The Chinese Semiconductor Industry: A Growing Force

The Chinese semiconductor industry has become a major player in the global technology landscape. As the world’s largest consumer of semiconductors, China accounted for 53.7% of worldwide chip sales in 2020, amounting to $239.45 billion out of a total of $446.1 billion. However, it’s essential to note that a significant portion of these chips are imported from multinational suppliers. In fact, over 83% of China’s total chip sales in 2020 were imports, totaling $199.7 billion.

Key Players in the Chinese Semiconductor Ecosystem

The Chinese semiconductor ecosystem is a complex and rapidly evolving landscape, with several key players driving innovation and growth. These entities span across various segments of the industry, from design to manufacturing, and play a crucial role in China’s ambition to become a global semiconductor powerhouse.

• Integrated Device Manufacturers (IDMs): Integrated Device Manufacturers (IDMs) are companies that handle both the design and manufacturing of semiconductor devices. In China, IDMs like Semiconductor Manufacturing International Corporation (SMIC) and Yangtze Memory Technologies Corp (YMTC) are at the forefront. SMIC is China’s largest and most advanced foundry, while YMTC specializes in memory chip production, particularly NAND flash memory.

• Fabless Companies: Fabless semiconductor companies focus on the design and development of chips while outsourcing the manufacturing process. Notable Chinese fabless companies include HiSilicon and UNISOC. HiSilicon, a subsidiary of Huawei, designs chips for various applications, including telecommunications and computing. UNISOC, on the other hand, is a leading provider of mobile communication and IoT solutions.

• Foundries: Foundries are specialized facilities dedicated to the manufacturing of semiconductor devices. They do not design the chips but manufacture them based on designs provided by their clients. SMIC also operates as a foundry, alongside others like Hua Hong Semiconductor, which focuses on specialty processes.

• Outsourced Semiconductor Assembly and Test (OSAT) Companies: Outsourced Semiconductor Assembly and Test (OSAT) companies provide crucial post-fabrication services, including packaging and testing of semiconductor devices. JCET, Huatian Technology, and Tongfu Microelectronics are leading OSAT providers in China, offering a range of services to both domestic and international clients.

Despite being key players, these companies face significant challenges, particularly in light of recent U.S. export controls that target advanced semiconductors and semiconductor manufacturing equipment (SME). These restrictions aim to prevent Chinese firms from accessing nonplanar technology processes like FinFET and Gate All Around (GAA).

In response, Chinese companies are prioritizing the development of domestic toolmaking and manufacturing capabilities to reduce reliance on Western technology. This includes efforts to achieve self-sufficiency in mature node production and to extend the use of deep ultraviolet (DUV) immersion lithography systems for advanced node production.

Initiatives to Boost Domestic Production

China’s semiconductor industry has been the focus of intense development efforts as the nation strives to achieve technological self-sufficiency. In the face of international trade tensions and export controls, China has launched a series of initiatives aimed at bolstering its domestic semiconductor production capabilities.

• Government Subsidy Policy Models Transformation: One of the key strategies has been the transformation of government subsidy policy models. Previously, subsidies were allocated primarily for the expansion of wafer manufacturing capacity. However, this approach led to many plants becoming idle and underutilized. To address this, the Chinese government has shifted its subsidy model to be performance-based. Wafer factories must now secure orders and maintain a certain level of capacity utilization to receive government subsidies. This change incentivizes local fabs and IC design companies to expand their business and has made Chinese wafer fabs more active in attracting customers through strategies like low pricing and investment returns.

• Focus on Mature Manufacturing Processes: Due to export controls on equipment, China has turned its focus to developing mature manufacturing processes. The country is currently self-sufficient in 22/28nm and older process technologies. With continued government policies and subsidies, coupled with the support of China’s vast domestic demand market, it is expected that by 2030, China will have a mature process market with a nearly 40% share, significantly impacting global semiconductor production capacity.

• Wide-Bandgap Semiconductors: China is also focusing on wide-bandgap semiconductors, such as silicon carbide and gallium nitride. These materials are suitable for high-voltage and high-current environments due to their characteristics of low power leakage, high power, high-temperature resistance, and high voltage resistance.

• Other Incentives: The Chinese government has also provided other incentives to support its domestic semiconductor sector. These include grants, reduced utility rates, favorable loans, significant tax breaks, and free or discounted land. Such incentives offer a cost advantage for firms in China, sometimes shielding them from market competition.

• Building Domestic Alternatives: In response to export controls, China is making renewed efforts to build domestic alternatives for various components of the semiconductor manufacturing industry. This includes design tools, advanced materials, advanced packaging techniques, and systems engineering approaches designed to improve performance through a systems-led approach rather than relying solely on process-node improvements.

These initiatives reflect China’s determination to overcome external challenges and achieve a greater degree of autonomy in semiconductor production. The nation’s efforts to boost domestic production through policy reforms, focus on mature processes, investment in wide-bandgap semiconductors, and the creation of domestic alternatives showcase a strategic approach to securing its position in the global semiconductor industry. As these initiatives unfold, they will not only shape China’s technological landscape but also have a profound impact on the global semiconductor market.

Trade Wars and Challenges

The Chinese semiconductor industry, despite its rapid growth and ambitious goals, faces a multitude of challenges that could impede its progress. These challenges are multifaceted, ranging from technological hurdles to geopolitical tensions.

• Technological and Innovation Barriers: One of the primary challenges is the technological barrier. Advanced integrated circuit (IC) manufacturing requires not only massive investment but also the development of core competencies and intellectual property (IP). China has historically lagged behind in scaling and developing these crucial aspects of semiconductor production. The country’s efforts to innovate within the semiconductor space have often been hampered by a lack of foundational technologies that are essential for high-end chip production.

• Geopolitical and Trade Tensions: Geopolitical tensions, particularly with the United States, have led to export controls on semiconductor wafer fabrication equipment and AI processors. These restrictions have strategically limited China’s access to advanced technologies, exposing vulnerabilities in its chip supply chain. The U.S., along with allies like Japan and the Netherlands, has extended these controls, further constraining China’s ability to procure the necessary tools for cutting-edge semiconductor development.

• Financial Strains and Ineffective Subsidies: China’s semiconductor ambitions have also been affected by financial strains, exacerbated by the COVID-19 pandemic and the inefficacy of government subsidies. There have been reports of significant investments not yielding the expected returns, with many plants becoming idle or underutilized due to a lack of orders and capacity utilization. This has led to a reevaluation of investment strategies within the industry.

• Institutional and Political Challenges: The industry’s growth is also stymied by institutional and political challenges. China’s top-down model of innovation has overshadowed the domestic ecosystem of chip development. The absence of effective oversight and the dispersion of local government funding have created perverse incentives that do not necessarily align with the industry’s innovation needs.

• Market Conditions and Competition: The global semiconductor market has faced headwinds, impacting Chinese chipmakers as well. Companies like SMIC and Hua Hong Semiconductor have reported declines in revenue due to softening chip demand and elevated inventory levels of consumer and mobile devices. These market conditions have forced Chinese companies to adapt quickly to maintain their competitive edge.

• National Security Concerns: The expansion of China’s semiconductor production, particularly in legacy chip production, has raised national security concerns for countries like the United States. This has led to initiatives like the U.S. Department of Commerce’s Semiconductor Supply Chain Review, aimed at addressing these concerns and identifying dependencies on Chinese-sourced chips.

The Chinese semiconductor industry’s journey is fraught with challenges that are deeply intertwined with global technological, political, and economic dynamics. As China continues to navigate these obstacles, its strategies and responses will not only determine the future of its semiconductor industry but also shape the broader landscape of global technology and trade.

The Road Ahead

The Chinese semiconductor industry stands at a crossroads, facing both unprecedented challenges and opportunities. As it navigates through geopolitical tensions, technological barriers, and market dynamics, the path forward is both complex and promising.

• Embracing Domestic Innovation: The future of China’s semiconductor industry is increasingly hinged on its ability to foster domestic innovation. With the imposition of export controls by the United States and its allies, China is compelled to accelerate the development of its own semiconductor manufacturing equipment (SME) and materials. This push towards self-reliance is expected to drive significant advancements in domestic toolmaking capabilities, particularly for mature node production where the bulk of domestic demand remains.

• Expanding Capacity at Mature Nodes: Despite the restrictions on advanced technologies, Chinese firms are poised to expand capacity at mature nodes. These nodes, which are essential for a wide range of applications, are less affected by U.S. controls and continue to see substantial investment. By leveraging deep ultraviolet (DUV) immersion lithography systems and other available tools, Chinese companies aim to extend their production capabilities down to 7 and even 5 nanometers.

• New Fabs and Growth Projections: China is predicted to lead the global expansion of semiconductor production, with 18 new fabs expected to begin production in 2024. This expansion is part of a broader trend that has seen Chinese chip manufacturers forecasted to grow capacity by 13% in 2024, reaching a capacity of 8.6 million wafer starts per month (WSPM).

• Government Policies and Subsidies: The Chinese government’s policies and subsidies continue to play a pivotal role in shaping the industry’s trajectory. Through these measures, coupled with the support of China’s vast domestic demand market, China is expected to have a mature process market by 2030, with a nearly 40% share. This would mark a significant shift in the global semiconductor production capacity.

• Global Industry Impact: The impact of China’s semiconductor industry extends far beyond its borders. The nation’s efforts to achieve semiconductor autonomy and the resulting expansion are likely to influence the global industry in profound ways. As China continues to invest in wide-bandgap semiconductors and other emerging technologies, it could redefine the competitive landscape and drive innovation across the sector.

The road ahead for the Chinese semiconductor industry is one of strategic adaptation and resilience. While the industry must overcome substantial challenges, the potential for growth and innovation remains robust. With continued investment, policy support, and a focus on domestic capabilities, China’s semiconductor industry could emerge as a formidable force in the global technology arena.

Thanks for Reading 🙏

Connect with the Author on LinkedIn 

Follow FinGlimpse on Twitter, Instagram, LinkedIn, Flipboard, WhatsApp, Telegram