China's Way out of U.S. Chip Blockade
Yan Yu
Senior Research Fellow of the Chinese Academy of Social Sciences
Amid escalating China-U.S. tensions and the U.S. ban on Huawei’s access to the global chip supply chain, the chip has become the Achilles’ heel of China’s manufacturing industry. By comparison, Taiwan is a dominant player in the global chip markets, with the largest share in foundry services and the fourth in chip designing. The chip is essential to artificial intelligence, big data, 5G, cloud computing and other cutting-edge technologies. In this article, I want to explore the possibilities of Chinese mainland’s overtaking Taiwan.
Taiwan’s Success Story in Chip Making
Dedication is the key to success. It is the case for Taiwan’s chip industry. It is the case for Taiwan’s chip industry.
In the early 1980s, Hsinchu Science Park was set up, backed by favorable government policies and large funds. Taiwan has now become the unparalleled leader in the global chip markets after four decades. Various steps of chip making fall into four general categories: designing, manufacturing, packaging and testing. Taiwan has the presence of the whole industry chain, with each link being an industry leader.
In terms of foundry services, Taiwan is the indisputable leader. TSMC, the largest semiconductor foundry in Taiwan and the world, has pioneered the pure-play foundry business model by focusing solely on manufacturing customers' products, avoiding direct competition with them. In 2019, it had about 52% share of global foundry services, approximately three times as much as Samsung, the second largest player.
Taiwan is also a strong player in chip designing in the world. Taiwan had a 17% share of the global chip designing industry by value in 2019, ranking the fourth in the world, according to the 2020 edition of the McClean Report. MediaTek Inc., a fabless semiconductor firm, has been the fastest growing chip design firm in recent years. In November 2019, MediaTek released a 5G-enabled single chip solution, which was the most advanced in the world.
Taiwan also excels in chip packaging and testing. ASE Technology is the world’s largest packaging and testing service provider, with over 90% of electronics firms as its clients and a 19% global market share.
Relying on its competitive strengths in the chip industry, Taiwan is proactively developing AI, 5G and Internet of Things and building a global chip research and development hub. So far, 47 transnational corporations have established 65 R&D centers on the island, about 3 R&D centers per year on average.
Mainland’s Overdependence on Taiwan Supplies
Chinese mainland has been dwarfed by Taiwan’s towering status in chip production. In term of key technologies, there is a wide gap across the Taiwan Strait. With the most advanced technologies in the world, TSMC had produced 1 billion 7-nanometer chips by July 2021, a milestone in the global chip industry. TSMC is capable of making 5-nanometer chips and is expected to produce 3-nanometer chips by 2022. By contrast, SMIC, a Shanghai-based leading chipmaker on the mainland, masters only the 14-nanometer chip technologies, three generations behind TSMC’s products.
Given the mainland’s lagging behind Taiwan in terms of chip manufacturing, chips accounted for 42.3% of Taiwan’s total “exports” to the mainland and Hong Kong in the first half of 2020, according to official Taiwan statistics. In June 2020, the proportion went up to 46.1%, a new high.
In the past few decades, Taiwan-based semiconductor companies have established plants in mainland China. Tier-one players, such as TSMC, MediaTek, VIA Technologies and RealTek, have set up subsidiary plants or joint ventures on the mainland, giving rise to the emergence of local talents. For example, core specialists in SMIC are either from Taiwan or trained by Taiwan talents.
With the assistance from Taiwan firms and mainland-based firms’ own efforts, the chip industry on the mainland has been narrowing the gap. An array of packaging and testing firms are emerging, including Sino IC, Guangdong Leadyo IC Testing and Chip Advanced. In terms of foundry services, SMIC and Huahong Semiconductor are now among top 10 foundry service providers in the world. Huahong Semiconductor is the second company on the mainland, after only SMIC, to master 28-nanometer chip technologies. Despite the still wide gap with peers in Taiwan, firms on the mainland are catching up.
In May, TSMC announced its plan to build a 5-nanometer chip plant in Arizona, with a total investment of 12 US$ billion, yielding to the pressure from U.S. authorities. What’s more, TSMC is not allowed to sell chips to Huawei according to U.S. regulations. Yu Chengdong, CEO of Huawei’s consumer goods, revealed in early August that the supply of high-end Kirin chips would ran out soon because TSMC will no longer provide foundry services.
The mainland is heavily dependent on chip “imports” now. Only 20% of chips consumed on the mainland are provided by local manufacturers and the remaining 80% are imports. In 2018, the mainland imported US$312.1 billion worth of chips, about 60% of total global chip sales. Credit: Unsplash
The mainland imported over US$200 billion worth of chips for seven consecutive years through 2019.
Solution to the Problem
The chip industry is vital to the new economy. The absence of an advanced chip industry is casting a shadow over downstream sectors like artificial intelligence, big data and cloud computing on the mainland. Following the U.S. ban on ZTE and Huawei, the Chinese government realized that the chip industry was related to national security and decided to boost the industry through nation-wide efforts.
The State Council, China’s cabinet, issued a document titled A few Policies Regarding Integrated Circuit and Software Industry in the New Era on August 4, aiming to boost chip self-sufficiency to 70% by 2025 from the current 30%.
In late July 2020, the State Council’s education office designated integrated circuit as the level-1 interdisciplinary subject, parallel to electronics engineering. It was widely seen as a catalyst to the rise of a large number of future talents for chip designing and production.
In terms of materials, carbon-nanotube-based chips may be the direction if the mainland hopes to overtake Taiwan. In terms of silicon-based chips, TSMC has commanded 5-namometer chip technologies and is working towards 3-nanometer and 2-nanometer chips. However, 2 nanometers is almost the limit to silicon-based chips. New materials such as carbon-based chips may offer new hope.
The mainland embarked on the chip industry 13 years after Taiwan did. However, after many years of efforts, technologies mastered by mainland firms are only three to five years behind Taiwan. With favorable industry policies, strong investments in research and development and sufficient dedicated funds, the industry on the mainland may have bright prospects.
In theory, with enormous capital, strong education and the world’s largest markets, the mainland should be able to build an advanced chip industry. However, it is easier said than done.
First, the Taiwan-based semiconductor companies stick to the “Taiwan First” policy and are reluctant to transfer technologies away from the island. Although TSMC decided to set up a 5-nanometer chip plant in Arizona but its production is scheduled for 2024. By then, Taiwan should be able to produce 3-nanometer or even 2-nanometer chips. It shows that even the United States is unable to get the most advanced technologies.
Although Taiwan firms are allowed to build chip plants in China, it is required that technologies used on the mainland must be two generations behind. Such regulations guarantees core technologies are kept only in Taiwan.
TSMC has supplies of chip making equipment from Dutch-based ASM while the mainland firms are restricted from buying the equipment due to the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Good and Technologies and U.S. sanctions. Furthermore, photoresist exports to the mainland are also restricted. Without proper equipment and tools, it is hard for mainland firms to produce chips.
Conclusion
Massive markets and favorable government policies on the mainland are attractive to investors. Many local Chinese governments offer preferential tax or land acquisition treatments in order to win over investors. According to a report by SEMI, an industry association, China, of all countries and regions, will add most new chip plants from 2020 to 2021.
However, capital is chasing profits. But the chip industry requires heavy investments but has a long investment recovery cycle. China’s quest for an advanced chip industry is a long way. Shortsightedness won’t lead to great chip firms.
Recent years witnessed a few failed chip projects. Nanjing-based TTSEMI went bankrupt in July 2020, only five years after its inception. Globalfoundries was out of business in Chengdu in May 2020, three years after its launch. Similar cases occurred in Guizhou and Hubei provinces. Those failures serve as an alarm to those who underestimate the difficulties in the quest for a strong chip industry.
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