With China facing a severe semiconductor shortage due to US sanctions and Covid-19 repercussions, the country is more motivated than ever to increase its microchip self-sufficiency
By Patrick Body
Semiconductor chips are used to run just about all the world’s electronic devices and the current shortage is having a huge negative impact across many industries. Nowhere is this more true than in China. Given the country’s dominance in electronics manufacturing, from novelty children’s toys through to consumer electronics and home appliances, the current shortage has had an extremely serious affect on the country’s economy. In 2020, China consumed $143.4 billion worth of semiconductors, with only 5.9% of them being produced by companies with headquarters in China; the country relies on imports for the rest.
The Covid-19 pandemic resulted in the auto industry in China closing many factories in anticipation of lower demand, but the faster-than-expected bounce-back meant the factories, having cancelled previous chip orders, were now struggling to bring production lines back up to speed. In China the home appliances sector is being hit hard, with companies facing 10% shortfalls at least in chip supply. Given the maturity of the market, operating profit margins are extremely low, combined with a lack of product to sell, there will be increased pressure on businesses to adapt.
The manufacturing of semiconductors is a precision endeavor, there are long lead times for changing production output and it can take years and billions of dollars to shift leading-edge manufacturing capacity and capability. The number of manufacturers capable of high-end production around the world has fallen from 25 in the year 2000, to only three in 2021—Taiwan Semiconductor Manufacturing Corp. (TSMC), Intel and Samsung. With all three struggling to meet demand, the global shortage is expected to continue well into 2022.
Although it had some form of semiconductor development in place even from the 1950’s, China still lags well behind the rest of the world in chip production and China’s issues with semiconductor supply pre-date current interruptions.
The US has in recent years placed various sanctions on China which limit its ability to import many classes of semi-conductor chips from the world’s top makers. The leading Chinese manufacturer SMIC (Semiconductor Manufacturing International Corporation) was placed on a US blacklist in December 2020 as part of the US-China trade war. The blacklist, which includes tech giants Huawei and, up until early May 2021, the smartphone firm Xiaomi, subjects entities to license requirements for the export or transfer of US goods, drastically decreasing semiconductor availability. Exacerbating supply issues, TSMC will no longer take orders from Phytium Information Technology Co., a leading Chinese supercomputing firm, due to its addition to the list. This follows TSMC halting their supply to Huawei in September 2020. With TSMC having the largest market capitalization of any manufacturer, and controlling nearly 90% of the market for the most advanced chips, this is a huge setback for China manufacturers.
China is seeking to reach parity with the world’s best in semiconductor design and manufacturing to ensure future resilience. Premier Li Keqiang has pledged to boost spending and drive research into cutting-edge chips in the latest Five-Year Plan, China’s national strategic blueprint. Following an initial step in 2014, a second allocation of government funding for the industry came in 2019, raising RMB 204 billion from government and SOE sources. SMIC recently received $2.35 billion for a manufacturing plant in Shenzhen. There were 32 semiconductor firms listed on China’s A-share in 2020 and the year saw a 366% increase of venture capital investment on 2019.
But China must learn from failed business attempts in order to continue an upward chip trajectory. An example is the Wuhan Hongxin Semiconductor Manufacturing Company, a multi-billion-dollar project started in 2017 which went bankrupt recently after failing to raise enough funds to cover the staggering up-front costs required for chip manufacture.
There were five other billion-dollar semi-conductor enterprises that failed between 2019 and 2021. They all highlight the problems with supply-chain infrastructure and knowledge in China. Without a better level of local expertise for new semiconductor manufacturers to rely on, China will continue to run the risk of sinking funds into failing ventures.
The shortage is clearly a worldwide issue, but China is facing more difficulties than other countries because of huge demand and supply problems compounded by US sanctions and their knock-on effects. This has led to China placing itself, in effect, on a ‘war footing’ address the problem. It is determined to reach its goal of self-reliance and parity in semiconductor design and manufacturing, and the way that this plays out will be a defining element in the shaping of the 21st century.