When Leo Liu left China to study overseas almost three years ago, semiconductors occupied only a sleepy corner of the Chinese technology industry. Liu had chosen to study chip design because he was fascinated by the idea of creating advanced “black box” chips that could fend off hackers. When he returned to the country with a master’s degree from the Netherlands, he was deluged with job offers. Since he’d left, domestic chip makers had become desperate to find people with skills like his.
A lot had changed. When Liu left, he didn’t know the Trump administration would impose sanctions on some of China’s biggest companies, which restricted them from obtaining components produced using US technology. As US tech is integral to the semiconductor value chain, and semiconductors are the basis for every technology, this export ban could deal a blow to the global competitiveness of these companies.
The semiconductor industry has traditionally been defined by low hope of return for new entrants and high barriers to entry. Specialised companies exist at every stage of the production process, with many almost completely cornering their respective markets. Chinese companies, along with others, have long-relied on a globalised value chain, and supplies from other companies. But this reliance has become, in the words of those at its highest levels of government, a “choke point” for the country’s technological ambitions.
“It’s now a hot industry,” Liu says. Of the companies that reached out to him, many had projects already in progress and needed talent. Not all those Liu visited were innovating; some were developing products that had already been on the market for ten years, or trying to reduce individual unit production costs. Some companies added “chip” to their names just to find new funding. The threat of losing access to supplies, as a result of sanctions, energised China’s drive for more chip autonomy. It has also driven a rapid increase in the number of companies hoping to profit from these political dynamics.
China’s policymakers have been talking about developing the domestic semiconductor industry for decades. Several Chinese companies have become established players in some segments of the semiconductor value chain, such as SMIC and state-owned chipmaker Zhaoxin.
In 2014, China’s government established the National Integrated Circuits Industry Investment Fund, its “Big Fund” which raised 138.7 billion yuan (£15.4bn) in its first financing round from state-owned enterprises and banks. The following year, Made in China 2025, which set out an industrial blueprint to upgrade China’s manufacturing, emphasised the importance of increasing domestic market share in “basic core components”.
The government has ramped up policies that aim at more “chip autonomy” and decreased reliance on American technology. It offered chip companies tax breaks in March, and it set up another big fund of 204bn yuan (£22.6bn) last year. This is not only a source of funding; it’s also a strong signal the government prioritises semiconductors in its industrial policy. With this reassurance, vast amounts of private capital have flowed into the semiconductor industry. Much of this is facilitated by semiconductor companies listing on the Shanghai STAR market.
China’s policymakers have emphasised technological “self-reliance” as a key goal. While China is the world’s biggest consumer of chips, domestic companies only meet around 30 percent of local demand. Amid ramping geopolitical tensions between Washington and Beijing, the US has started to leverage its dominance in semiconductor production to curb China’s technological advancement.
In 2019, the US Commerce Department banned telecoms giant Huawei from buying parts and components from US companies without government approval, as the Trump administration claimed Huawei endangered national security. In May 2020, the department added more restrictions, by issuing rules that stipulated foreign manufacturers using American-made machinery or software must obtain a special licence to design or produce semiconductors for Huawei. In December 2020, the Trump administration blacklisted SMIC, China’s largest semiconductor foundry. The company says this will affect its R&D efforts and capacity to produce cutting-edge chips of ten nanometres (nm) and below.
The stand-off is likely to continue even post-Trump. In April 2021, the Biden administration added seven Chinese supercomputing companies to the blacklist, on the ground that they are involved in the development of China’s military. “The Biden administration is continuing the Trump administration’s policy in a more calibrated way,” says John Lee, a senior analyst for the MERICS think tank. “There’s quite a lot of evidence that they are not going to soften policy towards China on digital technology issues.”
China saw these recent and previous sanctions as American attempts to stop its technological advancement by kneecapping some of the country’s most successful companies. The country’s tech-nationalists rejoiced, as they had been handed more proof that globalisation was flawed, and that China needed to develop its own homegrown industry. It also gave huge commercial incentives for domestic companies to align with the government.
Almost every large Chinese tech company has announced a semiconductor-related project. Oppo and Xiaomi are working on their own in-house 5G chips. Tencent is investing into AI chip startup Enflame, Bytedance into its own cloud AI chips and ARM server chips, and Alibaba into AI cloud computing chips.
There is also a domestic drive to develop chips that have been around for years – the lower-density 28nm chips used in everything from cars to internet of things devices. Being able to mass produce 28nm chips at a Chinese foundry would mean that China would produce most of the chips it needs with comparatively less dependence on foreign tech suppliers.
To protect themselves against possible sanctions, Chinese companies have been building stockpiles to safeguard production lines. Chinese media has been calling it a “competition for inventory”, noting that some companies are buying chips at up to twenty times normal prices. Huawei, for instance, which has borne the brunt of sanctions, has stockpiled two years’ worth of crucial chips needed for its 5G base stations and cloud business. The rush to stockpile has spread worldwide, leaving suppliers struggling to keep up with demand. That, combined with the impat of the pandemic, has precipitated a global shortage of chips.
The semiconductor industry is now a politicised battleground, with risks for businesses and governments alike. Having a reliable source of chips for government computers isn’t enough. It’s now about having that for every industry, be that agriculture, healthcare, or consumer electronics. Access to semiconductors is now a matter of national and economic security, for all countries.
Total chip autonomy, many believe, is close to impossible. It doesn’t make commercial sense. “If you want to become more self-sufficient, you need to focus on really niche markets that are often in the hands of just a few players with severe market entry barriers,” says Jan-Peter Kleinhans, director of the technology and geopolitics project at Berlin-based think tank Stiftung Neue Verantwortung. The most common misconception that he encounters is people thinking countries only need their own fabrication plant, or fab, to achieve autonomy. It’s better, in his view, to see a fab as a “network company”, a meeting point for high tech companies from all over the world. Even a speck of dust can ruin a circuit. “No region, even within the next ten or twenty years, will become self-reliant,” says Kleinhans. “It’s too complex, and it would create too many inefficiencies if you try to bring the entire stack back to your own country.”
The interdependent nature of the semiconductor value chain means that while new players face high market-entry barriers, it’s also difficult to cut large existing players out. As China is the world’s largest consumer of chips, when sanctions landed on Chinese businesses, some of their staunchest defenders were the US semiconductor lobby, who were worried for their own revenues – Qualcomm received a license to sell 4G chips to Huawei last November.
“The US semiconductor sector opposes broad, sweeping export controls against all Chinese companies because industries are heavily reliant on the Chinese market,” says Lee. “It goes directly to the ability of American companies at different points of the value chain to remain industry leaders, because they plough a lot of that revenue back into R&D, which allows them to stay ahead of the competition.”
Another effect may be that other companies, caught in the middle of geopolitical tensions between the US and China, will try to keep US tech out of their production lines. Soon after the US ban on selling to Huawei was announced, British chip designer ARM, which licenses chip architecture and has engineering teams in the US, declared that its technology was of UK origin and not subject to export controls.
For China, developing the domestic semiconductor industry will continue to be a top priority. “China’s technological catchup methods have often been inefficient, there’s been much wastage. But they’ve also been effective in helping a few companies emerge as industry leaders,” says Lee. “I don’t know whether that’s going to work for certain things in the semiconductor value chain.” However, Lee thinks, there may be potential for technological leapfrogging with next-generation chips made with alternative materials, for which China’s government has already indicated its support.
Liu, who is now working at a chip design company in Shenzhen, is worried for the long-term future of China's nascent chip boom. “Most chip companies won’t survive for long,” he says. “If some are truly innovative and can survive for five years, perhaps they’ll become a giant like Huawei’s HiSilicon, but at the same time, a lot of smaller companies will fall by the wayside.”
Digital Society is a digital magazine exploring how technology is changing society. It’s produced as a publishing partnership with Vontobel, but all content is editorially independent. Visit Vontobel Impact for more stories on how technology is shaping the future of society.
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This article was originally published by WIRED UK
