China’s large-scale, loudly stated and massively funded ambitions to overtake the US in technological leadership and lead the world into tomorrow’s global digital economy have hit a snag.
The snag has caught the world’s second-largest economy as it races to match its rivals in a component that is, more than any other, the brains and guts of digital technologies. The problem has arisen despite massive public spending, shown in a January 2021 study to be worth $150 billion.
Semiconductors are the “weak links in China’s innovation-driven development strategy,” argues a new policy paper from Institut Montaigne, a Paris-based think tank that questions Beijing’s ability to stay at the head of the 4th Industrial Revolution.
The central problem for Beijing is the US sanctions that are squeezing China’s access to key chip components, the report, The Weak Links in China’s Drive for Semiconductors makes clear.
“Today, no other industry in China shows a wider gap between stated policy goals and the technological reality,” said Mathieu Duchatel, director of the Asia Program at Institut Montaigne and the author of the report.
Despite its ambition to spearhead the technological space, Asia’s manufacturing giant remains highly dependent on foreign technologies. This is glaringly clear when it comes to the American-licensed technologies required to create the kinds of chips that equip the most advanced smartphones and other IT devices in the burgeoning era of 5G and AI.
In 2019 alone, China imported $304 billion worth of semiconductors – more than it spent on oil and more than it spent on imports from its largest trading partner, the European Union. In that same year, the so-called “Workshop of the World” was only able to manufacture 15.7% of its domestic chip demand.
“Our dependence on core technology is the biggest hidden trouble for us,” warned President Xi Jinping in 2016, just ahead of Donald Trump’s surprise accession to the White House. Five years on, and in the wake of chip sanctions imposed by the Trump administration, that bleak assessment rings truer than ever.
The damage is already severe but the bigger question is whether it will worsen under the Biden administration.
Heart and soul of tech
Its domestic weaknesses in top-end chips “will make it difficult for China to truly dominate the digital revolution enabled by 5G infrastructure, through the growth of the industrial applications of cloud services, big data and artificial intelligence, and progress in computing power, including for mobile devices and connected objects,” says Duchatel.
Despite all-out, public-funded efforts, China’s chip industry has hit the “7 nanometers wall” as its leading semiconductor producers fail to produce chips below that critical threshold. It is a threshold that has already been crossed by the world’s leading chipmakers in Taiwan and South Korea – TSMC and Samsung Electronics.
TSMC’s new, ultra-miniaturized 5-nanometer chip already powers Apple’s Iphone 12. Samsung has realistic plans to deliver semiconductors of 3 nanometers in the near future.
China is nowhere near. Changxin, one of the nation’s most advanced semiconductor manufacturers, has reportedly signed a contract for new DRAM chips of 19 nanometers – far behind the sizes being rolled out by the global leaders.
“High-end smartphones need at least a 7-nanometer manufacturing process for their microprocessors, which makes the global digital economy, including China, dependent on Taiwan and South Korea,” notes Duchatel.
Within the highly integrated global semiconductor sector, US technologies remain indispensable pieces of the puzzle.
Washington’s super weapon
While the US is no longer a leading manufacturer of chips, its ownership of the intellectual property of key components, processes and even design kits grants Washington de facto veto rights over procurement of some of the most sensitive parts of the semiconductor value chain.
“It’s almost impossible to produce high-end chips without US technology,” says an industry insider working for a South Korean competitor, who requested anonymity.
Take Dutch company ASML, which equips the most advanced foundries in Taiwan and South Korea with their extreme ultraviolet (EUV) lithography processes. These processes – indispensable to producing the most miniaturized chips – use US-licensed parts. These parts, and the related processes, are now out of reach of China’s manufacturers.
This predicament places China’s future industrial trajectory at risk.
Under Trump, the US squeezed Chinese tech champions, targeting the world’s largest phone maker, Huawei, as well China’s top semiconductor manufacturer, SMIC. These companies were added to US blacklists in 2019 and 2020 respectively, drastically restricting their access to key technologies.
As a consequence of Washington’s move, TSMC, Samsung and other key manufacturers in US-allied nations, such as South Korea’s SK Hynix, had no choice but to sever many of their ties with Shenzhen-based clients.
Under pressure, Huawei piled up stocks of advanced chips to tide itself over until hoped-for policy change under the Biden administration. But if Biden continues Trump’s high-tech hawkishness, the future of Huawei as an advanced smartphone maker is in jeopardy. Rumors are even swirling that it could offload its phone division.
Beijing is fully aware of its Achilles heel and has been speeding up its acquisition of sensitive materials. In 2020, Chinese businesses bought almost $32 billion of equipment used to produce computer chips from Japan, South Korea, Taiwan and elsewhere. That was a 20% jump from 2019, a Bloomberg analysis of official trade data showed.
Chinese ambitions stumble
Under Xi’s leadership, China has been beefing up its self-reliance in this strategic sector. “Core technologies” were again on the top of the priority list set by the Chinese Communist Party during its Beijing plenary last October.
Yet the numbers don’t meet the president’s ambitious expectations, Insitut Montaigne says.
Beijing is unlikely to meet its target of producing 70% of its own semiconductors by 2025 as set out in its “Made in China 2025” strategy, argues the report.
Despite massive public investment at national and provincial levels, as well as poaching some of the best engineers in the field, red tape, wastage of resources and corruption have hindered China’s latest great leap forward, the think tank said.
Examples of the failures of the top-down industrial policy push are not hard to spot.
The fiasco of semiconductor company Wuhan Hongxin, which suffered a loss of $2.1 billion dollars after falsely claiming it had acquired a cutting-edge machine from ASML, is one example. Another is the default of Tsinghua Unigroup in December, a group heavily engaged in chips, with debts of $8 billion.
The US debate
Could all this derail Xi’s China dream of national rejuvenation?
Perhaps. More than ever, the fate of China’s tech sector depends on overcoming or bypassing the barriers to technology transfer that it is facing.
These barriers are being erected by Europe in a bid to challenge their “systemic rival” – as China has been dubbed by the EU Commission – but it is the Biden administration’s stance on Chinese tech that is the most critical variable.
The nascent administration is being pulled in different directions.
Last month, Washington-based semiconductor industry lobby group SEMI called on the incoming administration to review Trump’s measures, pointing out that they have been hurting US jobs. SEMI argued in favor of further coordination with other global stakeholders.
However, there is growing bipartisan consensus in favor of a tough approach to China on Capitol Hill. And there is a corresponding understanding of the mission-critical role semiconductors play in the global tech space.
“In DC, many understand that semiconductors are key to American leadership,” says June Park, a researcher at George Washington University. “If they let them go, they know it’s over.”
Against this high-stakes backdrop, early signals from Biden’s team toward China indicate policy continuity rather than a U-turn.
“President Trump was right in taking a tougher approach to China,” said new Secretary of State Antony Blinken during his confirmation hearing. “I disagree very much with the way that he went about it in a number of areas but the basic principle was the right one.”
Institut Montaigne argues that China cannot be counted out yet but Washington’s strategy is on-point.
“If there is anything we can learn from Chinese history when it comes to reforms and opening, it’s that we can still expect more progress as a result of strong policy guidance and determination,” Duchatel wrote.
“But if strict controls are maintained on some chokepoint technologies, China will find it extremely difficult to upgrade its industry to the level of the global leaders.”
This story was originally published in French in Le Figaro. It is republished by permission of Sebastian Falletti, Le Figaro’s Asia correspondent