light of the US sanctions and regulations on Chinese tech companies, TSMC’s shares registered its largest one-day drop in price, namely 8.3%. However, the rest of the effects of these decisions remain to be seen and only time will tell.
Having considered the different aspects of the US restrictions and their impact so far on the Asian stock market and the related industries, it is rather interesting to speculate what the future might hold for China in the overall US-China chip war landscape.
China’s reaction
The US restrictions on China’s semiconductor industry and its technological ambitions, in general, have undoubtedly significantly threatened the plan for Chinese enterprises to become globally competitive in 10 industries, including automation, microchips, and self-driving cars, and eventually dominant later in the century, according to the “Made in China 2025” framework. However, Xi Jinping reaffirmed the country’s ambition at this month’s Communist Party Congress, calling for consistent efforts to “win the battle in key core technologies” and emphasizing the importance of innovation only days after the announcement of the restrictions.
The most likely path that the Chinese government will therefore follow in the near future is to increase self-sufficiency and rely less on imports from the US in the technological field by “reinventing a lot of existing wheels”, as Dan Wang, a China tech analyst at Gavekal Dragonomics stated to Bloomberg. This plan would not be immensely challenging, given that for the first time ever China overtook the US in the global share of high-impact AI papers in 2021 and the country’s spending in R&D has consistently increased the past years with recessions having a minimal impact along the way. Without a doubt, science, technology, and education have taken a central position in China’s policies and self-sufficiency is imperative. According to recent projections, domestic chip producers will be able to meet approximately 70% of its market demand by 2025. This is no surprise given that last year domestic revenues in the Chinese semiconductor industry were approximately $157 billion and almost all of the 20 most rapidly growing semiconductor companies globally were located in China.
It is also important to note the fact that the industry has developed over the past decades thanks to the coordinated efforts of the US, Taiwan, Japan, China, and the Netherlands through the unparalleled benefits of globalization. According to industry experts, the new restrictions will represent a major challenge for China, but eventually, western companies will be the ones to suffer the most. Modern industrial history suggests that China will prevail in terms of competition in the long run and around 30% of revenues of the American semiconductor companies comes from sales to China. For instance, in the area of high-speed rail, Chinese companies are leading the war, having already acquired the necessary technology during the stages of early construction from foreign European companies Siemens and Alstom.
Future plans: State support and funding
In order to achieve this ambitious goal of self-sufficiency, the day after US President Biden’s announcement, the local government of Shenzhen, arguably China’s most important technology and innovation hub, released a plan to accelerate research in the semiconductor industry through financial incentives, preferential tax policies, R&D subsidies and talent programs for enterprises in the entire value chain. This comes in addition to previous vast investments in quantum computing, with $11 billion invested between 2009 and 2011, and semiconductors, with the government-led Big Fund having channelled around $137 billion of private and public funding in the industry. Moreover, the central bank has released a series of special low-interest loans amounting to around $30 billion for high-tech companies, while national labs have continuously released advanced research over the past years. Additionally, the provincial government is attempting to minimize the barriers for promising entrepreneurs by providing other benefits such as encouraging lawmakers to accelerate the IPO procedure and even offering employment positions for spouses of innovators. At the same time, however, they are targeting waste, corruption, and overlaps by forcing caps on the equity stake they can take and the extent of the monetary subsidies.
Two companies have been able to benefit greatly from the state support and funding: the Semiconductor Manufacturing International Corporation started shipping seven-nanometer chips despite the American sanctions, and the Yangtze Memory Technologies Corporation, a state-owned memory chip producer, was in negotiations to supply Apple with all the necessary Nand memory chips for iPhones sold in China before the embargo. This would represent a major change in Apple’s supply chain which has recently been moving to Vietnam and India for device assembly.
In its essence, the Chinese government’s plan is attempting to leverage the power of the private sector so that the market mechanisms and firms are the ones that determine what and how technologies are manufactured and which areas the funds are funnelled towards. One important characteristic of the Chinese consumer innovation market is the sophistication of its participants and the demand for high quality, meaning that only the best companies can survive.
However, as aforementioned, some important issues that might threaten China’s ambitious plans for self-sufficiency are the great dependence on international talent and the lack of basic research. In detail, the China Semiconductor Industry Association reported that there will be an estimated shortage of 300 thousand experts in the field by 2025 and without enough labs working on basic instead of advanced research, there might be severe lags in innovation. Some analysts claim that the Chinese industry is behind by around 10 years from the US in core technologies, and these usually take years of cumulative knowledge to develop properly, so this might pose a danger to China’s techno-nationalism.
Conclusion
The recently announced US restrictions towards China are likely to significantly impact the global landscape of the semiconductor and other advanced technology industries. It is uncertain whether the Biden administration will successfully prevent China from taking the lead in the market, or if China will be able to quickly recover and rise to a dominant position in the long run.
Sources:
Written by Stergios Mastoris, Ema Melihov, Anastasia Larionova
The device you use to read this article, be it a smartphone or a laptop, the car you drive, the ATM you withdraw money from, and hundreds of other devices all require chips. Recent policies taken on by the Biden Administration on behalf of the United States ban the export of semiconductors to China, which not only builds on to the already existing shortage but also challenges the functionality of economies globally due to the dependence of many high-tech industries on these chips. These restrictions come in addition to the lasting geopolitical tensions between China and the US, that have led to the well-known trade war between the two nations, and in recent years, to a “semiconductor war”, that starts to reshape the global chipmaking industry. This new wave of regulations has been perceived by some as a “massive escalation” of this already alarming landscape. As stated by Abishur Prakash, expert on geopolitics and technology: “With the latest action, the chasm between the US and China has now expanded to the point of no return”.
Pre-existing conditions: Chip shortage
Many causes contribute to the chip shortage even before Biden took action, including but not limited to the COVID-19 pandemic, the US-China trade war, the rise of cryptocurrency mining, weather conditions, and the Russia-Ukraine war.
In early 2020, when the COVID-19 pandemic hit, many chip supply chains were disrupted due to the hectic shift towards a stay-at-home economy. While mainly South Korea’s and Taiwan’s suppliers were referred to as the causes of the shortage, many other Asian countries have chip production factories, including China and Japan. Besides the pandemic, severe droughts in Taiwan at the end of Q1 of 2021 were another major contributing factor to the shortage due to the lack of ultrapure water needed to clean the factories and wafers. At the same time, cryptocurrencies were on a rise, with an increased amount of mining, which requires specialized computers, and hence chips. Increasing demand for said computers couldn’t be matched by sufficient supply and further worsened the already existing shortage. Other hazards that contribute to the scarcity of chips include facility fires, which have been quite prominent in the last three years. Examples of incidents include the Japanese company’s Asahi Kasei semiconductor plant, and another Japanese factory, Renesas Electronics, both of which were set on fire. Lastly, the Ukraine-Russia war caused a shortage of neon, a noble gas needed in the production of semiconductors. Chip manufacturers have searched for alternatives, such as noble-gas manufacturers in China, but any changes in quantity produced would take at least nine months to implement, which is a significant time delay. However, all of these challenges are not as significant as the new ones, arising due to the implementation of Biden’s new export ban on Chinese semiconductors.
US’ export regulations on Chinese semiconductor industry
On October 7th, the Biden Administration imposed a comprehensive set of export regulations, which include ways to cut off China's access to advanced semiconductor chips and the equipment needed to produce them. Regarding this topic, the US department of commerce has stated that the export controls “restrict [China’s] ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors”. The implemented export curbs include high-end computing chips, such as A100/H100 from NVIDIA and GPU from Intel. These rules, a lot of which go into effect immediately, are an addition to the restrictions set for high-tech companies earlier, including KLA, Lam Research, and Applied Materials, which obligated them to halt shipments of equipment to China. Hence, it is a form of national security with the intention of the policy to protect American intellectual property and attempt to shift producers away from China, incentivizing domestic production. In other words, Biden hopes to decrease the dependence that the US economy has on China, aiming to regain economic sovereignty. Moreover, since China’s economy is growing so fast, challenging the American hegemony, it is then in Biden’s interest to slow down Chinese economic development and prevent the shift of power and global dominance.
Another way that Biden’s policy looks to domesticize the production of chips has been by forbidding US citizens and green card holders from working for certain Chinese entities or companies within the high-tech industry. Indeed, according to Bloomberg, the new regulations prohibit US citizens from “supporting the development or manufacture of chips covered by restrictions”. It is clear how this rule is aimed at regulating the flow of US expertise to China affecting both its ability to produce semiconductors and its plans of self-sufficiency, that are dependent on international talent, as it will be further explained in the article.
As confirmation of the dependency of China on overseas supply, the data indicate that the country uses more than three-quarters of the global quantity of semiconductors, but currently produces only 15% of the output. Some analysts have stated that China’s equipment is four to five years behind the US, making domestic production for them quite challenging, and overall high-tech production heavily affected by this shortage of a primary input factor - the chip.
As we have seen the new regulations in the US concerning the semiconductor decoupling from China, placed on top of the already-existing harmful effects of the COVID-19 pandemic on the world’s supply chains, are painting an uncertain picture for the future of the chip industry. This is already reflected in markets and in the performance of top manufacturers of tech-related items.
The effects of the chipmaking crisis on Asian economies, markets, and companies
China and the US are being advocates for a shift towards domestic production of chips and technological innovation pursued on a national scale, as opposed to the specialized and cost-efficient international supply chain including Taiwan, South Korea, China and the US. This scenario covers with a layer of unpredictability the future of the current largest players in the chip industry; but what exactly does this mean for the leading Asian nations?
China – geopolitical tensions leading to strict decisions
Back in 2019, Huawei, the famous Chinese tech company that held one of the top positions among phone manufacturers worldwide, was deeply hit by US sanctions and has seen sharp declines in revenues and performance, leading to the end of a flourishing period. It now seems that the US with the implementation of these export controls is set to apply the same strategy to Chinese chipmaking companies. Analysts’ expectations about China’s ability to recover do not look bright. The fears and decrease in confidence regarding Chinese companies were reflected by the stock market at the beginning of October, when China’s largest chipmaker, Semiconductor Manufacturing International Corporation (SMIC), fell by 3% in a day. Other Chinese chipmakers followed this trend and saw considerable falls in stock prices, as for instance Hua Hong Semiconductors (down by 9% in a day), and Shanghai Fudan Microelectronics, which traded over 20% lower. It is estimated that following the US export control announcement, on Monday October 10th, over $8.6 billion was lost by Chinese chipmaking companies.
“The US has been abusing export control measures to wantonly block and hobble Chinese enterprises,” and “such practice runs counter to the principle of fair competition and international trade rules”; this is China’s view on the actions taken by the United States, highlighted in a speech given by the Chinese Ministry of Foreign Affairs Spokesperson Mao Ning.
Even though Chinese tech and chipmaking companies are highly affected by the US regulations on exports, the Chinese government also works towards the domestication of chip production and the development of artificial intelligence capabilities. China’s focus on making YMTC the leading chipmaking company in the country is one of the most notable interventions on the matter and consists of funding towards YTMC amounting to approximately $30 billion.
Although China is the only nation subject to direct sanctions or regulations, this didn’t prevent the restrictions from affecting other Asian countries. The most striking example is South Korea’s chipmaking industry that is set to see losses and difficulties in maintaining its position in the sector.
South Korea – the situation of SK Hynix and Samsung Electronics
The South Korean companies Samsung Electronics and SK Hynix are some of the most important players in the chipmaking industry, with relevant market shares and ties with both the US and China. This places the companies and the country in a delicate position within this alarming scenario characterized by the ongoing conflict and tight regulations.
Both Samsung and SK Hynix have an important number of factories and plants in China, therefore the issues of certain technologies and equipment’s restricted access in the country led to a fall in their expected revenues in the following year. Following the US’ new and tighter regulations for China announced in early October, the stock prices of Samsung Electronics and SK Hynix fell by 3% and 1% respectively, highlighting the dependence of the South Korean chipmakers on China.
In the case of SK Hynix, around half of the production of the company’s DRam chips used in computers, smartphones and servers is now conducted on Chinese territory, in Wuxi, making it hard for the chipmaker to project future performance due to the numerous new obstacles standing in the way of innovation. Samsung Electronics is faced with a similar situation, being unable to bring chipmaking equipment to its factories in China. The company is currently searching for a “common denominator” to navigate through the semiconductor war, namely building a $17 billion facility in Texas, US, while also maintaining its operations in China.
It is important to note that the US has granted a one-year exemption to SK Hynix from the regulations imposed on China, therefore allowing the company to bring machinery into its Chinese factories. However, the effects of the rules are still expected to hit the South Korean chipmaking companies’ performance in the near future.
Alongside South Korea, another country that has been indirectly affected by these new restrictions is Taiwan, a key player in the global semiconductor industry and at the heart of the geopolitical tensions between China and the US.
Taiwan – will TSMC continue to lead the chipmaking industry?
Taiwan Semiconductor Manufacturing Company (TSMC) is currently the world’s leading chipmaker, providing 54% of semiconductor chips in 2021. Many of the well-known tech companies around the world, and specifically in the US, rely on the advanced chips produced in the country, and for this reason its delicate position in the US-China semiconductor war brings threats to numerous industries, from car manufacturers to mobile phone producers. The leading role of Taiwan in the chipmaking sector brought security and protection against a potential attack from China, given the high dependency of the US on Taiwanese semiconductor chips. However, the new trajectory that the US is taking involves not only cutting the nation’s dependency on China, but also on Taiwan, and shifting towards US-based semiconductor manufacturers. This could potentially lead to a radical change in US’ attitude towards China’s plans on annexing the island. In light of the US sanctions and regulations on Chinese tech companies, TSMC’s shares registered its largest one-day drop in price, namely 8.3%. However, the rest of the effects of these decisions remain to be seen and only time will tell.
Having considered the different aspects of the US restrictions and their impact so far on the Asian stock market and the related industries, it is rather interesting to speculate what the future might hold for China in the overall US-China chip war landscape.
China’s reaction
The US restrictions on China’s semiconductor industry and its technological ambitions, in general, have undoubtedly significantly threatened the plan for Chinese enterprises to become globally competitive in 10 industries, including automation, microchips, and self-driving cars, and eventually dominant later in the century, according to the “Made in China 2025” framework. However, Xi Jinping reaffirmed the country’s ambition at this month’s Communist Party Congress, calling for consistent efforts to “win the battle in key core technologies” and emphasizing the importance of innovation only days after the announcement of the restrictions.
The most likely path that the Chinese government will therefore follow in the near future is to increase self-sufficiency and rely less on imports from the US in the technological field by “reinventing a lot of existing wheels”, as Dan Wang, a China tech analyst at Gavekal Dragonomics stated to Bloomberg. This plan would not be immensely challenging, given that for the first time ever China overtook the US in the global share of high-impact AI papers in 2021 and the country’s spending in R&D has consistently increased the past years with recessions having a minimal impact along the way. Without a doubt, science, technology, and education have taken a central position in China’s policies and self-sufficiency is imperative. According to recent projections, domestic chip producers will be able to meet approximately 70% of its market demand by 2025. This is no surprise given that last year domestic revenues in the Chinese semiconductor industry were approximately $157 billion and almost all of the 20 most rapidly growing semiconductor companies globally were located in China.
It is also important to note the fact that the industry has developed over the past decades thanks to the coordinated efforts of the US, Taiwan, Japan, China, and the Netherlands through the unparalleled benefits of globalization. According to industry experts, the new restrictions will represent a major challenge for China, but eventually, western companies will be the ones to suffer the most. Modern industrial history suggests that China will prevail in terms of competition in the long run and around 30% of revenues of the American semiconductor companies comes from sales to China. For instance, in the area of high-speed rail, Chinese companies are leading the war, having already acquired the necessary technology during the stages of early construction from foreign European companies Siemens and Alstom.
Future plans: State support and funding
In order to achieve this ambitious goal of self-sufficiency, the day after US President Biden’s announcement, the local government of Shenzhen, arguably China’s most important technology and innovation hub, released a plan to accelerate research in the semiconductor industry through financial incentives, preferential tax policies, R&D subsidies and talent programs for enterprises in the entire value chain. This comes in addition to previous vast investments in quantum computing, with $11 billion invested between 2009 and 2011, and semiconductors, with the government-led Big Fund having channelled around $137 billion of private and public funding in the industry. Moreover, the central bank has released a series of special low-interest loans amounting to around $30 billion for high-tech companies, while national labs have continuously released advanced research over the past years. Additionally, the provincial government is attempting to minimize the barriers for promising entrepreneurs by providing other benefits such as encouraging lawmakers to accelerate the IPO procedure and even offering employment positions for spouses of innovators. At the same time, however, they are targeting waste, corruption, and overlaps by forcing caps on the equity stake they can take and the extent of the monetary subsidies.
Two companies have been able to benefit greatly from the state support and funding: the Semiconductor Manufacturing International Corporation started shipping seven-nanometer chips despite the American sanctions, and the Yangtze Memory Technologies Corporation, a state-owned memory chip producer, was in negotiations to supply Apple with all the necessary Nand memory chips for iPhones sold in China before the embargo. This would represent a major change in Apple’s supply chain which has recently been moving to Vietnam and India for device assembly.
In its essence, the Chinese government’s plan is attempting to leverage the power of the private sector so that the market mechanisms and firms are the ones that determine what and how technologies are manufactured and which areas the funds are funnelled towards. One important characteristic of the Chinese consumer innovation market is the sophistication of its participants and the demand for high quality, meaning that only the best companies can survive.
However, as aforementioned, some important issues that might threaten China’s ambitious plans for self-sufficiency are the great dependence on international talent and the lack of basic research. In detail, the China Semiconductor Industry Association reported that there will be an estimated shortage of 300 thousand experts in the field by 2025 and without enough labs working on basic instead of advanced research, there might be severe lags in innovation. Some analysts claim that the Chinese industry is behind by around 10 years from the US in core technologies, and these usually take years of cumulative knowledge to develop properly, so this might pose a danger to China’s techno-nationalism.
Conclusion
The recently announced US restrictions towards China are likely to significantly impact the global landscape of the semiconductor and other advanced technology industries. It is uncertain whether the Biden administration will successfully prevent China from taking the lead in the market, or if China will be able to quickly recover and rise to a dominant position in the long run.
Sources:
- Bloomberg
- Financial Times
- New York Times
- Korea Times
- TechWire Asia
- CSIS
- CNBC
- Euronews
Written by Stergios Mastoris, Ema Melihov, Anastasia Larionova