China Semiconductor Industry Build Out: Needs. Commitments. Collaboration.

BRIEF:?The Way Forward for the China Semiconductor Industry Build Out:?Needs. Commitments. Collaboration. | China continues its push for mutual global collaboration in the semiconductor industry while at the same time, it will not hesitate to respond aggressively to build up its own domestic capability in response to US sanctions designed to cause economic pain and disruption to China’s efforts in the semiconductor industry worldwide. Now consuming around 70% of global semiconductor production, China is taking a lead in addressing the unprecedented pandemic-induced global shortage of chips by accelerating the development and manufacturing of 14 nm chips.?At stake is enormous potential because there are huge opportunities for 14nm process chips with the rise of the 5G and AIoT arenas. Optimized chip technology within smart cities, autonomous vehicles, high-end consumer electronics, high-speed computing and remote IoT monitoring will unlock abundant long term future opportunities.

China is now ramping up mass production of 28nm chips yet late to the game and catching up fast regarding the focus and commitment to a 14nm technology rollout by 2022. And underpinning the entire effort is the need for China’s chip manufacturers to continue building up the required investment, manpower and active collaboration with its domestic semiconductor supply chain.

_________________________________________________________________________

“Many of the technical problems associated with the development and production 14nm chipsets and which cover the entire integrated circuit industrial chain system in China, have already been overcome, and progress is clear to see.”??Dr. Wen Xiaojun, Deputy Director at China’s Electronics and Information Industry Development Research Institute (CCID)

_________________________________________________________________________

The Message is Clear

Let’s commence this exploration with a recent statement by Eric Xu, Huawei rotating chairman as he explains in his keynote speech during the recent Huawei Global Analyst Summit (HAS)

“...semiconductors are highly complex products to design and manufacture, and they require a massive investment in R&D and capital expenditure. This has resulted in a highly specialized global supply chain where every region plays a different role based on their own strengths. This collaboration has helped pave the way for nonstop innovation and lower costs, benefiting companies and consumers worldwide.”

_________________________________________________________________________

In other words, the messaging coming from China’s ministry of communications and companies like Huawei are unsurprisingly consistent; Xi Jin Ping has made China’s intentions for mutually beneficial global cooperation crystal clear. There is no debt trap diplomacy. There is no vaccine diplomacy. There is only China’s effort and commitment in cooperating with other countries on a basis of respect and straight up reasonable bilateral economic deal-making without attaching the export of its own country’s ideologies.?At the same time, there is an aggressive and much needed response to the nagging little problem of the aggressive stance and sanctions within the semiconductor industry steadily flowing outward from the current Biden administration of the United States.

Regardless of whether the aggressive U.S. position is rooted in irrefutable evidence or vacuous rhetorical allegations, the aggressive U.S. stance, messaging and sanctions are here to stay and lead to important questions.?

With China ramping up its domestic semiconductor manufacturing capability, what purpose does the on-going US sanctions still serve and at what cost to stakeholders around the world including the United States itself?

Where does the current situation fit with respect to global semiconductor supply chain collaboration especially considering the EU member states who recently signed the Joint Declaration on Processors and Semiconductor Technologies?

The aggressive U.S. position in its efforts to block China’s progress and capability is unmistakable. I point it out to show the reader how the U.S. position remains in diametrically opposed contrast to the messages expressed by both the Chinese government and Huawei Technologies who remain clearly in favor of greater global collaboration amongst all nations large and small. Huawei’s message is crystal clear, reiterating the importance of global collaboration in chip manufacturing for several reasons which fit the interests of all parties involved across every region of the global supply chain to benefit both companies and consumers by paving the way for nonstop innovation and lower costs, as Chairman Xu noted.

Becoming A Self-Reliant China

As China moves forward to claim its self-sufficiency in the global semiconductor industry, industry analysts clearly recognize the needed technology milestones. In learning that smaller 5nm, 7nm, 10nm and 12nm chip sales are a far smaller market share, we also quickly recognize the wisdom of China’s commitment to the far more widely used 14nm chipsets. According to Christopher Taylor, Director, RF and Wireless at Strategy Analytics, more than 95% of the market is at 14nm and above. In addition, China’s commitment to self-reliance will also help address the global chip shortage and accompanying rise in prices hampering the global economy in numerous ways which is set to persist thanks to continued demand plus panic stockpiling in chipsets worldwide.

_________________________________________________________________________

“China needs not just to fabricate the chips, but they also need to design software and equipment without having to rely on other countries for those. China has to approximately double its production of semiconductors for its own consumption from 15% of its needs to 30% to lessen the effect of supply disruptions and production of electronics,”? Christopher Taylor, Director, RF and Wireless at Strategy Analytics

_________________________________________________________________________

China currently imports $300 billion worth of semiconductor chips, clearly indicating its reliance on chip imports. Yet at the same time, let’s consider recent indicators that China is not sitting still in developing its self-sufficiency.?According to SIA’s (Semiconductor Industry Association) 2021 white paper, “Earlier this year, China landed a rover on Mars. Chinese state media reported that inside both China’s space station and the Mars rover were 100% indigenously designed-and-produced semiconductors, signaling China’s increasingly sophisticated microchip capabilities. ...while China has mastered some chip technologies, its commercial semiconductor industry is still relatively nascent.”?Still, the Chinese government is making serious efforts to close the gap, investing well over $150 billion from 2014 through 2030 in semiconductors.”?

There is far more to the story which clearly reveals the breadth and depth of China’s commitment and wise focus on a future which is centered around the 14nm chipset. President Xi Jinping has injected billions into China's chip industry and just in 2020, an astounding 22,000 semiconductor companies were created while in 2021, an additional 15,000 plus have registered as well. According to industry leading analyst and news provider Total Telecom, China’s “plans to mass produce 14 nm chips next year (2022) within the country is likely to make China the biggest semiconductor supplier globally.”

Further thoughts from Strategy Analytics’?Christopher Taylor indicate the road map of China’s plans will unfold in coming months and years. We begin by noting that by Q4 of this year, China’s Shanghai MicroElectronics company will have 28nm machines, the equivalent of ASML’s 1980Di machines. Taylor then surmises that with multiple patterning capability, more advanced versions of the machine capable of 7nm chips will be a reality.

While we can’t forget that the U.S. took steps to effectively shut China out of access to needed semiconductor fabrication tools, the setback has not stopped companies such as China’s SMIC to continue its development of both 14nm and 12nm process nodes based on fin field-effect transistor (FinFET) technology. This is accomplished by using mature deep ultraviolet lithography toolsets and processes used in the majority of existing semiconductor production today. That analysis is according to market intelligence provider & analyst firm CCS Insights. SMIC’s CEO Zhao Haijun has increased spending by another $1.1 billion to a total of $4.3 billion, focused on chip demand in communications and automotive applications.

_________________________________________________________________________

"While the Chinese government support is central to driving the industry’s direction, CCS Insights has stated, “China’s ability to create a vibrant and healthy semiconductor industry is still a very tangible possibility, with or without government support.”? CCS Insights

_________________________________________________________________________

Even China Mobile, the world’s largest wireless operator, has created its own chipmaking business to address the need for chipsets related to IoT applications.

While the global semiconductor manufacturing industry has certainly split very much in line with the geopolitical influences of the day, at the root of China’s expansion plans we find economic reality; a relentless demand for 14nm chips based on existing process technologies which China is now boldly stepping into and expected to become a major player.?

U.S. Sanctions and Unintended Consequences

As is known, because of alleged concerns over China’s military gaining access to chip technology, the United States admits any ties to the Chinese government are unclear and unproven, yet persists in its aggressive position to block China’s ambitions. The majority of pundits are willing to associate this competition as competition between autocracies and democracies even including the alleged systemic degradation of human rights which will occur in China’s chip-driven data rich smart cities. The excess rhetoric of concern has gone so far as to include a recent U.S. military commander warning that China might actually invade Taiwan to gain control of Taiwan-based TSMC. Within this rather dramatic geopolitical backdrop, the United States has seen fit to implement semiconductor industry sanctions limiting China’s access to the world chip markets.

The US sanctions not only brought challenges to Chinese companies, but also caused a ripple effect on the whole ecosystem and damages throughout the supply chain, including the US semiconductor industry.?

The EU Semiconductor Commitment and A Call to Collaborate

The recent EU Member States Joint Declaration on Processors and Semiconductor Technologies was created and signed by member states to bolster across Europe’s electronics and embedded systems value chain stated as, “This Declaration aims at creating synergies among national research and investment initiatives and ensuring a coherent European approach of sufficient scale. It builds on and will expand collective efforts, including the future KDT and EuroHPC Joint Undertakings, the European Processor Initiative and the existing IPCEI on microelectronics.”

Such ambitions for EU semiconductor industry self-sufficiency point to the current weaknesses in the industry foundation and immediately lead to the opportunity presented to the EU by Chinese enterprise’s call for greater collaboration together. Currently, there is a understood lack of industry foundation whereby little semiconductor industry manufacturing takes place in the EU.?During a recent August 2021 Delphi Economic Forum, Remco Zwetsloot, Research Fellow with Georgetown’s Center for Security and Emerging technology expressed the narrative that there is no single EU country which could contain all the parts of the semiconductor industry supply chain efficiencies which are needed. Zwetsloot noted that while the specific strengths exist such as with Netherland’s ASML and other German wafer technology firms, the EU cannot become independent manufacturing-wise in any meaningful sense because the manufacturing foundation is simply not there.

In identifying a weakness, we also identify an opportunity. Even today, as a stand alone semiconductor market supplier, the EU is far behind China’s industry chain capability.

Collaboration between China and the EU will incubate a thriving semiconductor industry and is clearly calling for such collaboration at this time.?Stepping forward together would directly address a number of pressing mutual interests and needs including effectively addressing the global chip shortage all stakeholders are impacted by. The EU’s commitment to ramp up its semiconductor manufacturing capability meets the rising demand for semiconductors in the China market with?companies ready to diversify their supply chains while collaboration with Chinese enterprises will very much make it possible for the EU to better meet that demand.

At the same time, the EU member states remain side by side with China understandably wary of the current U.S. posture, knowing that new U.S. initiatives and sanctions against China further disrupting the semiconductor industry, rational or otherwise, may be suddenly made public at any moment as the battle for control continues. By collaborating with China, the EU will be protecting and building its own interests very much in line with its recent EU Member States Joint Declaration on Processors and Semiconductor Technologies

Conclusion

Circling back around to our question, “What purpose does the on-going US sanctions still serve and at what cost to stakeholders around the world including the United States itself?”, we must consider true underlying intent. While unsettling, there are those who suggest that the U.S. intent is pointedly to create industry disruption and chaos, creating a damaging economic disruption and technology gap so as to allow itself to sweep in and gain a grip on market share and maintain control of the US dependency within the supply chain. Ongoing U.S. sanctions continue to blunt China’s efforts yet are having the unintended impact of disrupting the industry across the entire globe.?

Facing such pressures, China’s national imperative to aggressively expand its semiconductor industry will only continue and accelerate with the role of the Chinese government in supporting its domestic semiconductor industry an unmistakable force. As noted by SIA’s white paper, “In China’s newly released 14th?Five-Year Plan, semiconductors were explicitly identified as a strategic technology priority requiring a whole-of-society effort.”?Such initiatives include preferential tax policies valued as much as $20 billion to semiconductor manufacturers. Furthermore, a recent study indicated that the move toward decoupling would actually cause a variety of damage to US markets. How is it possible the U.S. government administration pushing China sanctions is not aware of the danger of shooting itself in the foot?

Analysts are perplexed by the absence of a more reasonable U.S. strategy leading to the threat of even further demise in the number of American chip firms. This then undoubtedly leads to significant reductions to R&D and capital expenditures, estimates of well over 100,000 additional U.S. job losses and an obvious reduction in U.S.?competitiveness.

Continuing U.S. sanctions seem a paradoxically brute force replacement for working with allies and China to collaboratively develop fresh rules and standards across the global supply chain ensuring fair market access and competition for all industry players. Brute force export controls aimed at China are having the opposite effect of damaging the U.S. position rather than more targeted, reasoned multilateral export controls which do not stifle the collective innovative capabilities found and more essential than ever within the intertwined global semiconductor industry and supply chains. Ultimately, the needs of the marketplace across the globe, the commitments declared and pursued by both the EU and China to step up their semiconductor industry capability sends a clear message to the U.S. that mutual collaboration and diplomatic cooperation may be a far better choice than its current negative, aggressive stance.

Mario Cavolo, Senior Fellow, Center for China & Globalization

_________________________________________________________________________

REFERENCES

https://www.totaltele.com/510253/China-set-to-achieve-14-nm-breakthrough-in-2022

https://www.totaltele.com/510209/Mass-production-of-14nm-chips-in-China-will-spur-future-growth-of-its-chip-industry

https://digital-strategy.ec.europa.eu/en/library/joint-declaration-processors-and-semiconductor-technologies

https://developingtelecoms.com/telecom-business/partner-spotlight/11452-mass-produced-14nm-chips-the-launchpad-for-china-s-chipset-industry.html.html

https://www.semiconductors.org/taking-stock-of-chinas-semiconductor-industry/

Delphi Economic Forum - https://youtu.be/xcFnYit8JBs

https://www.ccsinsight.com/blog/chinese-chipmakers-set-to-achieve-14-nm-breakthrough-in-2022/