When it comes to bargaining chips, President Xi Jinping is hedging his bets. The leader of China and the chairman of the country’s ruling Communist Party made that crystal clear last week when he stressed that increasing semiconductor production had become a priority.
As the trade dispute with the United States develops into a battle of technology, the world’s second-largest economy is being forced to revamp its small domestic chip sector or face being frozen out of the market.
If that happened, the consequences for the country’s high-tech industries, and Xi’s cornerstone ‘Made in China 2025’ policy, would be catastrophic.
To underline the problem, Xi talked openly about the enormous challenges during a visit to inspect integrated circuit assembly lines at the Xinxin Semiconductor Manufacturing Corporation in Wuhan.
“No matter how big a person is, he or she can never be strong without a sound and strong heart,” he said, using a typical home-spun metaphor to urge domestic tech companies to strive for major breakthroughs in semiconductor technology.
The task will be daunting. A glance at the global industry illustrates how far behind the nation is when it comes to chip manufacturing, and research and development.
Last year, revenue from the semiconductor sector in the US edged close to US$250 billion compared to China’s miserly $24.7 billion, statistics from IEK, which is part of the government-sponsored Industrial Technology Research Institute in Taiwan, showed.
Technological powerhouse
With such a disparity, it is hardly surprising that Chinese companies have to import about $200 billion worth of chips from the US each year.
In turn, this has left Beijing exposed, threatening the whole concept of Xi’s plan to turn China into a technological powerhouse and putting at risk ‘smart’ companies such as ZTE, Huawei and Xiaomi.
Even online giants like Baidu, Alibaba and Tencent, or the BAT grouping, as well as JD.com, could feel the aftershocks if the supply of semiconductors dried up.
For China Aerospace Science and Technology Corporation, it would also seriously curtail its satellite and space programs.
While this is strictly a ‘doomsday scenario,’ it cannot be ruled out as President Donald Trump’s team prepares to visit China in the next seven days for tough trade talks in Beijing.
“Chinese companies have a large task ahead, given their talent and capability gaps, the high bar for global leadership, and the need for the country’s global champions to be the top one or two players in their segments,” Christopher Thomas, a principal at global consulting firm McKinsey in Beijing, said in a report back in 2015.
“The more segments and technologies in which China attempts to be number one, the more diffuse industry and government efforts will be. The more companies that attempt to become the Chinese champion for a certain segment, the more the best talent will be spread across too many teams,” he added.
Three years later, very little has changed. Data from Bloomberg showed that Intel, Broadcom and Qualcomm, the US suppliers of semiconductors for smartphones and computers, had at least 10 times the market value of China’s biggest chipmaker Shenzhen Huiding Technology.
As for processors used in high-end electronic products, American companies dominate the landscape. Chinese chips tend to be used in low-end items such as bank and key cards.
“The gap is still huge and the semiconductor industry is capital- and labor-intensive” Dai Ming, a money manager at Hengsheng Asset Management in Shanghai, told the South China Morning Post. “It requires massive investment and technology accumulation. In the short term, it’s difficult for China to catch up with the US.”
In a move to address the problem, The National Integrated Circuitry Investment Fund, or “Big Fund,” plans to roll out new investment opportunities to boost local chip production and R&D.
Backed by the Chinese government, NICIF announced it was close to closing a 120 billion yuan ($18.98 billion) investment round for a second fund to support the industry, Reuters news agency reported.
Indeed, urgency has become the buzzword around Beijing’s corridors of power after the US Justice Department started investigating Huawei for suspected violations of export sanctions to Iran.
Last week’s decision came after fellow tech conglomerate ZTE was barred in April from buying US-made components, such as semiconductors, for seven years.
Spooked Beijing
The incidents have spooked Beijing and are seen by Xi’s administration as an attempt to wreck the country’s booming high-tech sector.
“Following the ZTE incident, China has basically reached a consensus to develop its own chip technology,” Zhang Lili, a research fellow with the Pangoal Institution, a public policy think tank in Beijing, said in an opinion piece for Global Times.
“However, making semiconductors is very complicated, involving more than 50 industries and 2,000 to 5,000 processes. Some observers have said that mere enthusiasm alone won’t lead to success and China may not achieve chip breakthroughs on its own,” he added in the state-owned newspaper.
Finding partners in any ’semiconductor war’ with Washington might be difficult as the other major players, Japan, South Korea and Taiwan, would probably be reluctant to break ranks with the US in an industry which generated more than $420 billion last year, Statista, an online statistics portal, revealed.
They will be hoping that cooler heads prevail before the broader trade dispute escalates into a trade war. Yet hopes of a quick settlement appear to be fading, judging by the rhetoric from both sides.
“High technology is the core competitiveness of the US, but with China’s development getting more attention in recent years, the US fears losing its advantages and may adopt stricter measures against China,” Zhang wrote. “We need to prepare mentally for this.”
Still, in this particular game of ‘cold war trade’ poker, China holds very few chips.
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trump is no nixon and will be very harsh on china to force the inbalance of trade down. using micro chips will certainly play inot this. china needs to get very serious in dveloping their own technology.indias may be a partner.
Taiwan has three world class semiconductor companies. There may be a good part of the solution in this island
Clearly, this move by the US is unrelated to the questions regarding the balance of trade. If that were the issue, the US would be prodding China to buy MORE chips, not less, to lower its trade surplus.
What we are seeing here is no mere trade dispute, but a threat to monkey wrench China’s "Made in China 2025" plan, which has created panic in certain quarters in the US. It is more in line with the sanctions regime the US uses against countries which displease it.The US holds some good cards here, and may be using this as a bargaining chip in trade negotiations. Or maybe it won’t. Maybe it will treat these issues separately.
Clearly, if China’s access to chips is cut off, especially if the US leans on its allies to follow suit, China’s tech ambitions will be badly hurt. It will take many years (decades?) to build a chip industry on par with the US. On the other hand, US tech companies will suffer not only from lost business in the short run, but also the market’s lack of confidence in these company’s ability to deliver, which will hurt them in the medium to long term. This may be a price the US is willing to pay to slow down China’s high tech ambitions. We’ll see.
When you use soldiers as weapons to fight a war, soldiers get killed.
When you use the dollar to wage financial war, the dollar whithers.
Whenyou use high technology to fight a trade war, that technology dies from lack of a market.
When you withold rare earth from others, new sources will be developed.
Lessons learned?
Xi keeps threatening Taiwan, but if it actually did anything hostile that would probably just make things worse for China. Even if it pushes chip making, it has to get a lot of the raw materials and equipment from other countries – and if sanctions went into effect the China chip industry would collapse.
No. They cannot learn that lesson. I doubt Chins will be hurt much if it doesn’t spend USD 200 billion on US made semi-conductors.
China must take some self-criticism. China buys commercial airplanes from the US. Why can China increase the number production lines in their airplane factories? China buys agricultural products from the US, when the same products is available in BRICS and Asean? Why do China fund the enemy by buying more than $1 Trillion in US Treasury Bonds?
China should look for alternate suppliers or build up their own semiconductor capacity. China is too much dependent of oil from the Middle East, war seems to imminent. Increased oil prices hurt Chinas economy. Why not use some of the $1 Trillion for further investment in green energy? There is a lot of investments opportunities in new markets that will increase Chinese trade.
Hold on a minute… You mentioned that "Chinese companies have to import about $200 billion worth of chips from the US each year."
The total US exports to China in year 2017 were $127 bilions. Source is report published US China Business Council on 30th of April. So, figure of $200 billions doesn’t sounds logical.
In the battle between China and USA on the semiconductor industry, sales of microchips by Chinese companies can only increase due to the high demand for microchips by Chinese companies and the reluctance of USA to sell microchips to Chinese companies. On the other hand, sales of microchips by American companies can only decrease because the US government prohibits them to sell their microchips to Chinese companies. There is no doubt that in five years’ time, sales of microchips by Chinese companies will increase to 250 billion dollars whereas sales by US companies will decrease to 25 billion dollars.
Sam Genokapi speaking or writing English properly is not a sign of intelligence. Get that into thick skull.
China is trying to balance the trade with the US so as to reduce the much talked trade deficit.
TK TK Yes, that is true. However, the one TRILLION dollars is an investment, not trade. China invest in the US who use some of the money to fund the wars in the Middle East, and fund insurgency groups that want to Balkanize China.
The US has tried to destroy many countries and force change of Governments, in Iran, Korea, Russia, Venezuela, and many other countries by using tariffs, sanctions, covert operations, currency wars, and now semiconductor war.